The 4th DO for SaaS startups – Make your website your best marketing person

If you're building a modern SaaS solution for the Fortune 5,000,000, the importance of your marketing website cannot be overstated. In the old world of enterprise software, most software vendors used to have pretty lame websites. Most of them were poorly designed and looked very technical and uninspiring, and the only images they contained were the seemingly obligatory stock photos (suit-wearing business people trying to out-smile each other, handshake close-ups and of course an attractive headset-wearing woman – often the same one on multiple vendors' sites!). Compare that with the website of a modern SaaS solution like Zendesk and I'm sure you'll understand what I mean.

To be fair, those old-school software vendors were probably able to afford having bad websites since the Internet just wasn't their primary sales or marketing channel. By contrast, if you market a SaaS application using a low-touch sales model, most of your customers will have very little interactions with your sales team, which turns your website into the face of your company. Use this as an opportunity to make your website your best marketing person!

The primary objective that your website has to achieve is clear: attract as many visitors as possible (mainly by providing great content, more on that in a later post) and turn as many of them as possible into trial users. There can be a number of secondary goals like collecting email addresses of visitors who aren't ready to start a trial yet, generating interest from and providing information for partners, informing about job openings at your company, transporting your brand image and so on, but getting visitors to try your product is clearly the most important one. As such your site needs to combine a convincing, simple value proposition, which catches the visitor's attention and makes him want to learn more, with a clear and highly visible call-to-action (hello, AIDA).

If you're new to SaaS, probably the best way to get started is to take a look at a number of successful SaaS websites. Great examples include Xero, MailChimp, CampaignMonitor, Harvest and SquareSpace. For some examples from our own portfolio, check out Zendesk, FreeAgent, Clio, Vend or Geckoboard, to name just a few. If you take a look at these and maybe other sites you'll see that they have a number of elements and characteristics in common:

• Beautiful imagery of the software (good screenshots, photos showing the app on Apple hardware) which makes you want to give it a try
• A screenshot tour and/or videos that let you easily learn more
• Brief information about the key value propositions on the homepage, with links to more comprehensive information about the product on sub-pages
• An easy to find link to a clean pricing table so that the visitor doesn't have to search for pricing information
• Quotes from customers and the press and sometimes security certificates or awards to show credibility
• Highly visible buttons for the key calls to action (usually "Sign up" and "Take the tour")
• A simple signup form with as few mandatory fields as possible in order to minimize the barrier to sign up

For an example and some additional notes, here's a wireframe that I created for my portfolio company samedi some time ago and which became a part of the briefing that we gave to the graphical designer:

(click on the thumbnail for a larger version)

Notes and bonus tips:

• Looking at existing SaaS websites and my notes above will give you a good sense for the typical anatomy of a modern SaaS site, and since a lot of thinking and often A/B testing went into them you can deduce some best practices by analyzing these sites in detail. However, this shouldn't stop you from trying your own ideas and from trying something completely new.
• Keep it simple. Just like your product needs to allow for gradual discovery, your marketing website also needs to start with a simple, compelling value proposition and keep the more detailed information for the sub-pages. Interestingly, if you look at the evolution of popular SaaS sites you'll often notice that they got simpler and simpler over time. Example: This is how Basecamp looked like in 2006, and this is how it looks like today.
• I've mentioned secondary conversion options above. It's important that you offer something to visitors who are interested in your product but aren't ready to take a trial yet. It can be a newsletter subscription, a callback button, a whitepaper download, a live chat window or signing up for a webinar, to name some options. Ideally it allows you to get the visitor's email address so that you can reach out to the user later.
• This may not be relevant for you right after the launch, but at some point in time you should try to personalize your homepage based on information that is available about the visitor and see if it has a positive effect on conversion. One simple way to do this is to customize the page based on the user's location A site like Clio, for example, could use geo-targeting to tell a visitor from, say, New York how many lawyers from New York Clio has among its customer base already or show case studies from Clio customers in New York.

Software is eating the world, but the smartphone is pretty hungry too

Last August, Marc Andreessen wrote a great essay titled "Why software is eating the world". In his article, which got a lot of attention in the tech world, Marc explains why and how a variety of industries have been and continue to be disrupted by software. Read it if you haven't read it yet, it's a well-written and inspiring post by one of the most successful and knowledgable people in the Internet industry.

Recently I read about the concept of "dematerialization" (in the book "Abundance – The Future Is Better Than You Think" by Peter H. Diamandis and Steven Kotler). The book quotes Bill Joy saying "We're seeing the tip of the dematerialization wave, like when a phone dematerializes a camera. It just disappears." and goes on to list a number of other goods and services that are now available with the average smartphone.

Software is eating the world, but the smartphone is pretty hungry too.

There's no real contradiction here though, since a large part of the smartphone's appetite for disruption is driven by software as well (although innovations in the hardware used by smartphones play an important role too). Either way, I think it's a fascinating observation. When I look at myself, my iPhone has already replaced my wristwatch, a pocket translator, a GPS running watch, a travel alarm clock, an address book, a calendar and an MP3 player. Most of the time it also replaces my camera, camcorder and calculator.

For other people the smartphone has replaced radios, TVs, GPS navigators, flashlights, mobile game consoles, pocket mirrors and, in case you forgot that you can also use these thingies to make calls, landline phones. Soon the smartphone will dematerialize credit cards, loyalty cards, keys, and this is just what I came up with thinking about it while writing this blog post. I'm sure there are dozens or maybe hundreds of other products or services that are being eaten by the smartphone already or will be in the near future, and I'd love to hear your experiences or predictions in the comments below.

In his now legendary launch presentation of the first iPhone, Steve Jobs said:

Today we’re introducing three revolutionary products of this class. The first one is a widescreen iPod with touch controls. The second is a revolutionary mobile phone. And the third is a breakthrough internet communications device.

So, three things. A widescreen iPod with touch controls. A revolutionary mobile phone. And a breakthrough internet communications device. An iPod. A phone. And an internet communicator. An iPod. A phone. Are you getting it?

These are not three separate devices. This is one device.

It probably took most of us some time to really get it. But now we're getting it. And it's not just three separate devices which the iPhone is replacing, it's dozens of devices.

Bon appétit.

