How to Start and Scale a SAAS Startup – IndianStartUpChat

IndianStartupChat is a weekly podcast series on new startups in India and their ecosystem. Moderated by Lakshmi Rebecca, the discussion is spearheaded by Ravi Gururaj, Entrepreneur & NASSCOM Product Council Member and Mukund Mohan, Director at Microsoft Ventures. This podcast , which is the 10th in their series, has the members discussing on starting and scaling up a SAAS based startup.

You can listen to their discussion here

Transcript

Hello, and welcome to IndiaStartupChat, the best podcast series on startups, investments, opportunities and views from India, brought to you by Ravi Gururaj, Mukund Mohan and me, Lakshmi Rebecca.  Here is this week’s chat.

Welcome to Episode #10.  A few episodes ago,we talked about how to raise your first round of funding.  Today’s topic is ‘How to Launch and Scale a SaaS Startup’ – that is, software as a service startup and of course, we have with us Mukund and Ravi.  Hello Mukund, hello Ravi.

Mukund: Hey.  Welcome.

Ravi: ‘Rock n Roll’ Lakshmi!

Lakshmi:  Namaste, Namaskara, vanakkam.

Mukund: Namaskara.

Lakshmi: Kee haal hai?

Ravi: ‘Kee gal hai’ – it is not ‘kee haal hai’ – come on!

Lakshmi: Oh, I’ll say it this way – you say it the more proper way, the more like…you are more Indian that way, okay?  I’m more South Indian that way.  (Laughter)  Okay, so SaaS startups.  You know, before we go into ‘how to’, I want to ask both of you what habeen your experience with SaaS startups, both as entrepreneurs and technologists?  Let’s lay the context for every listener here today.

Ravi: My context is, I started a SaaS company back in 2008 – BuzzGain; grew it to a reaonably decent size and then sold it to Meltwaterin 2011.  The company had about 20-something people and we were breaking even, and that was one of the key parts that Meltwater really loved about the solution when they purchased it.  It was selling in the $2000 to $2500 per year range.  We had a ton of customers who were actually buying it at that number.  The company was started in India.  We were selling from India.  We were focused on US customers, so I had gone through the whole product market fit, and gotten to the point where we had customers paying for it.  It was completely customer-funded and my money, so we didn’t get any external funding at all.  So that was my background with SaaS.  After that, I have invested in about 4 companies that are purely SaaS alone and then advising 3 more that are saaS based business.  2 of them on the marketing side, 1 of them more on the customer service.

Mukund: So, you know, my experience with SaaS has been really just with my own companies and the companies that, you know, I have invested in. I think, you know, for the India-perspective for startups, SaaS companies out of India, I think this is a good opportunity to actually build companies that all tiers of scale.  You could build relatively small SaaS companies successfully I think, then go after long-tail niche markets and build a very good runway business.  You could actually scale up massively, to build, you know, global saaS companies out of India as well!  I think, you know, SaaS, of all the different entrepreneurial ventures

I’ve seen, it seems to me the most metclix driven and the most, you know, in terms of being able to structure for success, where, you know, the playbook that you get from other entrepreneurs, the techniques are extremely templatized and you know, if you don’t follow it, you’re going to be missing a beat.  Obviously every company has it’s own vertical focus; it has to have it’s own delightul product, but there is so much framework in honest work that’s available in building a SaaS company, that, you know, I think you get a big jumpstart if you get it right, if you get the formula right, you get all the structuring right upfront.

Lakshmi: What are your top three tips on how to start a SaaS startup?

Mukund: Yeah, so I think, you know, top three tips in starting a SaaS startup don’t look very different than starting any startup, in my mind.  You got to make sure you are really solving a real pain, right, and in the SaaS startups, especially I think you have got to make sure that feedback loop also – the connection to the customers, the connection to the pain point you are solving, that feedback loop is coming to you very fast.  So this is basically do a lot of A/B Testing, you know, essentially instrument to app., extremely strongly because you have the luxury of being able to watch everything the customer does with your app. very closely, much more closely than you can in any other experience you might deliver to the customer, right, in any other venture.  So that’s the first thing.

Make sure you have got very clean value prop; make sure you are instrumenting deeply; make sure you are extremely customer-focused and, you know, I think the second tip I would say is basically get your pricing right, which is, you know, often times people think we need to offer it for free, the premium model – that’s fine, but really don’t lowbow.  I see this tendency sometimes with startups to lowbow.  I think, you know, you should be able to extract the right premium for your product.  While you might do lead-gen with a free offering, I think you should be able to extract the right value from the customer over time, right, and you know, really price at the right levels.  And the third thing I would say is, make sure you really build it out like out like a platform so there is an opportunity for others to integrate, the others to embed you, so two-way kind of interfaces that allow people to come, you know, into your product and for others to kind of hang off your product, right?  I think those are two very important aspects that I would keep in mind when architecting the product.

