The era of hyper-functional SaaS is here, and it’s reshaping the landscape of SaaS companies.
At a recent SaaStr Workshop Wednesday, held every Wednesday at 10 a.m. PST, SaaStr CEO and Founder Jason Lemkin lays out how SaaS companies are now faced with the challenge of delivering more comprehensive, automated, and efficient solutions than ever before. The bar has gone up, and it’s not just in AI. With SaaS spending accelerating overall, why have some SaaS unicorns slowed?
Buyers are expecting much more from a product, and yes, AI is accelerating those expectations. They want a platform to do everything, and they don’t want 200 point solutions anymore. Let’s talk about why we have to work even harder for the same dollar today.
Sorry, But There’s No Downturn. At Least — Not In Spend, and Not Outside of B2B “Tech” Customers.
To set the stage, if you talk to any VC out there today, they will tell you that half of their investments which were growing at epic rates in 2021 are barely growing today. So yes, while it’s true that challenges are real for those in the right-hand column above – overall cloud spend is still up 20%.
And non-tech platforms selling to SMBs or consumers, like Toast or Monday remain very strong:
- Over 70% of Monday.com‘s customers are non-tech and they’re growing over 34% at a billion in ARR
- Shopify has re-accelerated and at ~$10B is growing 21%. That means it’s adding 1. 6 billion of new revenue per year.
- Klaviyo is at $900M, growing 35% and cash flow positive. (A deep dive with their CEO here.)
- Samsara is an epic one. Trucks are still running, and the U.S. unemployment rate is still 3%.
- Google Cloud, Azure, and GitLab, all tied directly or indirectly to AI, are seeing massive acceleration.
- Security and compliance are strong, with Wiz turning down billions from Google. Crowdstrike is up and still grew 35%.
So non-tech is strong, we all know AI is strong. Is there a bubble? Yes. Does it matter? Who knows? But Google Cloud, Azure, and GitLab are all benefiting and on fire.
And we talked about security compliance. There is no downturn in security compliance. Is there some pressure? Yes. But Zscaler, CrowdStrike, Rubrik, for all of these folks in security compliance, there is no downturn.
But there are challenges.
For the first time, Salesforce has fallen to single-digit growth, while MongoDB recently announced they’re seeing more pressure on workflows. Buyers are trying to spend less per application, but net new customers are growing just as fast as ever.
If you’re in the categories on the right, like Salesforce, Mongo, Elastic, or Asana, you might be struggling — but it’s time to adapt to this new normal.
And the tough part for folks on the right, which is probably folks reading this, is that you have to do more. You have to maybe either sell to different customers, or have to build more software or be more AI. But you have to be hyper-functional.
The New Era of Hyperfunctional SaaS: 2024-2029
So what are the pillars to operating as a Hyperfunctional SaaS company?
#1: AI is Table Stakes. Eighteen months ago, we didn’t know what AI would do to SaaS apps. A lot of it isn’t good, although some is great and some is emerging. Regardless, it’s table stakes. Everyone has it, and you have to have it, too. In the world of B2B / SaaS, simply implementing AI won’t suffice; it must enhance the product significantly. AI has ripped through categories like the post-sales space and customer support centers. AI has become core to products like Zendesk rather than an experiment, and it’s quickly becoming table stakes.
#2: The product has to be better for it. AI has meant that customers are expecting so much more from us. Everything has to do more and be more automated, from onboarding to email. Your product has to be 2-5x better than 24 months ago, and you can be sure your competitors are promising AI and automation functionality. So if you can’t step up, you’ll lose deals to competitors who make a lot of promises that are 70% true, but if you’re not at parity or won’t make that commit, you’ll lose the deal.
#3: Radical Efficiency. The good news is, you have to do what everyone else is doing in AI and production innovation with less money. You have to build better software for less money. Radical efficiency is expected of all public companies, and they have all found a way to make their dollar go 50% farther to build 100% more software. Everyone wants everything to be automated. AI in SaaS is automation in many cases. So, if your product is full of manual work, people will leave for one that automates everything.