The 3rd DO for SaaS startups – Create an awesome product

With some delay I'd like to continue my little series:

3rd DO for SaaS startups

Create an awesome product

This one is a little tricky. Firstly because it feels like I'm just stating the obvious – who doesn't want to create an awesome product? Secondly because it's hard to offer a lot of useful advice in a blog post on a topic which shelves of books have been written about. But a series on the DOs for SaaS startups would be incomplete without at least one DO about the product I and will focus on a few aspects that I personally feel strongly about.

As mentioned before, I'm going to assume that you want to build a modern SaaS solution for the "Fortune 5,000,000". This most likely means that you won't have a field sales force and that you're going to use a low-touch online sales model instead. What implications does this have for your product?

The entire user experience – from the first time the user visits your site to the moment he signs up for a free trial, through the onboarding and the exploration of the product and further on – needs to be completely frictionless. It should be designed with the same mindset that designers of online shops have, e.g. when they design a checkout process: Any little thing that doesn't work flawlessly, anything that may make the user doubt can kill a few conversion percentage points.

If your product is complex, and chances are that your product will have significant complexity at least from a new user's point of view, hide a big part of the complexity from the new user and give him or her a way to gradually discover it. When you have the user's attention, you have to fight to keep it against a million possible distractions. Make the learning curve as smooth as possible and give the user as much gratification along the way as possible. The masters of this discipline are designers of games that teach the game to new users in many small steps, meticulously making sure that it never gets too difficult nor boring, giving the user lots of little gratifications along the way.

Speaking about games, I think this is how product discovery looked like in the old enterprise software world:



Poor Mario is faced with an insurmountable barrier, and it takes the vendor's sales and support team (those little guys on the right) to pull him up that mountain, which means lots of money and time spent on sales, setup and training – and a lot of time and reasons for Mario to give up before reaching the flag.

Contrast that with new world of self-service, low-touch sales SaaS:



The big barrier has been torn down, and the way to the required understanding of the product is paved with several "aha" moments (those little trampolines which help Mario jump to the next step). *

Online shops, games, instant gratification, gradual discovery – by now you can probably guess the bigger theme that I'm heading at: The consumerization of enterprise software. The consumerization of enterprise software means that the way enterprises buy software is changing. Keep that in mind – you're not developing a product for IT professionals (unless you are offering a product to the IT team) who are super tech savvy and will make a choice based on a feature matrix. Your product will be used by marketing, sales, HR, support or finance people or founders or managers of small businesses – whatever the case may be – and your product must be easy enough to use so that a typical member of your target group can come to your site, start a trial and see the value of your product with little to no intervention from your company.


_________________________
* Thanks to Roan Lavery of FreeAgent, whose presentation at out recent SaaS Founder Meetup was the inspiration for the images above.

Yummy, dog food! Or: Running a VC fund in the Cloud

Point Nine not only loves animals, we also love dog food. After all, some months ago we invested in ePetWorld, which runs hundeland.de, a fast-growing online shop for dog food and supplies. Today I'm going to talk about a different type of dog food though.

If you know us a bit you'll know that we talk a lot about the Cloud. In our opinion, the move of software from the desktop or local servers to the Cloud, along with the consumerization of enterprise software and other developments that go hand in hand with it, truly is a revolution. Like in any revolution there will be casualties, in this case incumbents that aren't fast enough to adapt to the new realities, but fortunately it'a a peaceful revolution which only puts bad UIs, overpriced software maintenance contracts and "call us for a demo" websites under the guillotine. And like in any revolution there will be new rulers – startups that drive the Cloud revolution and attract tens of thousands of customers within few years. Our goal at Point Nine is to find some of these revolutionaries at an early stage and back them on their way from the bottom to the top.

Back to the dog food. We run Point Nine mostly using Cloud apps, and it tastes pretty darn good. I wrote about the idea of going "Office free" about seven years ago. Today we're using Google Drive (plus Basecamp) for 90% of our documents and spreadsheets, and ironically that's not because Google Documents and Google Spreadsheets are particularly good products. In fact I think they are pretty bad, and I'm amazed how slowly Google has been developing them if you consider that they were launched many years ago already. But the fact that Google makes it dead simple to collaborate on documents and spreadsheets, this one USP over desktop software, is such a compelling argument that we happily accept all of the products' shortcomings (makes me wonder, by the way, if there could be an interesting opportunity in building a better online version of Word and Excel).

While we're heavy users of Google Docs, Google Spreadsheets and Basecamp, by far the most important application for us is Zendesk ¹, which we use for deal-tracking ². It's our life blood, and I don't know how we'd survive without it. While Zendesk has of course been built for a different use case – customer service –, and Mikkel might kill me if he sees how we're using Zendesk, it turned out that because of its adaptability it works perfectly well for our needs. For us, every new potential investment becomes a "ticket", and we use Zendesk from our first encounter with a new company through the entire assessment of the deal up until we either decide to pass (about 99% of the time) or to invest (about 1% of the time, in which case Basecamp takes over, since we set up a Basecamp project for every investment to collect updates, notes, etc).

Here are some of the great things that Zendesk allows us to do:

• Every email that we receive at submit@pointninecap.com is automatically turned into a Zendesk ticket and gets assigned to Fabian, with the stage automatically being set to "evaluating". Fabian and Nicolas then do some initial research and add things like slides, spreadsheets (ouch, you got me) or call notes to the ticket. Once Fabian and Nicolas have made up their minds they assign the ticket to Pawel or me and set the stage to "Recommendation: Evaluate further" or "Recommendation: Pass". This makes the ticket appear in the respective view/filter for Pawel and me.
• It happens very often that we talk to a startup which looks interesting but isn't ready for an investment yet. Zendesk makes it easy to keep track of these opportunities. We simply set the stage to "Follow-up in 3 months" or "Follow-up in 6 months". After three or six months, Zendesk automatically sets the stage to "Take another look" and sends us an email notification.
• Zendesk makes it easy to stay up-to-date on everything since you'll get an email notification whenever a ticket is updated. You can reply directly to those emails to add comments to the ticket (as well as create new tickets by emailing them in), plus there are great apps for the iPad and the iPhone, so it's convenient to work on tickets on the go.
• Finally, you can use tags or custom fields to collect additional information about tickets. We are, for example, tracking deal sources and company locations, which is helpful for analyses that we're going to do in the future.

Bye now. I still have a bunch of open tickets in my queue. :)


¹ In case you don't know yet: Disclosure, I'm an investor in Zendesk.
² Dear founders, sorry to call your startup a "deal". That's VC speak and I hope it doesn't sound too disrespectful.

