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Basic Lessons of Saas
There are some basic lessons of SaaS businesses that are valuable for every entrepreneur. Take out the word SaaS and for the most part these lessons apply to many businesses. The difference in SaaS vs. many other businesses is that of scaling quickly.
If you run a coffee shop on a busy day maybe you have thirty people in the store at one time, and perhaps a thousand over the course of a day. In this case, the only way to grow you business would be to process more people faster or to get a larger space. But in a SaaS business, you are generally not confined by space or your ability to serve tens of people at one time, perhaps hundreds or thousands though, so you have to worry more about getting people into the store before other stores open up and marketing.
The lessons below cover this issue and several other major issues that so often crush SaaS entrepreneurs.
Most people I’ve talked to over the years about SaaS think a lot about the product and then what they’re going to be doing with their millions of dollars, but the work between those points is vital to reaching those goals. The first thing people don’t realize is that when you’re building a SaaS, you’re building a business just like any other.
This is how most people think about SaaS.
Some basic things you’re going to need in your new business include upfront and ongoing costs such as:
- 1.A federal tax ID - In the US, where I am, this is the first step in starting a new business.
- 2.Website hosting - It’s got to live somewhere, right?
- 3.A phone number(s) - Don’t think you can get away forever without one of these, ‘cause you can’t.
- 4.Customer service agents - A lot of people are going to be asking a lot of questions, and if you’re out traveling the world or collecting your millions, how are you going to answer them?
- 5.Customer service software - Got to keep all those requests straight.
- 6.Electricity - In one way or another you’re going to end up paying for this.
- 7.Insurance - You may not need this at first, but I guarantee you will eventually.
- 8.Security Systems - Those pesky hackers all want your money and information. Better to pre-empt them than pay a ransom (which happens everyday).
- 9.An advertising budget - Your Google overlords don’t work for free you know.
- 10.Marketing - The people of the world aren’t going to find you without you being in front of them, saying the right things, and lookin pretty!
- 11.Marketing software - so you can keep all those marketing dollars working.
- 12.Customer Relationship Management (CRM) software - A way to track and manage all those nice people giving you money every month.
- 13.Sales team members - someone has to answer those customer questions before they give you their money!
- 14.Money management software - now that you have things to pay for, you’re going to need a way to manage where all your money is going.
- 15.Taxes - How are you going to buy coffee for those long nights if you don’t have things like roads?
If that sounds like a lot of stuff, that’s because it is. Starting a business is time consuming, has an element of risk, and costs a lot. This is the mistake so many people make. They think they’re building software when in fact they are building a business.
if all this stuff sounds like it’s right up your alley, then let’s keep going!
If not, you may want to consider putting the computer down for a few minutes and taking a little walk to rethink this project; if you aren’t excited about working on all the things mentioned above, you’re probably just going to be throwing your money away and getting frustrated. Also, you’ve probably heard the saying that ‘as a new entrepreneur you get to choose your own hours, and that means you can work any 16 hours per day you want’. If this doesn’t sound like your idea of a good time or you don’t have the means to do this (at least for a while)… well, just think about it ok?
Here is the first big secret about SaaS success -- it’s important, and I hope will guide you through the rest of this journey. The number one indicator of success in SaaS, or any business for that matter, is how many times the person leading the startup has done it in the past. That’s it, that’s the number one, biggest thing.
What that means to you is that you’re probably going to fail your first time, but that’s okay because now you know it’s going to happen and you need to start with something small so you can afford to fail. This is seriously one of the most important ideas in this entire book. Really.
Failure is how we learn to succeed. If you haven’t failed, then you probably haven’t tried.
Steven is successful CEO and a friend of mine. Through our casual interactions and more focused talks, he has helped lead me to success in ways I’m sure he’s never realized. The first time I met him he handed out value bombs like they were tic tacs. Perspectives and insight that changed my view on business were given out so freely that I was always left asking more questions. This one particular conversation was changing for me. It helped me go from feeling like I was lagging behind my peers to a strong potential success. I hope it can do the same for you.
It was a perfect night in Medellin, Colombia. It was warm, but not hot. We had just had some delicious grilled octopus and an icy lemonada de coco (coconut lemonade - it’s their specialty there). It was also my last night of a 2-month stint during what would have otherwise been an oppressively cold winter in Atlanta, Georgia. My girlfriend and I had been hanging out with a bunch of other SaaS owners there and I was explaining to Steven that I was really bummed that the SaaS I had been working on for a long time wasn’t making any money.
