Month: November 2016

Bend the curve with Average Contract Value (ACV)

SaaS entrepreneurs know how hard it is to scale their companies from zero to their first few $M in revenue. I’ve posted before about misconceptions about scaling SaaS businesses – namely that adding more sales pods will lead to exponential growth. While pod additions are part of it, the single most powerful lever in driving exponential growth of a SaaS business is increasing Average Contract Value (ACV). I’ll assume for this article that ACV also equals annual contract value.

The other day our team was reviewing portfolio performance, and I nearly fell off my chair when I saw the power of ACV in the chart below (scale, years and a few data points adjusted to protect the innocent):

SaaS startup example revenue and customer growth

pic-1

While after Q2 2013, monthly customer growth of this company stays relatively constant on average (meaning customer count grows linearly), revenue is a hockey stick. Why? Incredible gains in ACV of new customers.

The chart below distills this in more detail. In fact, below, monthly customer additions do increase but go up only a bit more than 2x from a relatively steady average of ~7 in 2013 to ~16 in 2014. However, new ACV grows from $5K in the early days to nearly $25K in the most recent months shown, a 5x increase. WOW!

New customers and ACV per monthpic 2.png

For those of you who like calculus, the 2x and 5x represent multipliers in a sort of second derivative of the ARR revenue level – the change in the change that bends the curve. In other words, over a period of a few years, the company is adding 2x * 5x = 10x per month more in ARR than it did early on. Yet it is doing this while only adding twice the number of customers per month than it used to. Assuming sales people remain as efficient from a # of customers per month perspective, the company is doing all this with only a 2x the size sales force. In fact, this company added more sales people than that because higher ACV also comes with somewhat longer sales cycles and higher levels of support. However, even if sales person deal efficiency is half of what it was, overall ARR efficiency of the sales force is still up 5x * 50% = 2.5x. I would invest in that all day and night.

So how did they do this? (you can do it too)

Mature your product (fast): A SaaS MVP usually lacks integrations, enterprise functionality and other controls and features – just enough for small to medium size businesses to find value in. To increase ACV, you need to give something to get something.

Who are the key adjacent software players in your ecosystem? More importantly, with which ones have your early customers expressed a desire for integration? Then there are the common MB and enterprise asks: single sign on, administrative controls, reporting, etc. Once you integrate a few key adjacent platforms and basic enterprise functionality, you suddenly have a means other than number of seats/users to drive price. Want Salesforce integration with SSO? Sure, that’s our “pro” version for 2x the price.

You don’t get what you don’t ask for: Early on, the startup game is about getting a few customers, any customers. You don’t really care what your early customers pay. Often they are friendlies and have agreed to iterate with you on product and feedback, so you’re fine with giving them a deal. Unfortunately, this can anchor you and your sales team to bargain pricing. While being conscious of competitor and comp pricing in your space, take off the gloves and ask for more. You need to prove that you can do this for yourself and your sales team. If your ACV is $10K when you hire your 4th, 5th and 6th sales rep, it’s likely to stay that way until you prove to them it can be higher. The only way to break the habit is to land some higher ACV sales yourself – as a company leader – and set a new precedent. You will both show your sales team that it can be done and get mad props.

Puff up your fur with killer marketing: Animals puff their fur in a fight to make themselves look bigger. Smart startups do this too. Our best SaaS companies are spending surprisingly large parts of their budgets on sponsoring key industry conferences. It’s how you look bigger than you are, help customers overcome startup aversion and grease the sales skid with name recognition.

 

Time to Heal, Learn, Unify

Like many of you, I was surprised by election results.

As we each individually decide what is next, what we do next, we need to see this in the context of 250 years of peaceful transitions across all imperfect leaders. We are so fortunate to be upset or ecstatic at the functioning of democracy rather than suffering war, coup or famine as in so many other places.

Now we – in our fortunate state – need to heal, learn and unify.

Heal: When I suffer loss, I find an immediate passing of time to be the strongest salve. Last night a low, then sleep, this morning fellowship in absorbing the discontinuity – whether you think it good or bad. By noon, back to business and the needs of our companies/customers, investors and team. Then sleep and more normalization tonight. The half-life of despair and joy in an otherwise good life (and we are all very lucky in the tech world) is short. By natural selection, our discount rates are too high to get stuck in any one experience in time. This is also known as hope, and hope is our greatest mechanism for survival and putting one foot in front of another.

Learn: We recently suffered a setback in our portfolio. That goes with the territory, but it got me thinking about the failure modes of startups. CB Insights has aggregated 166 post-mortem blogs posts and exposés from CEOs of failed startups. I read most of them. Yes, there are the obvious primary modes of failure: execution problems, PMF failure, no market, bad business model. But there is also an observable meta trend – high functioning people internalize blame amidst a search for truth. This is a powerful combination.

Today, if you don’t like the election result, what could you have done differently. Donate? Phone bank? Did you do those things? If not, do you have a right to complain?

More importantly, while some on either side may be “deplorables”: racists, misogynists… or crazy liberals, I am loath to cast stones. History will judge all of us as it inevitably does. In vast majority, millions of good people voted for both sides, including Trump. Outside of our ivory tower of high education, high class tech – where talent of a failed company is reabsorbed by the job market in mere weeks – millions of our fellow citizens feel left behind with limited education, diminished prospects and stagnant real wages.

What are we doing to help them? It’s our right and common mode not to do anything for others, but then do we have a right to complain about how others vote? “Of the people, for the people and by the people” means everyone, so this is on us too, on all of us.

Unify: The greatest signal of the strength of our democracy is an outpouring of calls for unity among leaders and citizens. As many continue to mourn or celebrate internally, we need an intentional period of unity to give a new government the chance to embrace all constituents. Partisan rancor early in a term, or before one starts, only sets precedent for an ineffective future and gives both sides excuse for irresponsible and non-inclusive governing.

If you are a democrat hug a republican; if a republican, hug a democrat. We all get the chance to fight again in four years. And remember, there was at least some good news for all of us last night. More states voted to legalize pot, and we get another 4 to 8 years of Alec Baldwin on SNL. Some levity, especially in combination.