The 2nd DO for SaaS startups – Build the right team

Continuing my little series using the "minimum viable" approach, here is my

2nd DO for SaaS startups:

Build the right team

I've written about the topic before, so if you've read this post from early this year most of what I'm going to write now won't be new for you and you may want to skip this article.

I'm going to assume that you want to build a modern SaaS solution for the "Fortune 5,000,000" – a great product that's easy to understand and so useful that it will almost sell itself. If your plan is to create a bloated piece of enterprise software with an ugly interface and make it up by hiring a large field sales force from the get-go you might succeed as well, but in that case please don't ask me for advice. :)

Let's start with the founder team. If you want to build a great SaaS product that's (relatively speaking) easy to market and sell you will need

• domain expertise, 
• UX/UI talent, and 
• a great engineer who can code the application. 

The reason is obvious, you need to understand the problem that you are solving for your target customers, you need a product that looks good and feels good and can be sold online and last but not least, to say it how Dave McClure would probably say it, you need someone to get sh*t done. :) If you're a genius you might combine all of these threes qualities in one person, but it's more likely that you'll need a founder team of two or three persons to cover all three areas.

What if you don't have that SaaS founder dream team – a CEO with domain expertise, a great CPO and a rock-star CTO? If you're only missing the domain expertise that may be comparably easy to acquire. In many (but certainly not all) markets you can probably learn a lot of what you need to know within a couple of months. If you don't have product and engineering knowledge that's tough. In my opinion you absolutely have to have this in the DNA of your company. Don't even think about outsourcing product design or engineering to an agency, I can almost guarantee you that it ain't gonna work. So if your founding team consists of five MBAs who've never built a product before, don't start a SaaS company, build an eCommerce business instead (there's nothing wrong with that either).

What comes next? The first hires after the founder team usually are, in this order:

• Developers (get even more sh*t done)
• Someone for customer support (in the beginning the founders should do customer support themselves in order to stay as close to the customer as possible, but at some point you'll need more manpower to deal with customer questions and support issues. Your customer support person will also likely act as your first inside sales person who helps converts trial users into paying customers.)
• One or more inside sales people (to maximize the conversion of your inbound leads)
• A marketing person (depending on a variety of factors, this person can also come in before the first sales person)

With the exception of the developers (arguably), these hires can all be pretty junior people – young, smart, hungry people that learn fast. Later in the game you'll need people with a lot of experience, for example for the VP Sales role. But for most positions, most of the SaaS CEOs that I've talked to have a strong preference for "raw talent" and people with the right attitude.

PS: As you know, this whole series is, and will continue to be for some time, a work-in-progress. Any comments or feedback is very welcome!

1st DO for SaaS startups, continued

Further to my post about my "1st DO for SaaS startups" (and again, in the spirit of releasing early and iterating fast) I'd like to touch on a few additional points with respect to the right market.

Market size

• If you want to go big and build a large, successful company it's obviously important that your market is big enough. How big is big enough? Most large VCs would answer that the TAM of a SaaS company should be at least $1B. The thinking is, if it's a $1B market and you grab 5-10% of it and get a revenue multiple of 5-8x, the company will be worth $250-800M at exit. This is where large VCs start to get excited. 
• We as a small early-stage fund are a little more modest but we also want to see a clear potential for a $100M+ exit, which means there needs to be a clear potential to get to at least $10-20M in revenues. If you assume 5-10% market share, that means the TAM should be $100-400M at the minimum.
• Note that by TAM I mean your primary market. If there's potential to expand into new products or geographies that's great and can be a big plus, but given the uncertainty of these expansions it's important that your primary TAM alone is big enough.
• Can't you target a smaller market but aim for much bigger market share? The general thinking is that it's much easier to get to, say, $50M in revenues in a $1B market than in a $200M market. My gut tells me that's right, but it would be interesting to see some real data on this question.
• Note that I'm answering the question from my biased VC perspective. There are plenty of opportunities to build very respectable companies in smaller markets or niches. They just may not be VC-fundable – which can be completely fine if you don't need that much capital and if your competitors don't get VC funding either.

Fortune 500 vs. Fortune 5,000,000
Should you go after the Fortune 500 or the Fortune 5,000,000? At Point Nine we're big fans of the latter. To some degree that's just a personal preference. We don't have expertise in enterprise sales and we just love consumerized, low-touch sales SaaS businesses. Some of the most valuable software companies have been built based on the enterprise sales model (including SAP, probably the most successful high-tech company coming out of Germany in the last 40 years) and maybe that's still possible. It's just not our thing.

Here are a few of the reasons why we like targeting SMBs:

• You need less time and money to get a first version to the market. The lean startup approach doesn't work well for enterprise software as you need to invest much more money into product development and sales.
• When you develop for enterprise clients there's a risk that you become a victim of the law of small numbers: You develop your product based on the requirements of a handful of pilot customers but you don't know if the rest of the market has the same needs. When you target SMBs you'll develop and iterate your product based on the needs of a much bigger sample size.
• The same goes for the sales side: Because you're dealing with small numbers it's easy to draw wrong conclusions. For example, you may think that you have a great CAC/CLTV ratio and all you have to do is hire more salespeople whereas in reality you just had luck with a few good customer wins.
• Customer acquisition is much less sales-driven, which means that you need less capital and that you can grow faster.
• And finally, starting with SMBs doesn't prevent you from going upstream over time. As your product becomes more and more robust and you understand the needs of bigger clients better and better you can target increasingly bigger customers. Much better than doing it the other way round since it's very hard to take an enterprise product and strip down features to make it usable for SMBs.

Horizontal vs. vertical

• The advantage of a vertical product, i.e. a product made for a particular industry, is that you know exactly who your target customers are. That makes it much easier to find out the precise needs of your target customers and also makes your marketing efforts easier. The downside of a vertical product is that your niche might not be very large and you might struggle to expand into other verticals.
• For horizontal products it's usually the other way round: Bigger TAMs, but it may not be obvious who the first adopters of your product are and it's harder to reach potential customers in a targeted way.

DOs and DON'Ts for SaaS entrepreneurs – #1

I've been thinking about a "DOs and DON'Ts" article geared towards early-stage SaaS founders and upcoming SaaS founders for a little while now. I thought it would be a good idea to summarize what I've learned about SaaS in the last few years and put it into a format like this. Problem is, it's a very large topic, and if I try to make it as broad, deep and well-written as I'd like it to be I'll never do it. I don't have sixkidsandafulltimejob.blogspot.de like Benchmark's Michael Eisenberg, but three little kids, about 25 angel investments and Point Nine keep me pretty busy too.

