How do you reverse-engineer your first million as a SaaS startup founder? SaaStr founder and CEO Jason Lemkin chats with Sam Parr on the popular YouTube channel and podcast My First Million about what’s required to make it on the map for a $100M exit and then reverse engineers the steps to get there.
To the OG software people who read SaaStr, Jason is “the guy,” Sam says. He’s the person that the founders of Hubspot and companies that make tens of millions of dollars want to learn about software from.
For those who aren’t as familiar with our CEO and founder, here’s a highlight reel (as per Sam):
- Jason started a software company called EchoSign, which sold for nine figures.
- He’s invested in startups as a VC since 2013 and has 10x his fund.
- His first million came from a startup making implantable batteries from nanomaterials that sold for $50M after 12.5 months.
EchoSign, which Adobe bought, had $12M in ARR, growing 100%, with 120% revenue retention and cash flow positive. Today that would be a dream, but in 2011, people didn’t understand the metrics around recurring revenue businesses, so investors weren’t sure it was a good business.
If you want to build amazing stuff, you can reverse engineer it to figure out the rules of the game you need to play and optimize for those rules. So, what does it take to get to a $100M outcome?
You Need A Business Model with Economies of Scale
As you’re trying to reverse engineer whether your business model makes sense, you have to look at your business model. Certain business models have economies of scale, and some don’t. If you want to go really big, you want ones with economies of scale.
Let’s step back into the older days of software. The Adobes, Microsofts, and Intuits made $1M of revenue per employee. How? You had a bunch of engineers who would go into their private offices to code. They’d spend two years building a piece of software, put it on a CD-ROM that costs $.50, and package it up for another $.50 or $1.
Then, someone would sell it for you for $50 to $400. This was a really good business with 90% margins. $.50 of every dollar went straight into cash flow. We don’t see that anymore in public companies.
The low point was in 2021, with $100k of revenue per employee for all of these unicorns, and we were only 10% as efficient as we used to be. Now, the pendulum is swinging back somewhat. Historically, we were at $1M per employee. The low point was $100k per employee, probably $250k fully burdened with insurance benefits, so you were losing $150k per employee.
Now, every public SaaS company is at $300k to $400k of revenue per employee. That’s where you have to be. If you’re lucky or unlucky enough to raise capital, it can bridge the gap to get you to $300k-$400k, but you have to get there.
Reverse Engineering Your Way to $100M Tip #1:
Make some changes if your product isn’t profitable enough or your gross margins are too low. If you want to reverse engineer things, you have to have a model with economies of scale that get you to $300k to $400k per employee, or your model isn’t scalable.
Going Multi-Product is Required
”By the time you get to 10,000 customers, you better have a second product that can be bigger than the first,” Jason says. For Hubspot, CRM will be bigger than marketing automation in two years, and they were a marketing company.
The same is true for eCommerce customers who reach some type of critical mass, and here’s a good example of a mistake founders often make. They go to what’s easiest, which is a product extension. Using the eComm example, if you make shampoo, you decide your second product will be conditioner.
That’s the easiest thing because the customers already know you. But the problem is if the second product isn’t bigger than the first, and the first one’s still growing. You never catch up.
If you’re selling 50M shampoo and growing 20%, you’re adding 10M per year. You launch shampoo and conditioner, which sells a million in the first year; that’s great, but it’ll never get there.
Reverse Engineering Your Way to $100M Tip #2
The second product always has to be bigger than the first. We all default to the easy second product, but you actually have to do the harder one to get there.
You Want One-Third of Your Revenue Outside the U.S.
For some businesses, this doesn’t work. If you’re highly regulated, it can take a long time. At scale, the average public software leader gets about a third of revenue outside the U.S. Hubspot, for example, is a majority outside the country.
Let’s step back in terms of reverse engineering. There are a couple of things you need to lean into. Otherwise, you’ll be leaving a lot of money on the table. International and partners are two of them.
How do you learn to sell in France, Germany, Milan, or London? It’s not as complicated as it sounds. What you do is:
- Build your business and brand.
