Surviving as a "Software as a Service" (SaaS) Startup

Inhalt

SECTION 1: INTRODUCTION

SECTION 2: RESEARCH QUESTION

SECTION 3: LITERATURE REVIEW

SECTION 4: Research Method

SECTION 5: Analysis

SECTION 6: Synthesis

SECTION 7: Research Results

SECTION 8: Conclusion

SECTION 9: Bibliography

SECTION 10: Appendices

SECTION 1: INTRODUCTION

Software as a Service (SaaS) is changing the way businesses operate. It’s not just a trend: it’s a proven way for small business owners to save time and money. We owe it all to the cloud for ushering SaaS into the business world.

When examining the basics of running a business, a single subscription to a SaaS app could take the place of an entire department. Small businesses and start ups can have email, file storage, expenses, purchasing, human resources, collaboration and task management at a lower cost for IT and software. With access to services and software that was once only available to huge companies because of the high cost of infrastructures and maintenance, software services allow a business to cut costs and focus on their product and services instead of setting up elaborate software or delegating between departments.

As a startup in the SaaS space, it is a long and perilous journey just to survive, let alone be notably successful. As the marketplaces have become quickly crowded, just finding a niche deems very difficult, let alone actively dominating one. The big players easily establish themselves, offering freemium cloud storage and software build upon already successfully proven programs. Microsoft now offers its Office suite in the cloud and Google has its slew of online business tools, all as various and competitively priced monthly subscriptions. Other startups moved in quickly at the outset, snatching up software real estate and thriving: Basecamp for project management, Freshbooks for accounting, Salesforce for customer relationship management, Pinterest for project and interest discovery, Snapchat for innovative mobile conversation, the list goes on (Vidra, 2014).

So what exactly does it take to survive as a SaaS startup in today’s information age?

Technological innovation, design, strong business models and customer attraction and retention all seem to be at the forefront of SaaS culture, although the difference between short and long-term success may be more elusive than any particular set of recipes for permanence.

SECTION 2: RESEARCH QUESTION

By examining various contemporary business acumen of SaaS startups, contributing factors of a company’s durability will hopefully emerge. This may be achieved by first discovering what experts believe to be at the heart of entrepreneurship, innovation, marketing and monetisation using several examples before pitching two similar companies side-by-side over the course of their lifespans to date.

‘Entrepreneurs sacrifice sleepless nights and their life's savings in pursuit of building a product or a service that not only fills a need but changes people's lives. In the world of startups, we're all watching and waiting for the next big thing — for a company to come out of nowhere, do something amazing and make a ton of money; hopefully changing the world along the way’ (Fell, 2014).

Zwilling (2013) notes that the ‘problem is that professional investors (Angels and Venture Capital) want a proven business model before they invest, ready to scale, rather than the more risky research and development efforts’. In the meantime, many startups focus on their product and reaching their users — adopting bootstrapping or lean models, building a minimum viable product (MVP), validating it, procuring funding or sustainable revenue, and finally scaling (Maurya, 2010).

But first, users need to be not only acquired, but activated into revenue-producing customers. Assistant professor of marketing at Harvard Business School, Vineet Kumar (2014), says that ‘over the past decade, “freemium”—a combination of “free” and “premium”—has become the dominant business model among startups and app developers. Users get basic features at no cost and can access richer functionality for a subscription fee. If you’ve networked on LinkedIn, shared files through Dropbox, watched TV shows through Hulu, or searched for a mate on Match, you’ve experienced the model firsthand’.

Is the problem of long-term success connected to the origins, purpose or mission of the business? Or whether it can “pivot” by changing direction to keep with the times and customer needs? Is its initial priority to acquire users or profits? And how do they manage the threats of the marketplace in the early stages?

It seems SaaS startups have many problems to face while getting up on their feet. By examining these areas and their potential solutions in greater detail, we may begin to understand more about what is essential, what is incidental and what potentially works in the longterm.

