Tomasz Tunguz, partner at Redpoint Ventures and SaaS guru, sits down with moderator Connie Loizos, Silicon Valley editor at TechCrunch, to discuss what successful SaaS startups look like. What’s the investment climate, what are the hot verticals, and how can your business stand out?
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In a nutshell:
- Yes, venture funding is likely to dry up.
- With the right fundamentals, you can still secure funding; but otherwise, you’ll have to prove yourself.
- SaaS is still in its infancy, and machine learning and good UI are emerging trends.
Tunguz noted that investors expect much more MRR than ever before, and like many other panelists today, funding is certainly slowing down. Seed stage SaaS investments are down 18%; late-stage ones have fallen even further. After a boom in funding, signs are clearly pointing to a reversion to the mean.
He offered some ideas for reducing burn if you’re hit by the funding crunch. Layoffs, he argued, are a drastic measure; in his post on the fundamental units of SaaS growth, he argues that you need a certain atomic team composition to support your revenue goals. For example, you may need two marketers and a $100,000 marketing budget to supply enough leads for one SDR and three AEs to close deals, and two people on customer success to avoid losses and upsell. If you lay off people such that you divide the atomic unit, your business will falter. He recommends that SaaS startups reduce burn by slowing sales hiring instead. A few of his ideas:
- If SMBs are your target customers, consider content distribution - this can be very cost effective when you can’t support an inside sales team. Other light-headcount channels include mobile app store distribution and retargeting.
- Increase efficiencies in your inside sales team to lower costs.
- Channel partnerships have worked well in the past, and it’s possible to rent a large software enterprise sales team.
Given the current funding pinch, he says, you can’t spend your way to market dominance with a big war chest and no strategy. Instead, he provided four factors that VCs are looking for:
- Better technology
- Better go-to-market strategy
- Better relationships
All that said, Tunguz thinks SaaS is still in its early days. Enterprise companies boast $2 trillion in market capitalization, and 2% of that is SaaS. In the coming years, he thinks SaaS companies will differentiate on machine learning and solid UI - the former takes advantage of the volume of available data, and the latter reflects customers’ expectation that they’ll have a solid user experience.