Building Better Recurring Revenue SaaS Companies in 2019

Recurring Revenue SaaS  

Anna and I are about a year into our SaaSX and Beacon9 stories and about 15 months removed from the acquisition of our SaaS company. We worked with some amazing recurring revenue SaaS companies in 2018. Our journey, our clients, and the new year have caused me to reflect on our mission to help SaaS founders and leaders build better companies.

What does “better” mean?

My first reflection was around what makes one recurring revenue company better than another. Early last year I wrote an eBook on SaaS Growth Metrics that identified 11 KPIs that I felt were the most critical for evaluating and managing a growing technology company. Those metrics are a good starting point, but executional excellence — which is what makes one SaaS company more valuable than another — goes a lot deeper than that. And if I’m 100% honest with myself, these are not SaaS-specific problems or solutions. They’re business fundamentals that are far too commonly messed up. So here are a few of my reflections on what can be so right and so wrong in a growth-stage technology company.

The Importance of Early Hires

At ion interactive, our people were amazing. We had all the confidence in the world that we could delegate anything to our teams and have them execute better than we could execute ourselves. That’s often missing in fast-growing companies and it strikes me as a shortcoming of the founding team that gets baked in very early on. First hires become the backbone of the organization and culture. If they’re not right, the foundation is shaky and the evolution into a highly-valued company is less likely or at least stunted.

DROP THE DEAD WEIGHT

I’ve seen a couple of course corrections from weak early hiring practices. The first is that those folks end up in leadership positions and fail. The course correction — after lost momentum and turmoil — is to replace those weak leaders with stronger hired guns from outside. There are many downsides to this path. Often, the folks who get replaced leave the company. And take with them a great deal of high-value institutional knowledge. Next, it reflects poorly on the founders — undermining confidence in their ability to hire, manage, and lead.

LIFT THE DEAD WEIGHT

The other common path forward from a batch of weak early key hires is to keep them by either moving them elsewhere in the organization or by hiring a mentor as either a coach or higher-level leader. The advantage with this solution is that the institutional knowledge is preserved. The organization is also likely to view senior leadership as more trustworthy and caring. This likely engenders more loyalty and less employee turnover — both incredibly important to future recruiting. The downside here is obvious — you may be just moving a problem around or punting it down the road. If your weak early hires are valuable — but just not in a leadership capacity — then it makes sense to preserve them. If not, the organization will have more respect for you if you just let them go. It’s definitely a case-by-case and far from black and white.

Both of these course corrections are costly. The greatest cost, in my opinion, is in the lack of delegation that gets burned into the culture. When key lieutenants are sub-par, founders do far more than they should. Knowledge stays narrow, productive ideas are stifled, and growth is ultimately stunted. All because the foundation of people was weak. Ultimately the responsibility of hiring people better than you is on the founding team. So it’s a self-inflicted wound when, two years down the road, you can do nothing but grouse about your poor leadership team. Carefully chosen early hires will be worth the additional time, patience, and attention it takes to find them.

Outside Forces are Powerful

Somehow SaaS founders often think they’re in control of more than they really are. “Market fit” is so important because it’s not necessarily within the company’s control. (Yes, of course, you can correct to improve market fit, but only to an extent.) External forces are often far less controllable than we give them credit for. This cuts in both directions.

MARKET FIT THAT’S STRONGER THAN YOU

I’ve seen recurring revenue companies thrive despite having poor execution literally everywhere inside the organization. Everywhere. How? Because their market fit is so damn strong that it overcomes everything else. People want or need their solution so much that they grow 100%+ YOY despite themselves.

The interesting thing about a scenario in which you succeed despite failing is that everything is relative. You could succeed much more if the company was run better. And metrics-based management is likely out the window. I mean, what do you do with >100% annual churn combined with >100% annual growth? I’ve seen it. And obviously, despite the growth, the churn radically undermines the valuation of your recurring revenue (umm, because it’s not so recurring). But still. Somehow that’s both impressive and depressing all at the same time. And without outsized external forces driving zealous demand, there’s no way that’s sustainable.

MARKET FIT THAT DOESN’T EXIST

The flip side of external forces is trying to create a market that doesn’t exist. A lot of recurring revenue SaaS companies try this and the vast majority of them fail. It’s hard. It’s expensive. And the risk is enormous. If people simply don’t care, it’s an incredibly tough uphill battle to change those attitudes. It’s like the old adage in advertising — we can change behaviors much easier than attitudes. Because SaaS’s foundation is recurring revenue — and that’s where its real value is — market fit has to be sustainable. One-time changes in behavior might result in an initial subscription. But it often takes a more fundamental change to result in renewals that drive value against acquisition costs. It’s harder to create a market than we give it credit for. Can it be done? Sure. Is it likely? Nope.

Trying to create a fit from nothing is a recipe for years of too-hard work adding up to too-little value. Better to pivot to a need and build on that, rather than keep banging your head against the wall.

Leadership of People and Process

Over the past year, I’ve been struck by the destructive power of weak leadership skills. And by how charisma doesn’t translate to performance. Leadership is not a function of having followers. It’s a function of providing an environment that enables people to be their best selves. To me, that means it’s incumbent on leaders to deliver an experience that makes everyone better at making everything better.

Whatever construct is overlayed on leadership is of little consequence. Just because you add OKRs or KPIs atop a weak team doesn’t mean that team is no longer weak. That’s a little lipstick on a pig. If leadership skills are poor; and oversight is inconsistent; when favorites are played; and hiring and firing judgment is questionable; when reporting structures are ill-conceived; and performance is permitted to languish; all the overlays in the world aren’t going to correct the problems. Accountability and transparency underpin leadership values, start at the very top, and trickle down by example. It takes a lot to earn back broken trust. And it must be shown more than said.

Quality leadership is predictable, accountable, transparent, ethical, moral, and respectful. It’s wrapped in process only to the extent that it needs guardrails to ensure consistency over time. Authentic leadership leads to high-performing teams, which lead to high-performing companies. Quality execution is neither accidental nor the product of personality. It’s the result of strong leadership driving a culture of continuous improvement that literally makes everyone just a little bit better every day.

Recurring Revenue SaaS Problems

An interesting thing about recurring revenue SaaS companies is that many of them have many of the same problems and opportunities. Although my reflections aren’t SaaS-specific, they are remarkably ubiquitous as well. As you look forward to executing against your strategy in 2019, look to SaaS metrics, and look through the lenses of SaaS problems. But don’t then get complacent about the basics that really drive the business. Don’t give any less than 100% effort to hiring great people. Don’t underestimate the power of your market or overestimate your abaility to control it. And whatever you do, don’t neglect the leadership of your people and processes.

I’m looking forward to another enlightening year of helping amazing SaaS companies grow faster.

This article originally appeared on SaaSx by Justin Talerico.

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