- Find a niche where you’re the top two or three. You don’t have to beat Hubspot everywhere but find a little segment where you’re better.
If you’re in software, people in Australia, New Zealand, and some parts of France are used to buying in U.S. companies. They’ll find you if you’re the best. Traditional industries won’t find you, but the tech folks, early adopters, and cool kids will.
Reverse Engineering Your Way to $100M Tip #3
As soon as you cross 5% of your revenue in an area, invest in it. As soon as you see a cluster in England, Chile, and Brazil, invest in and support it. Don’t go hunt customers in places where you have zero, but be welcome to it whenever you have a few people popping up.
Make your product open to these places, which is the easier part, and then localize the product into 30 different languages, which is the hard part. Most engineers don’t want to do this even though it’s not super complicated.
Pricing Is Over-Discussed
Founders want to know if there’s a sweet spot on pricing, but the topic is over-discussed. Why? We all know what things should cost and what Notion or Hubspot should cost. If someone else has a better version and wants $50k, you would balk. But what if someone has something better and charges less? People might think it offers less value because it’s cheaper.
Reverse Engineering Your Way to $100M Tip #4
What you want to do is find the organic price points for products that are similar to yours and anchor around them. Don’t charge too much lower than them because you’ll tell the market you’re not as valuable. If you’re truly 10x more valuable, charge twice as much.
Founders often say, “There’s no one like us!” Jason says, “Try harder.” It doesn’t have to be the same as you, but it needs to feel the same with similar amounts of value and types of utilization, or maybe it’s metered or per seat.
That’s how you approach pricing until you’re really big. That’s why we underprice as founders, to remove friction. You want every deal to close in the early days, and your job as a founder, if you want to scale and reverse engineer things, is to relentlessly remove friction from your customer acquisition process.
People add friction at scale, but you don’t want to do that until you’re at tens of millions in revenue. Do whatever it takes to remove friction, including anchoring your pricing around companies that are similar to you in any way.
You Need to Get to 100% Net Revenue Retention
This point can be the most challenging for some: getting to 100% net revenue retention. If you want to reverse engineer things, you need to have a path at a product level so you can eventually get to that 100%. That might mean going a little upmarket and having more than one product to add value.
Let’s use Hubspot as an example because they’ve nominally raised prices. The average customer today pays $11k. The average customer two years ago paid $11k. The average customer four years ago paid $10k.
Reverse Engineering Your Way to $100M Tip #5
What Hubspot has done that others don’t do and get wrong is add more value for the same dollar. “Software is supposed to be a service. In 2022 and 2023, SaaS became software as a ripoff,” Jason says. Everyone got massive price increases for no benefit.
Now, Hubspot has 5x the amount of software that’s 50x more powerful and for almost the same price. That’s what you need to aspire to as a founder.
Raise Less Capital For a $100M Exit
If your goal is to get the first points on the board to make your first millions, not to have to work for the man, and exit for $10M-$50M, which is still harder than it looks, you want to raise only a small amount of money.
If you raise a couple million dollars, which is hard, you’ve lost no optionality. The only thing you’ve suffered is dilution. After a couple of million, the game changes. If you raise money, hire a few good people to de-risk the investment and get it off the ground. Some folks can do it on their own if they have two great engineers, but most of us aren’t those people, especially if you’re a business person.
But if you start there, with just a couple million raised, or none at all, any exit works. Once you raise over $10M, you’re signing up for a billion-dollar exit; anything less than that might not work out.
Reverse Engineering Your Way to $100M Tip #6
Don’t raise double-digit millions if you don’t feel a billion-dollar exit in your bones. Generally, it’s not worth it. Find a way to do it with less, and everyone will be chill. They’re not chill when you get to double-digit millions. People expect a lot, and VC money is not free.
The post How I Reverse-Engineered a $100M Exit with SaaStr Founder and CEO Jason Lemkin appeared first on SaaStr.
via https://www.aiupnow.com
Amelia Ibarra, Khareem Sudlow
