By Abby Sorensen, Executive Editor
If you haven’t read Bill Boebel’s “A better way to fund SaaS companies” article on VentureBeat, stop what you’re doing, click on that link, and soak in his perspective. I hope this post from the CEO and founder of Pingboard goes viral in the software community. More on this later.
Speaking of viral news, like many in the tech world, my eyebrows hit the ceiling when I read about Domo’s IPO filing. It’s not up to me to sound off on the $176.6 million loss Domo reported in 2017. I’ll let investors and the stock market take care of that. But it is up to me to ask people in the trenches of building software companies to educate our readership on growth strategies.
We’ll write more about this growth topic in the August issue of Software Executive, where I’ll pose this loaded question to our editorial advisory board: Should software companies be more concerned with top-line or bottom-line growth?
As a teaser, here’s what one of our editorial board members Sjouwerman, founder and CEO of KnowBe4, his fifth startup, thinks:
The choice between top- or bottom-line is not an either/or. It depends on the stage you are in as a software company, and what the growth goals are. It also depends to a very large degree on if you are bootstrapping or funded. Generally speaking, as a SaaS company, you want to get into a cash flow positive situation as soon as possible, because it allows you to remain the master of your own destiny.
I frequently see SaaS companies with very low churn rates still burning money on a monthly basis, which begs the question if growth is *that* important. In some cases, with a new green-field market, that might be the right choice to grab market share. However, I tend to be somewhat more conservative and do everything possible to become profitable ASAP and then turn around and invest all the money straight into further growth.
Sjouwerman’s company debuted on the Inc. 500 list at 139, the Deloitte Technology Fast 500 at #50, and has nearly 500 employees. Fellow editorial board member Tim McCormick, CEO of SaaSOptics, rightfully offers this different perspective on growth:
Focusing on top-line over bottom-line growth depends on several factors, including the company’s stage, business model, maturity of the market and the competitive landscape. For an emerging SaaS business in a new and immature market, top-line growth is everything. A later growth stage SaaS business in a mature, competitive market may focus on bottom line profitability.
Our business focuses on the under $100M SaaS market, which is very nascent and has few competitors, so today, we are hyper-focused on top-line growth with new customers and new and expansion annual recurring revenue (ARR), and we’re always working to increase customer retention.
SaaSOptics is in a different stage of maturity than KnowBe4, with just north of 50 employees and a recently announced Series A. That’s why both Sjouwerman and McCormick are right. And so is, Marc Haskelson, President and CEO of Compliancy Group. He chimes in with:
This is a question that should definitely be revisited as your software company grows and changes. Based on my experiences growing successful start-ups from the ground up, here's my perspective for how young companies and start-ups can start to tackle top- vs. bottom-line focus. For a young company, top-line revenue is critical, but it has to be considered while looking at your burn rate. You can focus on your top-line, but if your costs are increasing, then you're ultimately not going to be making the money you could be. The way to take your company to the next level is by stabilizing fixed costs with an eye on growing that top-line revenue. If you understand and forecast your fixed and variable costs and keep them in check, you can truly focus on top-line revenue, which will help your company grow.
There isn’t a “wrong” answer to my question about top- versus bottom-line growth. This article isn’t designed to tell you how to grow your software company, or to debate the pros and cons of VC money. Instead, I want to continue the conversation Boebel started when he announced a $5 million round of funding in late May. It’s easy for this to get lost in the headlines of all of the other companies issuing press releases about funding rounds. Here’s what I don’t want to get lost on our readers, taken directly from Boebel’s VentureBeat post:
SaaS companies in the seed phase are building a flywheel, not a rocket ship. Rocket ships stow an incredible amount of fuel onboard and burn it as quickly as possible in order to escape gravitational forces. Flywheels use human effort and gravity to their advantage, storing energy for later use.
Rocket ships are incredibly exciting to watch but incredibly inefficient. Flywheels are all about mechanical prowess and smoothing inputs and outputs for optimal efficiency.
Earlier this year I considered raising a traditional Silicon Valley-style series A. I met with partners at about two dozen top tier VCs to pitch them on Pingboard.
It was clear right away that Silicon Valley VCs all are looking to invest in rocket ships. A rocket ship will either get you to the moon or crash, and that is exactly what many traditional investors want to put their money behind. The Power Law of venture capital mandates that investors categorize you as either a 1 or a 0 as quickly as possible.
I love that Boebel isn’t the only one questioning the status quo of raising money from VCs. Just a week after Boebel’s take was published, SparkToro announced a $1.3 million round that involved 35 (yes, 35) angel investors. Cofounder Rand Fishkin told GeekWire, “Let me be super-clear about what we’re trying to build: an exciting, high-growth, high quality company that some venture investors might be excited to be part of BUT, one that preserves the option to do things that wouldn’t fit with the outcomes venture investors need.”
This sounds pleasant, doesn’t it? Being able to run and scale a software company without being a slave to the one-way street of outcomes VCs demand.
Maybe Domo’s eventual stock will take off like that rocket ship Boebel describes. Maybe I’m being too hard on VCs and the companies that take money from them. Or maybe the mainstream tech media isn’t being fair to startups who would rather find alternative paths to growth, and who choose to grow in a slower – yet more sustainable – way. Let’s keep this reasonable, important conversation going. Email me at firstname.lastname@example.org so we can set up a time to chat. I want to hear your opinion on the best way to grow your software company.