So what I'm going to do now, I'll apply Eric Ries to blogging, and in the spirit of release-early-and-iterate-fast I'll just get started with something. It's an experiment and I don't know yet what the result will be – how many DOs I'll end up with and if I have enough time to work on the series in a timely manner at all. But Reid Hoffman said that if you're not embarrassed by the first version of your product you've launched too late, and hey, no one is forcing you to read this crap. :-)

So...my first MVP are some thoughts on what I'll call...

The 1st DO for SaaS startups

Choose the right market

Some entrepreneurs will find this statement awkward because they don't feel like they've chosen a market. Some founders use a very systematic and analytical approach and evaluate a number of ideas first, but others just have an idea (or just happen to have domain expertise in a specific area) and get started without too much analysis and without ranking the idea against other ideas. There's nothing wrong with pursuing the first idea if you're really convinced of it and I'm sure that some of the biggest success stories began that way. But I do think that generally it makes sense for founders to do some due diligence on their idea, at least before committing the next years of your life and maybe your savings to it.

So how does an attractive SaaS market look like? Simply put, an attractive market allows you to provide:

• a painkiller solution
• to a large number of companies
• whose needs aren't adequately served by the incumbents

Additional aspects which make your market even more attractive:

• Plenty of opportunities to increase your TAM (total addressable market) by broadening the product offering, moving upstream or going into adjacent markets.
• Chance to realize network effects, to become a platform or to create a data asset.
• Most of your target customers are still using old-school desktop solutions or make do with a combination of generic applications like Outlook, Word and Excel.

A great example are web-based accounting apps: Every company must do their accounts and desktop solutions suck. Voilà, a painkiller solution for a large number of companies whose needs aren't adequately served by existing products. The category also scores well on the bonus points above:

• Let's say you start with an invoicing app for small businesses. That alone is a sizable market, but it's also a great starting point to move into accounting and payroll, as well as to gradually target bigger customers over time.
• There's also potential for network effects (think e-invoicing between your customers), to become a platform (for a variety of adjacent apps) and to create a data asset (e.g. benchmarking data), which all helps to make your position more defensible and gives you pricing power in the long-term.

To be continued!

A PS on grandfathering

If you've read my last blog post I still owe you a small PS. I mentioned that while I was writing the post I've learned two surprising things, so here goes. (Caveat: I usually try to provide some useful advice in my blog. What I'm going to write now doesn't have any practical value so feel free to skip it.)

Number 1: 

Do you know where the term "grandfathering" comes from? Maybe it's just my illiterateness and you're yawning but I had no idea that the term, which describes such a nice thing in the context of business and politics today, goes back to such a horrible concept:

The concept originated in late nineteenth-century legislation [...], which created new literacy and property restrictions on voting, but exempted those whose ancestors (grandfathers) had the right to vote before the Civil War. The intent and effect of such rules was to prevent poor and illiterate African American former slaves and their descendants from voting, but without denying poor and illiterate whites the right to vote.

(Source: Wikipedia)

Number 2:

I initially thought that the lower your churn rate is, the tougher it will feel for you to offer generous grandfathering. My thinking was: If you have a low churn rate and therefore a long customer lifetime, you're giving up a lot of incremental revenues by not increasing your prices for existing customers. If on the other hand you have a high churn rate you can more easily do without the price increase because you're existing customers won't stick around for a long time anyway.

Turns out this isn't true, at least if you expect churn to be constant – and if you're interested in the relative importance of the aforementioned incremental revenues as part of your total revenues (if you only care about the absolute dollars that you might be giving up, my original assumption is of course correct). If you take a look at this Google spreadsheet (let me know if you'd like to get the Excel version) you'll notice that the  relevant revenue portion that we're talking about (revenues from Group A customers due to pricing increase, cells E22-G22) is almost completely insensitive to changes in churn rate (cell B10)!

Look at cell G22 in the spreadsheet, which shows the revenue portion that you give up by offering grandfathering for year 3. If your churn rate is 1% p.m. that percentage is 7.35%. If it's 3% p.m., the percentage goes down to 7.22%, almost no change. And if your churn rate is 5% p.m., again almost no change to that percentage (7.08%). The reason is that revenues from your new customers ("Group B customers" in the model) are affected by your churn rate as well, and that effect almost completely offsets the effect of your churn rate on your existing customers with respect to the question that I was talking about. If you think about it, it's logical, but my original intuition was wrong.

The Case for Grandfathering

If you're running a SaaS startup it's likely that sooner or later you'll want to increase your prices. The reason is simple: It's impossible to find the perfect pricing right off the bat, so most startups launch with a pricing scheme that's on the low end to make sure that they don't scare away potential customers. "In the beginning, err on the side of being too cheap", was also one of the tips that I gave in my previous blog post about SaaS pricing.

Now let's say 12 or 18 months have gone by, you've acquired your first couple of hundreds of customers, you've added lots of features and made your product better and better. By now you also have a better feel for what your customers are willing to pay, maybe supported by A/B tests with different prices or customer interviews, and you want to increase your prices. 

There are a number of questions that you'll have to answer: Do you want to keep the pricing model and just increase the amounts or do you want to change the structure of the pricing – axes, plans, limitations – as well? How much do you want to increase prices by? Are you introducing new features or editions that justify a pricing increase or are you going to increase prices for the existing offering?

In this post I want to focus on just one question: Should the new, higher prices be applied to your existing customers as well or should their plans get grandfathered?

At first you might be tempted to increase prices for your existing customers. They like your product and are used to it (and will incur "switching costs" if they switch to a different product), so most of them probably won't leave even if they are not thrilled about the price increase. The additional revenue from the higher prices will probably more than offset the revenue that gets lost due to some customers who leave. So increasing prices for your existing customers promises to give you an immediate, maybe very significant revenue bump.

In spite of this I want to argue that if you take a long-term view grandfathering your existing customers is almost certainly the better choice. (At least if you're a fast-growing early-stage startup. If you're a big company in a saturated market things may be different, but then you're most likely not reading this post anyway!)