#4: Multiproduct is the new normal. The number one real issue for SaaS companies today isn’t AI or change or 200 competitors in the space. It’s being too slow to go multiproduct. Folks are slowing down between $10M and $500M ARR because they never developed a real second product, and they’ve exhausted their TAM and buyers. Multi-feature is not multiproduct. The most important thing is that your second product, is deployed on time before your initial market decays too much. And your second product has to be bigger than the first. Case and point, CRM is bigger for HubSpot today than marketing automation.
#5: Customers are demanding more than another point solution. There is massive point solution fatigue in the market. Of course, most companies have to start as a point solution, but customers want platforms to do more. This has been accentuated by the scrutiny on spend from procurement, from CIOs, and from others.
Companies have wanted to, in some ways, irrationally, and in other ways, rationally cut their overall SaaS spend. And, they’re pushing their existing vendors to do more. So you’ve got to find a way to be more of a platform. You cannot last as a point solution. In many cases, it’s just too hard. So this is the morale on becoming Hyperfunctional. We all have to do it, we can’t stay a point solution for long.
We all have to go multi-product earlier. We all have to automate everything. We all have to be more efficient doing with less.
AI is a Force of Nature. It’s Also … Table Stakes in SaaS.
AI has transitioned from a novelty to a necessity in SaaS. If you want to be in the contact center or any CX or CS space, AI must be mission-critical because it’s necessary to survive going forward. You can’t roll into this category without being AI first. Many folks are too slow here.
The bar to building a great product is way up, and customers are expecting automation and AI to replace maybe 20% of their stack. If you look at folks in contact centers, they’re expecting to replace 30-50% of their CS workers with AI. It’s already happening.
Everyone’s doing it and treating it as table stakes. Salesforce is doing it, Zendesk and Intercom are all doing it at scale. It’s parity, you have to find a way to do it. Even if you don’t have any more money, even if you don’t have any more engineers, it’s life. It’s parity, and it’s already happened in B2B.
Everyone is going to have a pricing page, check the box, function app, and feature parity on everything that is AI and B2B, everyone. So if you haven’t built it yet, find a way.
The Bar To a Truly Great Product Is Way, Way Up
AI is the accelerant for customer expectations going way way up recently. They expect more from us, which is tough. You see this first point viscerally if you’re involved in post-sales or support.
Customers are expecting:
- To replace 30-50% of your humans in support with AI. Sales is beginning to promise this. A small startup Jason invests in called MangoMint is coming up on $20M ARR with 100% growth for salon spa software. Why is it growing so quickly? It lets you automate away the front-end and back-end office. Companies are making that promise, and customers expect to get rid of head count efficiently with your product.
- All unstructured data to be instantly searchable. You’ll fall behind if your data can’t be found or it’s in painful dashboards. People expect to extract data from your product with a plain English prompt.
- In the SMB space, the biggest problem is onboarding for complex products. They don’t have time, and they don’t have an IT department to handle it for them. If they aren’t onboarded that day, customers often disappear. Now with automation, people want to be onboarded. at the end of the meeting. The idea that SMBs will tolerate weeks to go live is dying. If that’s you, how can you eliminate onboarding in your app? Find a way, or your competitors will.
- Core platforms going forward will do the work of 20 add-ons and point solutions. We all might have to do some of this and build more products and functionality earlier because customers expect it.
When the leading vendors in the world and the leading luminaries in the world are all telling you that AI makes this all easy, customers are going to demand it. They’ve heard it too many times. Now, they believe it.
Radical Efficiency Is The New Normal
Most people get this now, but related to hyper-functionality, you have to be multiproduct, achieve AI parity, and do it all with less money. The mistake founders make at this point in the cycle is they think it’s an excuse for slower growth. Efficiency matters today, but you still have to grow at top-tier rates. You don’t get a pass on growth for efficiency.
Look at this Monday.com example. They’re growing at almost 40%, now at 28% free cash flow and going up. That’s a radical change from -25%. You have to do it all. That might mean you hire fewer but better people. We’ve been taught unicorn math to grow headcount faster than revenue, and maybe if you’re venture-backed, you can do it. But you have to grow revenue faster than headcount.