SECTION 3: LITERATURE REVIEW

Gompers and Lerner (2001) reveal that ‘a growing body of research shows that individuals make decisions based on biased assessments of information. These assessments are powerfully influenced by people's beliefs about themselves and the workings of business. Most entrepreneurs are certain that their venture will succeed — despite the fact that nearly half of all venture capital-backed companies don't fulfil their potential and nearly one-third go out of business. For newly launched enterprises without venture capital backing, failure is almost assured: nearly 90 percent fail within three years’.

The following excerpt shows that historically, major business mistakes have ended fledging software companies since the beginnings of personal computer software development:

In the early 1980s, Tom Gregory and a group of his colleagues from a minicomputer software company decided to enter the personal computer software market and compete head-to-head with Lotus and Microsoft. The company they founded, Ovation Technology, raised over $6 million in venture capital financing. Gregory and his founding team possessed extensive marketing backgrounds but scant technical skills. So, perhaps not surprisingly, Gregory's team decided to spend substantial resources on marketing — at the expense of research and product development.

Out of the gate, Ovation began spreading the word about major improvements in functionality that their program would offer over their competitors. Its polished advertising campaign excited the imaginations of potential customers and investors, and gave them the impression that the company was thriving. Current investors, however, found it difficult to gauge the progress of the company. Although Ovation gave them glowing reports of the company's supposedly significant strides, they never presented a completed prototype. In fact, the company never finished developing its product — and never made a significant sale. If the founders had shared the necessary information with investors, perhaps Ovation's venture capitalists could have guided Gregory along the development path and this failure could have been averted.

(Gompers and Lerner, 2001)

Gompers and Lerner (2001) are of the opinion that ‘entrepreneurs will almost always choose to continue spending money to market their product or develop their technology — even when the evidence clearly shows that they should abandon their efforts. Similarly, overly optimistic entrepreneurs may feel compelled to expand their firm's capacity beyond its requirements because they overestimate the future demand for their products’. It’s what Agrawal (2014) calls ‘the difference between short-term capitalism and long-term capitalism. You have to optimise your strategy for the society we live in, not a theoretical perfect market’.

Evernote VS Springpad

With the ever-growing noise and mess of content on the Web and on social networks, people are increasingly looking for better ways to curate their digital experiences and channel that white noise into signal.

Springpad has long been considered a rival of the popular productivity app, Evernote, as both fundamentally seek to act as a memory aid for busy people, allowing users to capture anything and everything within apps or on the Web, and easily search content by keyword and tags. Yet, while Evernote has blown up in the past two years, soaring past 20 million users, Springpad has quietly been plugging along — adding features and building a viable competitor.

(Empson, 2012)

In a video from the Creative Industries Innovation Centre (see Appendix A), Digital Media Manager for Film Victoria, Brad Giblin, says: ‘It’s very, very crowded in these marketplaces today... [I]t’s a lot more innovative in terms of the business models, the distribution platforms and also the audiences. So you can afford to look at mechanisms to raise financing off pledges, off Facebook drives, off your friends and family, off pre-sales... sell portions... packages... sell limited editions or special versions that enable you to have some kind of revenue in the production phase and hopefully then further revenue when you come to sell it down the track’ (Creative Innovation, 2010).

Is this kind of impermanence commonplace? Do most startups begin with the intention to flip?

Evernote CEO, Phil Libin, gives a candid contradiction: ‘It never starts out with how much money can we make. It never starts out with how many of these can we sell? It starts out with what's the point of it; why is the world better off because this product has existed in it? If the world isn't better off because the product existed in it then it's just not interesting to make’ (Baer, 2013).

Libin isn’t interested in flipping his cloud note-taking company. In fact, he says it has ‘no exit strategy, despite the fact that it has amassed 80 million users and raised $US250 million’ (Shontell, 2013). Instead, they want to create what they call a “100-year startup”, consisting of two parts:

1. It should be a company that’s around in 100 years, which means Evernote’s product needs to be durable.
2. It should still be a startup in 100 years, which means it should still be an innovative company that people love (Shontell, 2013).

