COVID halted the UK startup industry, so much so that coming off a record year for growth in 2019, many British tech industry leaders were calling on the government to help “Save Our Startups” in April. The good news is there’s increasing evidence pointing to the resurgence of the UK startup industry as a whole and in particular, when it comes to SaaS firms.
Boston-based Venture Capital (VC) firm OpenView, taking a look at both European and U.S. enterprise SaaS firms, recently reported that “Public SaaS is more valuable than ever before – after falling nearly 50% from all-time-highs in March, SaaS valuations have rallied on the back of persistent long-term tailwinds.”
And data from SeedLegals, a platform that allows startup founders and negotiators to create, negotiate and sign legal agreements for funding rounds, recently said that, “Despite what you may have read, investors are not abandoning startups in droves.” Looking at its own data, the firm reported that there were no significant changes in UK startup valuations over the period and that investment from existing investors is hovering around historic averages.
Here are some of the factors that lead a SaaS startup to consistent success.
1. They employ product-led growth strategies.
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UK VCs surveyed 200 UK startups on how the COVID-19 pandemic has affected various aspects of their business. The respondents ranged from pre-seed to Series C+ companies, and included sectors beyond SaaS, such as health and travel. More than 50% had at least 25 full-time employees pre-crisis, and 35% have raised more than £10m. Many of the strategies employed aimed to hold on to cash – including halting online advertising (43%), cutting salaries (30%) and instituting hiring freezes (49%).
A marketing cash-strapped environment is one that is particularly favorable to startups with product-led growth strategies. This go-to-market strategy depends on bottom-up user adoption. It’s based on delivering an excellent customer service experience vs. a traditional model involving marketing campaigns and sales efforts. Companies successful in this approach spend less money on sales and marketing.
Marketing spend cuts plus the current trend toward remote work provide a boost to product-led growth strategies, because users are more actively looking for solutions to work-related problems.
OpenView says that among companies with $10 million in annual recurring revenue (ARR), those with a product-oriented strategy can scale faster while worrying less about hiring and funneling leads to sales. Best-in-class companies selling primarily through self-service and freemium can bring sales and marketing spend well below 20% of ARR. For these reasons, the firm recommends that startups lean into product-led growth strategies – such as free trials, in-product onboarding, product analytics for decision-making and self-service buying.
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The systems the company uses to manage everything around the product they deliver should be a reflection of what it’s trying to do with the product itself – make it both irresistible and essential for the end-user to adopt it. Implementing a product-led strategy requires that the organization takes the waste out of all processes and has really good visibility into where it’s spending money. By automating accounting processes, for instance, accounting and finance can access financial reporting at the click of a button to see the company’s financials in real-time. This enables the organization to quickly see if the product-led strategy is working and where to make shifts.
2. They hold product teams accountable.
Along with sales and marketing, product and engineering represents one of the largest expenses for startups. While companies took a hard look marketing spend and workforce, OpenView said engineering was not widely impacted by COVID-19 reduction in force (RIFs). Yet product execution still remains a huge concern for companies.
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OpenView recommends setting engineering KPIs that the management team monitors weekly and monthly, measuring things like product-influenced revenue, product influenced word of mouth/referral acquisition, revenue attribution to feature, team velocity and product quality indicators. Then, tie sprint planning to these KPIs. Also consider instituting performance-based pay for product managers akin to sales teams (compensation tied to revenue, ramp rate, contribution margin or customer acquisition costs).
The foundation for holding product teams accountable is a system that can easily collect, organize and make data available. These KPIs can be challenging to calculate and track without a system that’s capable of consistently collecting the many metrics needed to calculate them. Cloud-based financial systems can easily integrate with other enterprise software – such as project management and product management tools — to make tracking of KPIs much easier.
3. They value diversity, equity & inclusion (DE&I).
Data from TechNation shows that internationally diverse boards, on average, raise 453% more investment than non-internationally diverse boards, with one reason being the increased access to global networks for VC funding. What’s more, higher levels of gender diversity positively correlate with higher revenue. Diverse boards, TechNation said, see 0.7% higher turnover (revenue) than non-diverse tech company boards.
Yet the proportion of women on tech boards has remained stagnant over the last two decades, its data shows, standing at just 16%. The Inclusive Tech Alliance report said three quarters of boards and 70% of executive teams in top tech firms have no BAME (Black, Asian and minority ethnic) members. And just 15% of the digital tech workforce in the UK are Black, Asian and minority ethnic.
Data also indicate that women founders receive less funding but deliver a higher ROI to investors. In the U.S., Boston Consulting Group studied more than 1,500 Boston-based companies since 2010 and found that women received less than half of the funding that men did, an average $935,000 versus $2. 1 million. This leads to more conservative and efficient go-to-market strategies, fewer risky decisions and a direct translation to higher ROI. For investors in companies from the BCG study, revenue earned by female-led startups was 78% of the amount invested versus only 31% for those led by men.
These are some of the strategies employed by leading SaaS companies that will continue to harden their resurgence even as economic conditions continue to challenge their businesses. If your firm is interested in seeing how mature it is in instituting some of these recommendations, check out OpenView’s assessment questionnaire – offering insights into product-led growth strategies, how to prioritize paid features and how to lower friction so that customers will try your products.
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