The main reason for grandfathering existing pricing plans is that it just doesn't feel right to attract customers, get them used to and maybe even locked into your product and then demand more. Unless the pricing increase is very modest or your customers all agree that the old price was way too low relative to the value of your product, this will almost certainly upset a significant percentage of your customers.

However, the reason I want to focus on is mainly a mathematical one and is related to the effect of fast growth. It also doesn't require you to think much about business ethics as I will argue that grandfathering is also better for you, not just for your customers. :-)

Take a look at this Google Spreadsheet. 

Let's say your customer churn rate is 2.5% per month, your customer growth rate is 5% per month and you're planning a price increase of 50%. Based on these assumptions, by year 3 after the pricing increase the additional revenue that you get from not grandfathering your pre-price-change customers (named "Group A" in the spreadsheet) will – maybe surprisingly – account for a mere 7% of your total revenues. Here's how it looks like on a chart:

This does not yet include the effect of cancelations due to the price increase! If you assume that you will lose 5% of your existing customers due to the price increase (see the second scenario in the spreadsheet), the net revenue gain of not grandfathering has shrunk down to less than 2.5% by year 3, and by year 4 the gain will have turned into a net revenue loss:

If you're assuming a higher cancelation rate that will obviously happen even earlier.

You can download the Google Spreadsheet to play around with the assumptions (or let me know if you want the Excel file via email, in that case you'll also get the charts which didn't survive the Excel => Google conversion). It depends on your assumptions if and when the positive effect of not grandfathering will reverse itself, but unless you're not predicting much growth it won't take very long until the additional revenue will have become a pretty insignificant factor.

Importantly, I have not even taken into account the potential negative effect which not-grandfathering might have on your future growth rate by reducing referrals from your existing customers and generally by losing goodwill in your target audience (whereas generous grandfathering could motivate your loyal customers to give you even more referrals than before). These effects are hard to measure but I'm sure they exist and if you keep them in mind the decision will be even clearer.

Finally, if you agree with the above, consider creating a "Customer Bill of Rights" which, upon signup, explains to customers how you're going to deal with pricing increases in the future. I think I've never seen this on a signup page but I'd be curious to find out whether this would have a positive effect on conversion rates.

PS: While writing this blog post I learned two surprising things (surprising for me, at least). More on that soon. :)

The Price is Right (or not)

One of the most important questions which every SaaS company has to solve is to find the right pricing – the right pricing model as well as the right price levels. It’s obvious that getting pricing right is extremely important: If you’re too cheap you will leave money on the table and reduce your ability to invest in customer acquisition. You may also hinder adoption especially from bigger customers who think that your product can’t be good because it’s so cheap. If you’re too expensive you might be scaring away the majority of your potential customers.

It is of course impossible to find the optimal price point in a way academic textbooks would define it. Finding that would require you to do more tests than you can possibly do. What you should do is try to get to that point as close as possible, and when I talk about the “right” pricing I mean a reasonably right pricing.

Unless your target customers are all very similar (which is unlikely), the most important thing that your pricing model has to accomplish is to capture different amounts of money from different customers based on their willingness and ability to pay, which correlates with the value that they’re getting from your product. In the old enterprise software world this used to be the job of the sales people – talk to the customer, find out about his needs, get a sense for what he can pay, offer him a solution and negotiate a price. In the world of SaaS, customers (rightly) expect more transparency and will look for a price list on your website before they start a trial.

In many cases a per-user pricing (often also referred to as “per seat”) is an obvious choice, and some of the most successful SaaS companies including Salesforce.com are using that. Other successful examples include pricing based on:

• number of clients managed with the software (e.g. Freshbooks)
• number of newsletter emails sent (e.g. MailChimp)
• number of email recipients in the system (e.g. ConstantContact)
• amount of storage that is used (e.g. Dropbox)
• number of events tracked (e.g. KISSmetrics)

What these companies have in common is that they've found an "axis" that highly correlates with their customers' willingness to pay, which allows them to keep their service affordable for small customers while asking bigger customers for much more. It also allows them to benefit from the growth of their customers, since a growing company needs more seats/emails/MBs/events/etc over time. Ideally this can lead to what is known as "negative churn" – the wonderful situation when the MRR growth of some customers of a customer cohort more than offset the effect of terminations from that cohort.

Importantly, most successful SaaS companies differentiate their prices along more than one axis (David Skok wrote about this here). Secondary axes include the level of support, additional features or other usage parameters. For example, Freshbook's pricing is based on a combination of the number of clients that you can manage and the number of seats, plus two additional factors:

So what's the right pricing model for your SaaS startup? For obvious reasons it depends and I have no general answer to that question, but here are a few practical tips:

• Try to find one or more axes which correspond with the value that your customers are getting from your product and which correlate with your customers' willingness to pay. Talk to your customers and analyze how your early users are using the system to find out the ways in which larger customers are using your product differently from smaller customers.
• In the beginning, err on the side of being too cheap rather than being too expensive. In the beginning the most important thing is to get customers. You can optimize your margins later.
• Later on, make sure you're not leaving too much money on the table. If not a single customer ever complains that you're too expensive that's a strong sign that you're too cheap.
• Accept the fact that it's very unlikely that you will get your pricing right at the first shot. Go out with something that you think makes sense, get feedback from the market and be prepared to make changes quickly.
• If you increase prices, try to do it along with new value-add features that help justify the price increase. And offer your existing customers extremely generous grandfathering terms.
• If your pricing is differentiated based on features, consider giving all users the high-end plan with all features during their trial so that they can play around with the full product.
• Maybe not necessary to mention since these are all known best practices, but just in case: Give users a self-service free trial. Offer monthly pay-as-you-go subscriptions that users can cancel at any time. Provide an option to pay in advance for a year (with a discount). Create a clean, beautiful pricing page. 

Do you know any examples of pricing models that worked or didn't work, or would you like to get my feedback on your pricing model? Get in touch!

Know your user cohorts

One of the most important tools to better understand the usage of a web application – or a service, a game or a mobile app, it doesn't matter – is a cohort analysis. In fact, it's almost impossible to get a really good understanding of a service's usage without looking at activity and retention numbers on a cohort-by-cohort basis.

And yet, most startups that we're talking to haven't looked into cohort analyses yet. Often the reason is lack of resources. If you're a young, bootstrapped startup and you have to decide if you want to use your developers' scarce time to improve your product or to get better statistics most founders will decide for the product. That's understandable. Nonetheless I would like to argue for a high quality standard of metrics early on, since the insights that you'll get by understanding your metrics will often be highly actionable. And of course it will make your conversations with investors who want to understand your numbers much easier. At the minimum, I think you should try to make sure from the beginning that you collect the data that will allow you to do more sophisticated analyses later.