Founded in 2008, startup Springpad was designed as an organiser app for ‘recipes, movies to watch, home improvement projects, and interior design projects’ (Ungerleider, 2014). They focused more on the short-term marketplace, where their product fit and what differentiated them from the crowd. Springpad’s former head of user engagement, Katin Miller, laments: ‘We see so many apps coming out now doing what we were doing, but the market is so thirsty for it now. If we had come out a few years later and been mobile first, it may well have been a different ending’ (Ungerleider, 2014). Springpad says that its growth had been fuelled by mobile adoption. Nearly half of its users were using its Android app and a third using Springpad via an iOS device (Rao, 2011).

Their core product was designed for clipping items for later purchase, ‘but their 2008 launch date occurred before the mobile app economy fully bloomed’ (Ungerleider, 2014). Miller believes that their user base was their strength: ‘We had an evolved user-base we listened to and integrated into our needs and decision making. Springpad had a talented team, and when we talked to other tech companies... people were amazed by what we had done with less than 20 employees. We never had more than 20 people on staff at any one time, and had three polished and powerful apps on the market’ (Ungerleider, 2014).

For a basic overview of startup metrics for internet marketing and product management, a simple model was devised in 2008. Dave McClure is the founding partner of 500 Startups, an internet startup seed fund and incubator in Silicon Valley with over $125M under management (500hats, N/A). He created ‘an amazing deck in 2008 called “Startup Metrics for Pirates: AARRR” (details in Appendix B) and it’s still incredibly relevant today’ (Mullin, 2013). Essentially, McClure broke down the components of the startup analytics acronym into five categories:

A: Acquisition - where / what channels do users come from?

A: Activation - what % have a "happy" initial experience?

R: Retention - do they come back & re-visit over time?

R: Referral - do they like it enough to tell their friends?

R: Revenue - can you monetise any of this behaviour?

(Ford, 2012)

Acquisition

As an example of rapid acquisition, the formerly popular video sharing app, Viddy, was a viral app that grew rapidly by getting a user to sign up using their Facebook account and then sharing this action with their friends, social media always being a popular method of the third “R” - Referral.

In the first part of the “500 Distribution” series on activation for SaaS, content producer Susan Su (2014) thinks that ‘[m]ost SaaS companies are (rightly) concerned with user acquisition but fail to pay adequate attention to activation. What few realise is that activation plays a major role in user acquisition itself’.

This graph from the article “Retention is King” by Managing Partner of Quint Growth, Jamie Quint (N/A), shows ‘what happens when you are crushing user acquisition but failing to activate users’:

illustration not visible in this excerpt

This graph is representative of what many SaaS startups experience. Improving your activation rate is an ongoing process that should be done along with other conversion rate optimisation efforts, such as ‘[breaking] down activation into steps, run A/B tests, focus on user drop-off areas’ (Su, 2014). ‘Viddy never nailed the activation piece. Many of the users that signed up never came back to the app again. Thus, when Facebook put a stop to their friend-blasting user acquisition approach, they went into a tailspin from which they haven’t recovered’ (Su, 2014).

It seems effective acquisition means nothing if you ignore the one key metric — activation. Activation is one of the most important metrics for any SaaS company. It’s the second “A” in McClure’s “AARRR”, and ‘it’s a measure of the key action your users need to take to get value from your product, and how many users take that action’ (Su, 2014).

Activation

As a partner at GrowHack, Conrad Wadowski works with venture backed companies and has this to say about activation:

Activation is the process of getting a new user to a must-have experience and a set of best practices to get them active. The best activation won’t involve too much process. It mixes selling, education and using your product without too much friction.

(Conrad Wadowski, 2013)

He says that the best way to learn how to do this well is to learn from other products. After documenting over 70 activation flows from the best companies in the industry, some of the best tactics were leveraging motivation and testing ideas and talking to end users (Wadowski, 2013 – more in Appendix C).

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