You need 700 people when you get to $200M, but it’s up to you to determine how many people you need at $100M and $50M to be efficient and grow.
Automation Everywhere
Through 2023, SaaS was mostly workflow and dashboards. Build a workflow to connect data, and the CEO will get a dashboard. But AI, which is automation on steroids, means customers expect it.
This is what customers are expecting: to dial the amount of automation that they want one way or the other, and you’re probably gonna have to do this in your product as well. They want to dial a slider in every app where they can dial up how much. How much of human-led functions will now be automated? This is what everyone on the internet is promising.
So is the AI bubble is going to pop? Yes, eventually the amount of spend going into AI can’t increase forever. We’ll just run out of GDP. There just isn’t enough money in our entire economy to allow AI spend to keep increasing at the rate it is today. So the bubble is going to pop and so be it, but customers are going to expect this level of automation forever now. So if you’re not thinking about it, it may be time to seriously ask yourself what can we automate more and how can we accelerate this?
Death of the Point Solution?
Lots of folks have experienced whiplash over the last 18-24 months when point solutions stopped selling. Some of it was budget shock and companies cutting apps they overbought. But the leading vendors are doing more, and they’re expected to do more. So you’ve got to probably expand beyond being a point solution faster than we had to two or three years ago. Because again, customers are expecting this hyperfunctionality. Will they stitch together 50 apps if they have to? Sure. If they have to. But if someone like a Datadog or Canva already does it all together, why not stick with one vendor?
AI Point Solution Explosion
Some challenges for founders today are stepping up automation and multiproduct earlier. AI hasn’t just raised the bar in terms of product and customer expectations. It’s also taken categories that were sleeping and 100x’d the vendors. A couple of years ago, it seemed like sales engagement was only a few, like Outreach and SalesLoft. Now, there are 200 folks in it because of AI.
No one wanted to build a legal app before, and now hundreds of AI-based legal apps exist. The same is true for contact centers. These point solutions promise 10x better functionality, but mathematically, there isn’t room for these vendors. The bar has gone up again.
Who Will Do The Work
Founders are as driven as ever, but what about everyone else? We need to be relentless about not lowering the bar on hiring people. If you’re getting tired and thinking about just making the hire, don’t do it. Settling is worse than hiring no one.
Be relentless about only hiring pirates and romantics.
Two examples from SaaStr of slightly worrying data:
- For this year’s SaaStr Annual, we offered 813 people who were previously stuck doing booth duty to come to this year’s event on us to rub elbows with some of the best leaders in SaaS and maybe get a job from the best in the business. Only four people took up the offer.
- SaaStr Annual sponsors used to complain that they didn’t get enough leads, even when it was 500 or 600 leads. Now, the complaint is that there are too many leads and the sales team won’t put in the effort to follow up.
We have to be relentless about this because our sub productivity is so much lower than it was in March 2020, even two years ago, and we don’t have all the answers, but we’ve got hopefully automation will solve it for us as well, because it’s an existential issue of founders.
Go Find Your Monday
For some folks, it’s hard out there. Not for Monday.
They just crossed a billion in ARR, growing 34% with 110% NRR from SMBs and 22% free cash flow. We can’t all be Monday, but if you’re feeling sorry for yourself, find the areas in your industry that aren’t seeing a downturn.
Sell outside of tech. Go more Enterprise or SMB. Lean into security or AI budgets and find the money. Overall, the budget for SaaS is higher than ever, with hundreds of billions in revenue. If growth has slowed dramatically, it means one thing. You’ve fallen out of product market fit. You don’t have the product the market wants anymore.
It doesn’t mean your product is terrible, but it’s time to step it up and rebuild the products people want. Is it hard? Yes. But if you have decent NRR and customers aren’t quitting, you have time.
The post The Bar Has Gone Up: The New Era of HyperFunctional SaaS with Jason Lemkin appeared first on SaaStr.
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Amelia Ibarra, Khareem Sudlow