We were walking through the neighborhood of El Poblado around midnight as I explained that my team had just run into yet another technical challenge and was not progressing nearly fast enough. We were also years into the project and were still not breaking even. Fortunately, I told him, the SaaS was secondary to my main business at the time, a digital agency, and I didn’t need the money to make ends meet. As I was venting my frustration to Steven and asking for advice, he gave me an answer that surprised me, gave me hope, and helped me move forward.
We wandered up to a bright yellow building with red shutters and red chairs on the corner “Here,” he said “This is one of my favorite places for a mojito in this neighborhood” as we sat down at a table. After the bartender took our order and quickly returned our drinks, Steven looked up from a bright green, minty mojito and said “What you’re going through is what pretty much every successful SaaS CEO I know goes through.”
“Really?” I asked, putting my Aguilla on the table to listen more intently.
“For sure,” he said “For my first SaaS, I had huge hopes. It was going to be so good. But… it crashed and burned, and I lost all my money. It was really, really tough. I felt like I let a lot of people down, and I really did. I had to go back to work as a developer, replenish my funds, and totally start over. But I learned a ton.”
He stopped for a minute and sipped his mojito. I could see that he was thinking about it, and I could kind of sense that he was thinking about that time in his life. I was just about to ask him about what followed when he started back up.
“The next SaaS made a little money and we sold it after about a year or so. We tell ourselves that we broke even, but really, my business partner and I still probably lost money on the whole thing if you count the time I spent on it” he said with a smile.
“We felt really good about having exited somewhat gracefully. That got us enough money to start over again. And by the third time -- which was probably about year 4 or 5 -- we mostly knew what we were doing; and when we built that system, we turned it around fast and actually made a good profit! It was a few hundred thousand dollars for each of us!” he said with pride.
“Now, I’m on my fourth SaaS, and this time we know what we’re doing and a few months after launch we already have five thousand paying users and we’re cash flowing at over 100k per month. This time, we are on track to sell this thing for millions.” he finished up.
“Wow, that is great!” I responded. “So what do you think was your biggest takeaway?”
“It just takes time and persistence, learning what not to do, and being okay with failure. That’s it. And don’t worry, you’ve got a ton of ideas, and if this thing doesn’t work, the next one will. Just keep at it. Being a startup CEO is a profession, and there’s no class in the world that will teach you how to do it. You just have to do it and keep doing it ‘till you do it right.”
That conversation changed my understanding about how I was approaching the business. Even though it didn’t immediately stop the bleed in my SaaS, it made me realize that a lot of really successful guys failed over and over and over until they got it right, and even if your first SaaS is your baby, it’s ok for it to fail and for you to do another one.
One of the most beautiful things about a SaaS business model is the profit margin. The second most beautiful thing is that in a lot of SaaS businesses, you don’t need many smart people doing hard jobs that cost a lot of money.
You’ll need a few developers and designers or maybe an agency to start off, but afterwards, you can set up people to do the same jobs over and over, track their success easily, and hold them accountable. This makes running a business a ton easier. Oh, and people that do the same things over and over are also generally less expensive or can eventually be replaced by a smart enough machine, so you can keep your costs down in several ways
But with that reward also comes a good bit of risk: typically entailing a longer time to get to market and a greater potential for failure. So mitigating your risk, validating your ideas, and decreasing time to market can be key contributors to success.
Here it is, big secret number two. You’ll know when you have a winning idea when the people you tell keep coming back to you over and over asking to buy it. If you can get someone to pay you money for something before you finish or even start building it, you have a winner. If someone wants something so badly they will take a risk to get it, then you have an idea worth selling. If not, either you’re not conveying what it does well enough or what you’re building isn’t solving a problem worth solving.
Don’t believe me that people will buy something before it’s started? Just look up Kickstarter. If that doesn’t convince you, this book isn’t going to help you.
Personally, I can tell you from my SaaS systems that the times we’ve had winners, we knew it immediately because the people we told about it kept asking over and over and over about when we would have it done.
SaaS businesses can often be grouped into two different categories: platforms and tools. A tool is a system that does basically one thing really well. Whereas a platform is a system that is fully featured and users work in regularly.
Examples of tools are systems such as:
Whereas a platform would be something more like
- Adobe Creative Cloud
Really, there is a spectrum and different systems fall all over the place. The thing to remember is that when you’re building a SaaS, especially your first SaaS, build a tool. Don’t make it do everything -- just do one thing and do it really, really well.
Don’t like sales? Don’t start a SaaS.
Don’t like marketing? Don’t start a SaaS.
Think you’re just building a system then people will use it? You’re wrong.
Before your SaaS starts, while it’s being built, and especially after you finish your Minimum Viable Product (MVP) and from there forward, you are running a sales and marketing company. Every aspect of what the business does will be customer-focused and, thus, sales- and marketing-focused.
A SaaS business is a sales and marketing company with a technology component.