Back to the original point, why is a cohort analysis so crucial? Let's take a look at the following chart of an imaginary startup:



Looks like the company is growing nicely, hm? No exponential growth, but constant, linear growth. Now take a look at this chart:



It looks like the number of active users is growing even steeper. Great! 

But now let's take a look at the underlying cohort numbers in this Google Sheet.

The number of new signups are contained in cells D5 to D14, and the cumulated number of signups are in cells E5 to E14 (I used that one to make the chart look better :-) ). The number of active users, which the second chart shows, is contained in cells H15 to Q15.

In case you're not familiar with cohort analyses, here's a quick introduction:

• Each row represents a signup cohort.
• In the "right-aligned" cohort analysis at the top you can see the number of active users of each signup cohort for every calendar month. So, for example, I5 is the number of users who signed up in January 2011 and were active in February 2011, and I6 is the number of users who signed up in February 2011 and were active in February 2011. Accordingly, if you go down to the "Total" numbers in row 15 you'll see the total number of active users for each calendar month. These are the numbers which form the activity chart above.
• In the "left-aligned" cohort analysis at the bottom you can see the number of active users of each signup cohort for every user lifetime month. Example: I20 shows the number of users who signed up in February 2011 and were active in March 2011 (=user lifetime month #2 of the February 2011 cohort).

Row 29 and 30 calculate the monthly drop-off rate and the percentage of users who is still active n months after signing up. Here's where it gets really interesting. Our imaginary startup has a monthly drop-off rate of 50%, which means that after 6 months only 4% of the users are still active! That's not easy to see if you're just looking at the charts above, is it?

Note: In the example that I'm using, a user who registers in month x qualifies as an active user in that month. The assumption is that he logs in at least once after registration and that that log-in makes him count as an active user. That effect completely distorts the real activity numbers. If you're signing up a growing number of users it means that your activity numbers can basically only go up regardless of any real usage activity. So - if you're talking about "active users" it's best to leave out the users who have signed up in the timeframe that you're talking about. That is, if you're talking about the number of active users from last week, include only the users who signed up until the week before.

By the way, while I've used "activity" in this example you can of course use cohort analyses to track other aspects, too. As a SaaS company, for example, you should have a cohort analysis for retention/churn. As an online shop, you should have a cohort analysis for repeat purchases.

Point Nine loves animals

About one and a half years ago I became a vegetarian, after coming to the conclusion that it's impossible to ethically justify to kill – and in almost all case inflict enormous suffering on – living creatures that are capable of experiencing pain, just for the pleasure of eating meat (which, make no mistake about it, is a huge pleasure). Maybe I'll write more about that topic in another post. In the meantime, if you're interested in the rationale behind my decision, read Jonathan Safran Foer's bestseller "Eating Animals" or the hard to swallow but brilliant books of Peter Singer.

Today I want to write about different kinds of animals (sorry for the misleading introduction). I'm talking about business development animals. Coding animals. Usability animals. Design animals. Sales animals. Marketing animals. In short: Founders who work like beasts to make their startups successful.

In the words of the priceless Paul Graham:

What do I mean by good people? One of the best tricks I learned during our startup was a rule for deciding who to hire. Could you describe the person as an animal? It might be hard to translate that into another language, but I think everyone in the US knows what it means. It means someone who takes their work a little too seriously; someone who does what they do so well that they pass right through professional and cross over into obsessive. 

What it means specifically depends on the job: a salesperson who just won't take no for an answer; a hacker who will stay up till 4:00 AM rather than go to bed leaving code with a bug in it; a PR person who will cold-call New York Times reporters on their cell phones; a graphic designer who feels physical pain when something is two millimeters out of place.

Almost everyone who worked for us was an animal at what they did. The woman in charge of sales was so tenacious that I used to feel sorry for potential customers on the phone with her. You could sense them squirming on the hook, but you knew there would be no rest for them till they'd signed up.

When I read Paul's essay "How to start a startup" again a few days ago, I thought about the founders of the companies that I've invested in and was struck by how much truth there is in the "animal test". What all successful founders seem to have in common is perfectionism at what they're doing, coupled with a relentless drive.

I had to think about my old friend Stefan Smalla, who, less than one year after founding, has rolled out Westwing to fifteen countries while managing spectacular growth in Germany at the same time. I also had to think about Guk Kim and Ryan Fyfe, the founders of Cibando and Shiftplanning, respectively. Both are in their mid-twenties and started their companies all by themselves, did everything by themselves in the early days and are now doing an incredible job at running and scaling their companies. These are just three examples – I could go on and on and talk about every founder that I've invested in!

In the meantime, the "animal test" has become something like a running gag here at Point Nine Capital. Whenever we talk about a potential investment we're asking ourselves: Are these guys animals?

Financial planning for SaaS startups

[Update 03/23/16: I've created an improved version of the template - check it out!]

A few people who read my recent post about financial planning asked if I could provide an example for a good financial plan, so I'd like to post one here. The plan is very similar to the one that I created in the very early days at Zendesk and re-used a few times in the meantime, but I had to make a few adjustments to make it more generic.

It's a simple plan for an early-stage SaaS startup with a low-touch sales model – a company which markets a SaaS solution via its website, offers a 30 day free trial, gets most of its trial users organically and through online marketing and converts them into paying customer with very little human interaction. Therefore the key drivers of my imaginary startup are organic growth rate, marketing budget and customer acquisition costs, conversion rate, ARPU and churn rate. If you have a SaaS startup with a higher-touch sales model where revenue growth is largely driven by sales headcount, the plan needs to be modified accordingly.

For non-SaaS business models the template needs to be modified more heavily or may not be useful at all, other than that it shows my way of thinking around business planning. That was one of the points that I was trying to make in the original blog post – you can't simply re-use a template, your financial plan needs to mirror your specific business case.

Here's the plan as a Google spreadsheet. If you want the original Excel version please let me know (yes, Excel is one of the few desktop apps that I'm still using).

[Update: If you'd like to get the original Excel version, which looks a bit nicer, you can download it here. If you like it, tweet it!]

The grey box at the left contains all assumptions (blue text color). Everything on the right is calculated, no hard-coded numbers there. I have, of course, used dummy numbers for all assumptions.

