We enjoyed catching up with Varun Badhwar, Founder and CEO of RedLock, a leader in cloud threat defense and Sierra Ventures Portfolio Company that was acquired by Palo Alto Networks in 2018. Varun is now the SVP of Prisma Cloud Security Products & Engineering at Palo Alto Networks, where he brings over 14 years of experience helping organizations address their cloud security challenges. Varun’s experience includes founding a CASB company (CipherCloud), spending 4 years leading the Force.com security team at Salesforce.com, and consulting within the Risk Advisory Services group at KPMG.Check out Varun’s advice for entrepreneurs who are building and scaling SaaS startups.
***
4 things entrepreneurs need to think about when building a SaaS business
- You are the Sales team
- Know the importance of retention
- Understand customer usage patterns and use them to beat competitors
- Go back to the basics when fundraising
You are the Sales teamA common mistake entrepreneurs make is thinking they are going to hire a salesperson before they start selling the product. If a founder and founding team can’t convince a customer, then a salesperson can’t be expected to convince them. Before hiring any salespeople you need to prove that you, as a founder, can convince 7-10 people to buy your product. You will learn valuable information during this process that will help inform your product development and sales process.When selling, it’s important to remember that people are polite. They might tell you what you want to hear by saying, “Sure, that’s a problem for me. I’d be interested in your product.” If they say it’s a problem, go deeper and ask them how big of a priority the problem is for them. Is it a top 3 problem for them? A top 5 problem? If it’s not a top 5 problem for them, they’re not likely going to take a chance on a startup or take the time to do a pilot or proof of concept (POC). Also, don’t wait to build a customer pipeline until you have a product. If your potential customers feel like they are partners and they’re involved from the beginning then they have a stake in your success. Doing enough discovery in the beginning to make sure customers will be on board and write you a big check when you launch pays off later. Know the importance of retentionIn SaaS, time to value when deploying a customer is really important. Your product needs to demonstrate value in minutes or hours, not weeks. But once you get the customer, how you retain them is equally important.Studies have been done that show that a 3-5% difference in renewal rates makes a big difference to the bottom line of SaaS businesses. It’s important to track key metrics around renewal and retention from the beginning and it is critical that you build products that are sticky and easy to use. Your product must tightly integrate into a customer’s existing workflow so your customer revenue continues to grow and retention is strong. Retention takes a lot of pressure off of new logo acquisition. The cost of losing a customer you already have is very high. Understand customer usage patterns and use them to beat your competitorsIf you have a SaaS product, you have the advantage of really understanding customer usage patterns and behaviors. Have a process in place for collecting data, evaluating it, and using it to make your product better and stickier. Use the data on customer usage to drive the adoption of existing customers and define the product roadmap. Remember that with a SaaS product, you are on a short leash. Competitors are always hot and heavy on your tail. If you’re not customer-obsessed in everything you do, your customers will find someone to replace you. By leveraging data on customer usage and behaviors, you can ensure that your product remains relevant and competitive. Never lose sight of what current customers need from you. Go back to the basics when fundraisingWhen it comes to fundraising, whether you’re a repeat or a first-time founder, it goes back to the basics. Can you demonstrate founder market fit and clarity of vision? For a SaaS business specifically, a big concern for venture investors is whether or not you’re solving a sticky problem. Investors don’t want to write a check for a product that sells a one-year contract and then something else comes along and customers switch to the newer, shinier product the next year. It’s important to focus on how you’re going to land and expand your customers.Some additional fundraising tips:
- Always get an introduction. Warm introductions make a big difference and can be the make or break for getting a meeting with a VC. Tap into your network and reach out to other entrepreneurs of venture-backed companies in your sector to see if they can make an introduction.
- Do trial runs with friendly VCs to get feedback. We started the first set of conversations with “friendlies” at the end of August 2015. When we finally met with Mark Fernandes at Sierra Ventures in early December 2015, we had gotten helpful feedback that we used to refine our pitch, the founder story, and show our deep understanding of the space.
- Create and articulate a compelling story and vision. Very clearly outline the story of what you are building, why you are building it, and why you are the right person for the task. Articulating founder-market fit is very important. When telling the story, make it clear why the product is not just a feature and why it can be a standalone company. This was the hardest part for us when fundraising and when we got the story right it made a big difference.
- Prove customer validation and commitment. When we were getting started we talked to 20 potential customers and got early validation that the approach we were planning to take made sense. This was crucial when we went to pitch investors. Being able to name all of the companies that said they were interested and ready to become customers once we built the solution was a big selling point. When you’re not a technical founder and don’t have an MVP this becomes particularly important.
ConclusionBeing customer and data-obsessed pays off when building and scaling a SaaS business. Take the time to get to know customer needs and implement ways to consistently monitor usage patterns and behaviors to improve your product. When the time comes to scale, hone your story and get introductions to the right investment partners. Do all this and growth will follow!Some of the great SaaS startups that the Sierra team has invested in include Appcues, Balto, Enable, Phenom People, and Reify Health.
Learn more about our thesis around investing in SaaS companies.
If you have a SaaS startup and want to connect with us reach out to Vignesh Ravikumar at vignesh@sierraventures.com.