The first step in reaching a market is choosing a market. That means that when you set forth to build your SaaS business, you NEED to have as specific of a target market as possible in mind and know how to reach them.
The lesson here is that if you don’t know how to get in front of your target market before your product is built you’re not going to have any easier of a time with it afterwards. Also, the more specific a group you target, the more likely you are to be able to sell to them.
Your targeting could be specific to (to name a few):
- Business type
The key here is to pick something so specific that you would know exactly how to reach a large number of these people immediately and know that they have a need for the solution you are providing.
If you can’t reach them, how will you sell to them?
The phone rings.
“Hey, this is Chris, just wanted to let you know that I’m having a problem with the system.”
Chris was one of our first BrainLeaf paying customers. He’s a great guy, runs a great business, and has given us ongoing support and feedback on the system over years. He’s got my cell number and when he calls, I listen.
“Hey Chris, what’s going on?” I ask.
“On the editor page, I can’t add new cards” he says.
“Thanks for letting me know, I will get on it immediately. Should be fixed somewhere between 10 minutes and an hour from now. And thanks so much for letting me know. I really appreciate it!” I tell him.
“No worries” he says, “I figured you would want to know.”
“I definitely do! Thank you!”
Immediately, I get on Slack and start looking for the last deployment. Was it recently? Was it today?
It was about an hour ago.
The phone is ringing again, this time it’s a project manager, but they’re going to have to wait. This is critical. I immediately go to the system and double check to see if I can reproduce the issue Chris had.
Yep. Sure enough, it’s right there. “How the heck did this get through our automated tests?” I think to myself.
As soon as I know that the issue is reproducible, and especially that there was a recent deployment, I start pinging developers, project managers, and customer service.
Messages were something like...
- To customer service: Card creation bug. Reproducible. It’s going to be an issue, but I am taking care of it.
- To development: Critical bug in last deployment. Cannot create new cards. Drop what you’re doing and fix it or customer service is going to come looking for you.
- To individual developers: Please see note in #generaldevelopment channel. Critical issue!
- To project management: Hey guys, there is a critical bug in the most recent deployment. Cannot create new cards. I already let development know. Took them off of other issues to fix this. Please make sure this gets done or we’re going to have problems fast.
Customer service is already starting to chat back about issues they’re having now. Right away though, I see a message from our lead developer “I see the issue. We’re on it. Will have either a rollback or fix in 10 - 20m.”
“Thank you!” I respond.
So, why was this so important? Why the freakout?
Because at scale, little problems become big problems really fast. It isn’t one person having an issue, it’s about to be a thousand people not being able to use our system. That means customer service being overloaded, project managers getting called in, developers being sent on wild goose chases, customers churning, lost money, lost time, goals being set back, and potentially a bad day. For more on this, take a look at the chapter on running a Lifetime Deal to see how a few small issues can cause you weeks of work and headaches.
When you’re working at scale on a system, a tiny little issue can blow up fast.
About five years ago someone reached out to me about their SaaS. They said, “I worked with a team and built an amazing system. We spent about 430k, and after all of this, I am sure I have no idea how to make this successful. You can have the entire thing if you will just work out some kind of arrangement to pay back the investors slowly over time. These were my friends, and I want their investment to be successful, but I know I cannot do it. Can you help me?”
Sadly, I couldn’t help him. At the time, I was already spread too thin and going through a ton of personal issues as well and just didn’t have the bandwidth to take on something new.
The next time this happened, it was with a very smart, thirty-something lawyer-turned-internet entrepreneur who had raised millions of dollars to build a music app, which I still think is one of the coolest music apps I’ve ever seen, but couldn’t get it out there. He raised something like three million dollars, received patents, and put together a great team. The goal was to sell it to big companies, and he almost did, but in the end he couldn’t get it sold and it fell apart along with a lot of his life at the time (don’t worry, he’s doing fine now).
Both of these guys learned their lesson the hard way -- the really, really hard way: and they’re just a couple of the thousands of entrepreneurs out there who take major personal and professional hits in learning this important lesson.
Validate your idea before you spend real money on it.
PROTIP: It doesn’t matter how good you think your SaaS business idea is, if you aren’t able to get enough customers to put enough money into your pocket for you to run the business and make money, you are wasting your time.
So don’t build something just to let it all get flushed down the drain along with your well-being. By validating your idea, you will know where your money is going to be going, know what you should and should not spend money on, better work towards bringing in revenue early, and know where you need to cut things off.
Understanding the cost of getting a system to market is just the first part of this lesson, the next is in the next chapter on Process where we'll cover the step by step process to getting your system from ideation to growth.
If you want to watch this whole section take a look at the webinar: