Yoav Leitersdorf and Ofer Schreiber of are partners at YL Ventures.
Developing an enterprise-grade SaaS product is not easy. The keys are maintaining capital efficiency, launching early versions to the SMB market and constantly applying customer development methods.
A new era of tech events has begun
We’re back in New York this November for the 4th edition of our growth-focused technology event.
B2B companies, often due to the higher barriers to develop a working product, have historically been less popular with early-stage investors – such barriers sometimes involve tough requirements for core IP and deep technology.
However, we argue that in the long run, B2B companies can be more capital efficient than B2C companies, achieving maximum traction at minimal investment. And more importantly, B2B companies enable a gradual growth and funding strategy, based on real market traction and business validation.
There is no doubt that the B2C sector has experienced impressively large exits. As a result, early-stage investors in the past few years have sought after countless B2C deals, searching for the next “unicorns,” which are by nature almost impossible to find, and their success is very hard to predict.
Enterprise software companies, especially in the SaaS (Software-as-a-Service) sector, present great opportunities as well – many of them growing rapidly due to the clear value to customers and sustainable business models.
Most B2C companies have uncertain revenue models that often rely on a prerequisite of acquiring massive numbers of users. Traditional B2C monetization strategies, such as advertisement and freemium, are effective only after the product accrues millions of users.
Until that point, which may take a few years to accomplish, B2C companies are completely dependent on investors and their capital injections. This situation is not a healthy one: every “bump in the road” and every setback (or delay) in the company’s progress can potentially lead to real danger to the entire venture.
On the other hand, B2B companies present a more straightforward business model. Once a B2B product is up and running, early-stage companies can begin generating initial revenues. And in most cases, it’s a matter of months rather than years – a much healthier scenario.
With this model, not only can the company validate the value of the product from the start, but raising growth capital tends to be easier for an entrepreneur that has some cash flow, in addition to good feedback from satisfied customers.
Keeping capital efficiency and applying lean start-up methodologies are standard among early-stage entrepreneurs. But how can a B2B company, that eyes enterprise customers and six or seven figure contracts, proceed in a capital efficient way right from the start?
SaaS to dominate enterprise software
Within the enterprise software market, it’s quite clear that SaaS is the trending model. According to Gartner, the global SaaS market will grow at a CAGR of 17.9 percent to reach $22.1 Billion in 2015. SaaS benefits abound, including lower time-to-value, high agility, lower operational overhead and more.
Another aspect that drives SaaS adoption in large enterprises is the improved security controls that are being developed either by the vendors themselves, or by a new generation of security companies in the emerging Cloud Application Control (CAC) market.
Developing an enterprise-grade SaaS product is a long and difficult process. Large companies that are willing to pay top-dollar for innovative SaaS products present high requirements, on top of the product’s main functionality. SaaS products that fail to offer enterprise-grade features, like high reliability, integration with other enterprise products, enhanced security and customer support, are simply not adopted by large customers. These features take time and money to develop.
So what is the capital efficient way to do it? Should an entrepreneur stay in the garage and develop them for a few years behind closed doors?
This approach may present a risk by launch time. After all, market needs can change and new competitors can arrive at any time. In addition, many features already developed may not necessarily be attractive to potential customers – especially since they were not built based on ongoing feedback.
The key to reaching enterprises is surprisingly via SMBs
In the customer development era, defining Minimum Viable Product (MVP) is crucial. For a B2B company, the MVP is the most basic version of the product that provides the customer a clear business value.
A good MVP is a product that some customers will be happy to pay for, work with, and provide feedback for further development. This feedback is the cornerstone of building the right product, ultimately reaching the correct product-market fit.
The way to correctly reach enterprise customers is to take a detour through the SMB market. SMBs are the perfect initial customers for many reasons. First, SMBs tend to be more open to adopting new products and experimenting with innovative technologies.
Second, though not enterprise-grade, SMBs are easier to approach with shorter sales cycles, and they will pay reasonably for an initial version of a product.
Another key element with SaaS products, in contrast to on-premise software, is that the cost of acquiring a new customer is much lower. As opposed to traditional enterprise software that requires integration in the customer’s environment – a painful process that can often take months – organizations can start using SaaS products in a matter of minutes, especially since no installation is required.
SaaS companies employ low-touch sales models, converting Web visitors to customers either in a fully automated process on their website, or by closing sales by phone using an inside-sales team.
Myriad online marketing strategies, such as content marketing, social media, SEO and PPC, attract potential customers to the website, and with funnel optimization best practices, it’s easy to understand the SaaS product’s value proposition, and more importantly, easy to start using it.
The typical customer for this type of sales cycle is an SMB looking for a well-defined solution, and the pricing strategy should be in accordance. These are not six or seven figures deals, however, at the right amount of traffic and conversion rate, the company should be able to generate substantial revenues.
No less important than initial revenues, these mid-market customers provide invaluable feedback that can help the SaaS company improve the product, prioritize features development and increase value to its current and future customers. The early revenues can then be reinvested in the product by hiring more developers and adding the missing functionality that large enterprises will expect to see in future versions.
Ultimate success is then achieved when the company steadily expands the initial product’s capabilities, investing dollars back in R&D, backed by the revenues derived from these mid-market customers, and by the happy investors who quickly see real market traction and business validation.
This capital efficient approach is gradual and controlled, dictating early-stage companies to go out to the market, engage with real customers and start generating revenues as soon as possible. Then, the process can progressively evolve to the point that the company is ready to sell to larger, enterprise-level customers.
Location doesn’t matter, until it does
It’s important to note that in the first stages of the company, as long as the majority of revenues come from a low-touch sales model, the physical location of the company’s office does not really matter. As long as it has access to great R&D talent and solid sales and marketing professionals, the company can be located in a location with lower costs, relatively far from the target market.
For example, Israel is well-known for its technological innovation and strong entrepreneurial skills, second only to Silicon Valley. Growing a SaaS business in Israel by implementing low-touch sales methods can be capital efficient and profitable both for entrepreneurs and early-stage investors.
Once the start-up is ready to target larger companies, it must strengthen its physical presence in the target market, oftentimes migrating to the US in the later stages. This includes moving the headquarters and hiring local sales reps, which is done in a mature stage when the company is already generating substantial revenues, has proven market need and is ready to acquire large customers.
Keep in mind: Unlike many SMBs, most enterprises don’t buy software online. They demand more face time, on-site visits and deeper product customization. These processes, usually headed by veteran sales executives, take longer and are more expensive.
The obvious reward, however, is landing a substantial contracts. An early-stage company’s management team must identify the right timing and maturity level of their business to start engaging in this level of sales activities.
Moving forward: Enterprise SaaS is the place to be
As we soar through an era of tremendous potential for cloud-based enterprise software, it’s now increasingly being seen as the place to be for investors and entrepreneurs. And as the acceptance of the SaaS model grows around the world, opportunities abound, offering great potential.
Adhering to capital efficiency, lean start-up and customer development methods present a great opportunity to grow an enterprise SaaS business – at the end of the day it can be extremely lucrative for entrepreneurs and early-stage investors alike.