Ravi: So I think the top three things I would say about SaaS, number one – SaaS companies spend money first and they make money over time, so that is the biggest difference that I know from any other kind of company, meaning that, you have to be able to go ahead and realize that most customers pay on a monthly basis or an annual basis, so that’s one of the biggest challenges most people have.  You have to get this upfront money that you have to pay, unlike sofware, enterprise software business and forth, where the customer will pay a significant four-year or five-year kind of a outlay – perpetual license upfront.  SaaS – typically companies pay on a monthly basis, so account for that.  It is a big accounting difference. It becomes an operating cost for your buyer, not a asset purchase.That’s the first difference.  What does that mean?  That means you have to raise a little bit more money to keep the lights going, while you go ahead.

Also that means is that you actually hire much slower than you expect. That’s the first thing about SaaS companies, different from say mobile companies or any of the others.  You get paid over time, but you have to spend upfront.  The second thing that’s interesting that I have learned about SaaS companies particularly is that when you’re doing the scale, SaaS companies go through five stages, I think, in my own mind; this is just my perspective.  Getting to the first $100,000 or 60 lakhs and getting to the first million dollars after that, which is 6 crores, then getting to 10M, then getting to 50M and then gettting over a 100M – there are only about 20 companies that are doing more than a 100M in revenue in SaaS, so scale is very very difficult in SaaS.

I know of 430 companies apparently in the world that are SaaS businesses, that are doing more than a million dollars in annualized revenue.  So what does that mean?  Scale becomes very important and you can have a SaaS lifestyle business fairly easily and break even, but getting a scaled SaaS business requires a lot of money and also requires a large market, which leads me to the third point about SaaS businesses, which is go after existing markets, is what I have learned; tends to be a lot of value.  So if you think of the opportunity as there is a large market in HR, large market in customer service, large market in software as a service sales, and you go after an existing market, which has been underserved – for example, the big companies like Siebel and Oracle cater to the enterprises, but not to the smaller companies.

I am going to do the same software as a service, but for small and medium sized businesses, the market validations seems to be unlike in other software opportunities; going after an existing large market and going after someone that is in the software space now, in the software as a service space, is a lot more value.  So those are the three things that I have learned.  Go after an existing market; make sure that you plan for scaling very effectively at growth and understand that your operating cost will be a lot more than your asset purchase cost.

Lakshmi: You know, I was going to ask about how to scale next, but I think you have kind of addressed that already in both your answers, Mukund and Ravi.  So I’m going to go to the next question and ask: How do you acquire your first few customers as a SaaS startups?  What would be your top, let’s say, two things that you think one must do?  How do you connect with the first few customers and how do you decide who would be right and what kind of a difference does it make to get that right customer in the first few customers?

Mukund: So I think you are absolutely right, Lakshmi, in terms of getting that right customers as much as it is getting the first few customers, right?  The first thing I have learned and I want to ask you a question about this, right?  My question is: How did you go, get your first customers, not just for SaaS, but for your business?

Lakshmi: I think mine came about very organically as an anchor who was trying to do a talk-show online.  I realized I had the in-house capability to produce for other people as well and when I came across an opportunity where a healthcare startup or rather healthcare portal was looking for content and I said, “Hey, I can do both – I can anchor it and we can produce the content,” and that’s how it started and then one thing led to another and every other customer of ours has come on their own, because of the strong digital presence.  It was interesting to get a customer who could use the entire scope of services we could offer at that time, which has of course increased over time, but at that time, in the first few months of business, everything that we offered, this company could use and that gave us confidence in ourselves, in what we could deliver and that was an interesting turning point, I think, very early on.

Mukund: So one other thing which you have learned, which I also learned and I would like to get Ravi’s perspective, is that the first customers usually come from people you know.  So build your network; build your contacts way before you need them.  I use this phrase called ‘dig your well before you are thirsty’ – your first few customers are only through the network and they know you, they are trusting you; you may not have all the features; they are not the kind of people who are going to say, “I have this problem, so I am going to buy from you.”  People unfortunately still buy from other people or fortunately!  So build your network of potential customers way before you need them; put them in a customer advisory board, make sure that they are involved with you in helping build the product.  So that’s the tip that I would give.