The model should be largely self-explanatory but here are a few notes:

• It all starts with the signups that you're adding. I've separated signups into non-trackable signups (signups that you get from word of mouth, PR and so on) and trackable signups (signups from AdWords and other paid advertising where you can track the costs of acquiring a signup). You may have to break this down further depending on your customer acquisition channels.
• Then I'm assuming that you're converting a certain percentage of signups into paying customers (with a one month time lag, assuming that you have a 30 day free trial). The model contains just one conversion rate regardless of the signup source. You can change that if your conversion rate varies depending on the signup source.
• Next up, I'm calculating revenue by multiplying the (approximate) number of customers that you have mid-month by your average revenue per account. If you have a tiered pricing model or a per-seat pricing, consider modeling that.
• Moving down to the costs side – this should all be self-explanatory. Just replace the dummy values by your actual values or assumptions and add additional expense categories as needed.
• Regarding P&L and cash-flow, I'm keeping things really simple here and am assuming that your EBIT is equal to your operating cash-flow. That is, I'm assuming that you're charging your customers on a monthly basis, that you're not making any investments (in accounting terms) and that there are no taxes or interest payments. I think that simplification works well for most very early-stage SaaS startups but it of course needs to get more sophisticated as you grow.
• Last – but not least because this is one of my favorite parts – the sanity checks: I've seen MANY financial plans with an EBIT margin north of 90% in year 3. That's a classic mistake which can happen if you project your revenues to grow exponentially but don't provision realistic increases on the costs side as well. Adding some sanity checks will help you spot these mistakes and make sure that your plan remains realistic. For example, I've included the number of paying customers which each support agent needs to take care of. If that number gets too high you need to allow for more support staff.

A very brief history of Point Nine

I just created a slide about the development of Point Nine Capital for a little company presentation and thought it might be useful if I posted it here as well to give everyone some information on where we're at and how we got there:

In 2008, Lukasz Gadowski – who almost everyone in the German Web startup scene knows because he built or helped build some of Europe's biggest Internet success stories, e.g. Spreadshirt, studiVZ and brands4friends – and Kolja Hebenstreit teamed up with Pawel Chudzinski and Steffen Hoellinger to create Team Europe Ventures (TEV). TEV had two purposes: Building companies and investing in other Internet startups. Since then, TEV has founded a number of highly successful Internet companies – DeliveryHero, DigitaleSeiten, ChicChickClub, madvertise and SponsorPay, to name just a few.

In 2009 TEV raised a ~ €6M fund, which was managed by Pawel and invested in 24 companies. 16 out of these 24 companies were co-investments with myself, some led by Pawel, some by me, some by both of us together. So as you can see, although we didn't formally set up a partnership until recently, we've worked together very closely in the last few years.

In 2011 we concluded that it's time to take our collaboration to the next level and Lukasz, Kolja, Pawel and I decided to create an independent investment firm called Point Nine Capital. In connection with this, the existing TEV fund has been renamed into Point Nine Capital Fund I. The new fund, called Point Nine Capital II, is now managed by Pawel and me, and we're also the biggest stakeholders. Lukasz and Kolja continue to run Team Europe, which is now exclusively focused on creating fast-growing Internet companies, and they also support us as Venture Partners.

Point Nine Capital II has made four investments already – one is a great Canadian SaaS startup called Jobber, the rest hasn't been announced yet – and we're looking forward to making many more investments in the coming months and years. Our focus continues to be on SaaS, marketplaces, lead generation, eCommerce and mobile. Additional information is available on our website, and if you have any questions, feel free to ask!

Join Point Nine for a summer internship!

We're looking for an intern – a great opportunity for a young, super-smart over-performer to get an inside view of an early-stage VC in Berlin. :-)

I'm reposting our job ad here:

* * * * *

We offer a three month paid internship, starting middle of April or beginning of May at our office in Berlin.


What you do:

• Support evaluating the dealflow; give us your opinion on >100 business ideas and plans per month; find the one we should invest in.
• Do networking; meet people and founders.
• Screen new markets; find hidden champions; be faster than the rest.
• Dig deep into topics; help with research; find answers for questions we have not asked yet. 
• Help us run operations more efficiently.

What we offer:

• Insights how a venture capital firm works.
• Steep learning curve; small team; much responsibility if you can earn it.
• Access to our network: our portfolio companies as well as Team Europe (Company Building), iPotentials (HR), Gruenderszene & Venture Village (media).
• Berlin, the upcoming heart of the European StartUp industry. That is where you meet all the founders, evangelists, angels and influencers.
• Enough time to enjoy life.

What we expect from you:

• You are a digital native; you used facebook, before people heard about studiVZ; you check in with foursquare and take photos with instagram; maybe you even blog and twitter.
• You are familiar with basics of the Internet infrastructure and have some understanding of key Internet based business models, like e-commerce, large networks, SaaS, etc.
• You are curious; you have your own ideas; you want to see results.
• We do not need to tell you what you have to do. You see the tasks, you do them, you surprise us.
• You don’t need 9 to 5 working hours.
• And the usual stuff: you have at least 4 semesters at your business school, preferable already a first degree. You have gained international experience, have done at least one internship before. You speak fluent English and hopefully German.

* * * * *

Avoiding Parkinson's Law of Triviality in your financial plan

In the last few years I've seen a lot of financial plans, and since we started Point Nine in the middle of last year that volume has been skyrocketing. I've seen everything from just a few numbers in an email to extremely sophisticated Excel spreadsheets with dozens of tabs and tens of thousands of cells, and I thought I'd offer some advice on what I think a good financial plan looks like.

To begin with, among the worst financial plans are those that you get if you take a template from a business plan competition or a bank in Germany and don't customize it to your particular business. These templates are usually very detailed on the costs side, listing everything from magazine subscriptions to stationary and postage, but the revenue projection is just one line – a pure estimate that is coming out of nowhere. Parkinson's Law of Triviality comes to mind!

The best financial plans of early-stage Internet startups in my opinion:

• are relatively simple – just one Excel tab or a few at most (a later-stage company will often require a more complex plan but in the beginning you can keep it simple)
• are based on the key drivers of your business (your conversion funnel, your projected ARPU, churn etc.)
• make your assumptions transparent and easy to change
• contain very few hard-coded numbers which would make the plan hard to revise (an exception to this are historic numbers, of course)
• avoid Parkinson's Law of Triviality – spend more effort on what really matters and lump together stuff like tiny expense categories
• contain a few extra lines for sanity checks (anyone who will seriously review your plan will perform them anyway, so why not make their lives a little easier?)

If anyone is interested in further details, please let me know in the comments section, email me or send me a tweet and I can add some more color and post an example.

How does the ideal SaaS startup founder team look like?

Last night I read this question on Quora:

In general terms, what is the ideal size and make-up of a team for a pre-revenue SaaS startup?

It's a question I've been pondering about a lot already, and seeing it posted on Quora prompted me to try an answer. I think the second part of the question is more important. I do have a slight preference with respect to the team size as well, but it's light because I've seen and worked with very successful SaaS startups with different team sizes.

I have a stronger opinion on the make-up of the team. In my opinion, the founder team of a SaaS startup needs to excel in three areas: engineering/technology, product/UX and domain/market expertise. If I think about the founders of "my" SaaS startups, these are the three qualities that all of them have – in addition to a huge amount of intelligence, motivation and commitment, which allows them to quickly acquire new skills as the company grows.

Here's the full answer that I posted on Quora – I'd be very interested in what others think:

In my experience the ideal team size is three. The second best option is two, and the third best option is one, four or five. Why?

To begin with, founders are incredibly productive and usually work for relatively little cash, so a 3-person founder team simply gets more done – faster and at lower costs – than a 2-person team or a single founder. This can be a huge advantage, especially for a bootstrapped startup that can't afford to hire many people. Besides that, it’s rare to find all the skills that you need in order to get a SaaS startup off the ground in just one person, which is an argument for two or more founders (more on that below).

Needless to say, at a certain level these advantages get offset by the disadvantages of a founder team that is too large. If you have too many founders, too much time is spent on communication, and each founder doesn't get a big enough share in the company.

In my opinion, the optimal balance is reached with a team of three, closely followed by a team of two. Note that this is not a scientific answer, and I haven’t done a systematic comparison of the success rates of a larger number of startups – it’s just based on intuition and anecdotal evidence. Also, I have already invested in 1-person and 2-person founder teams, which became very successful, so my preference is only a light one.

With regard to the ideal make-up, a SaaS startup needs to have:

1. An excellent technical co-founder– a great developer who codes the first version of the product and has the skills to become the engineering team leader or CTO when the company grows.
2. An excellent product person – for example a great designer who designs the UI of the application as well as the marketing website and who will lead product management later. 
3. Domain expertise – whether it’s the CTO, the product person or a third co-founder who contributes this knowledge – at least one founder needs to understand your market, your customers and the problem that you’re solving for them.

Sales and marketing expertise and general management experience can be a big plus of course and are very important in later stages of the company, but in the beginning they aren’t as essential as the three requirements mentioned above. You can hire people for sales and marketing later and you can acquire management experience or hire additional people over time. But first you have to create a product that solves a real need for your customers – and the ability to do that needs to be part of the founder team’s DNA.

Bye-bye 2011, hello 2012

It's that time of the year – you're looking back to the old year and you're reviewing your plans for the new one. The last year was very busy for me, both privately and professionally. I became a dad for the third time, and I teamed up with Team Europe to create Point Nine Capital. Two startups, so to speak.

It's also a good time to take a look at my angel investments because from now on I'm going to make all new investments via Point Nine Capital. Last year I wrote a series of small portfolio review postings. This time I'd like to post some aggregated (vanity?) stats about my investment activity in 2011:

• I've made 14 new investments in 2011, which brings the total number to 28

• The new investments are: Lieferheld and Delivery Hero, Server Density, Fundly, Westwing, Shiftplanning, FinanceaCar, Vend, ChicChickClub, Unbounce, Cibando and 3 investments which haven't been announced yet
   
• Out of these, 10 were co-investments with Team Europe / Point Nine (see, we dated extensively before we got married)
   
• Before 2011 I've had 2 write-offs. In 2011 there were 0 write-offs, which means that the total number of active investments is 26.
   
• 15 of "my" companies did follow-on rounds at higher valuations in 2011 (some of these rounds were internal rounds, but most were external)
   
• My ROI (on paper) stands at a little over 5x if you use the last rounds' valuations as the estimated fair-market value. If you try to factor in the increase in valuation since some of these last rounds, which in some cases happened over a year ago, it's probably closer to 8-10x.
   
• No exits yet (but two small secondary sales, which together returned about 25% of the total amount I invested)

My portfolio is way too young to draw any final conclusions but it's obviously looking very good so far. Huge thanks go to all the incredibly talented and hard-working people at each of the 26 companies. Have a great New Year!

We came, saw and... invested

Our last investment in the old year is a novelty for us – our first investment in a startup from Italy. Founded by 23 year old entrepreneur Guk Kim, Cibando operates a popular iPhone app that makes it easy to find the best restaurants in Rome, Milan, Florence and other Italian cities.

What makes this significant (beyond its obvious significance for Cibando and for us) is that this is one of only a very small number of VC investments in Italy. So significant, at least, that the news got covered by TechCrunch and also made it to the online frontpage of Corriere della Sera, one of Italy's oldest and most reputable daily newspapers!

To say that Italy's early-stage funding ecosystem is underdeveloped is probably an understatement, at least that's what I've heard in the last few months. Not that it's that great in Germany, although with the rise of Berlin as Europe's new tech hub it's hopefully getting better. But in Italy it seems to be much worse – so bad that many of the serious Internet entrepreneurs from Italy leave their country to raise money elsewhere.

It might seem odd that we as a Berlin-based VC invest in Italy, but part of our strategy is to be somewhat location-agnostic. While the majority of our portfolio companies are based in Germany or Poland (homeland of Pawel and Lukasz) we're open to investing in other European countries and even outside of Europe. In fact, some of the best investments that Point Nine Capital (and/or I as an angel investor) made were in pretty unusual locations: myGengo (founded in Tokyo), Vend (founded in New Zealand), Zendesk (founded in Copenhagen) or Clio (founded in Western Canada) are great examples. Some of these companies later moved part or their operations to the US or even relocated completely, but that's another story.

Back to Cibando. You simply draw a circle on a map to select how far you’re willing to drive and select your preferred restaurant category. Cibando then lists the best restaurants that match your requests, along with reviews, mouth-watering photos and other helpful information. Think of it as a mobile version of Yelp or Qype but with several special twists. Buon appetito!