Ravi: I totally agree Mukund.  I think, you know, SaaS, more than any other business, is intricately kind of tied into the customer, right?  The customer has to re-renew their contract with you every single month, you know.  So that’s fundamental to, you know, ensuring that, you know, you are delivering value continuously.  I need to answer your question, your original question Lakshmi – ‘How do you get your first few customers?’  I think that’s about, you know, as Mukund said, about the network you have, it’s about finding designed customers. These are customers who are working with you to help you design the product because regardless of how much domain expertize you think you have, you’re going to have to have a first set of customers that are going to want to work with you, give you feedback on every single iteration, you know, because in a SaaS product, you could iterate equally every week.

It’s a continuous process of releasing the product, right?  And your (inaudible 0:11:18) to update is literally, on a feature by feature basis, you can update, right?  So I think that’s the method that you need to use – five, fifteen, twenty customers initially that have the pain point, represent the different silos who want to go after, focus on the core set of functionality that you can deliver to them, the 80-20 rule applies here and go after them deep and get their feedback continuously, right?  I think, you know, to do that, you need to have the network, as Mukund said.  I think you need to go out there, and you know, put a few free demo streak, meet them at various venues, conferences, if it is, you know, especially industry conference – I’m not talking about software conferences; you know, make sure you get the right set of people who are early adopters of technology especially, right?

Lakshmi: Sure.  Talking about people reminds me, internally, obviously in the start, having the right kind of resources is going to make a huge difference in how the business shapes up and the service shapes up or product shapes up and how the business scales.  So what are the two people assets that you think make a huge difference in a SaaS startup?

Ravi: Yeah, I would say, you know, it’s actually trying to find somebody who has built the successful SaaS startup before is very very valuable, because you don’t want to reinvent the wheel every time; you want somebody who has done it before, on the backend especially.  You need really good UX folks and frontend folks, obviously.  You know, that’s pretty straight-forward, but if I were asked to, you know, two hires, I would say awesome backend person who has done SaaS work before and you know, somebody who is today’s world, an awesome mobile frontend developer for SaaS products particularly.

Mukund: Yeah, I think I agree with Ravi, most of what you will see; the only difference I would add is it’s also important to be able to understand how to figure out a way…the thing that I have learnt about Saas business is there is so much what I would call infrastructure that needs to be laid up in place, even though you may not use a 100% of it.  So from a technology perspective, what I have seen consistently is people just putting together a version 1 by building whatever they could from things that they know, and then rearchitecting and replatforming and reskinning every six months or year.  So that’s the one thing that I have learnt is very very important from the perspective of making sure it does very well, and don’t scale for the first million users on the first day; just get something out as quickly as possible, preferably three to four to six weeks and then keep rearchitecting and rebuilding as you would go.

Lakshmi: You know, early on in the conversation, you mentioned the need for higher capital investment support scale.  Now,just now Mukund, you mentioned infrastructure.  I was going to ask: What is the top challenge that you have seen in your experience that a SaaS startup faces in the first five years and how can a SaaS startup overcome that challenge?

Ravi: Yeah, I think it’s just basically being able to scale up beyond the niche, you know, first few customers you might get, right?  You know, Mukund already laid out the various hurdles, like that SaaS go through; you know, the first million bucks is very hard to get to.  I think once you get to a million, probably ten is just a question of executing well, but then the next barrier comes, right?  A big barrier, which is…and if you want to go beyond ten million dollars, honestly, almost all SaaS companies that have gone beyond that, that had a big element of enterprise there.

Somebody who can…you can acquire that they bring you tens of thousands of SaaS users at one shot, right, because by it’s nature, the per head cost of Saas products is limited to about a 100 bucks maximum, right?  And so, you know, if you are going to make a big number on the revenue side, you have to have…and the per user number, revenue number is relatively small, but number of users – obviously, it has to be huge, right?  And that becomes a big challenge, I think, for SaaS founders to scale up.  I think most of them get stuck in that five million dollar range and not able to get out of that problem.

Lakshmi: And how do you overcome this?

Ravi: Yeah, so the way you overcome it is you have to figure out how your product is applicable to large organizations that can bring volume of purchases, right?  That can bring you volumes of customers in one shot, and I have seen very few companies, you know, have been able to just scale up or individual or presumer users, right?  They have had to scale to the next level of enterprise and that brings with it the bunch of challenges, you know.  Enterprises have slightly different requirements than the original product you might have built, for a presumer or even a low end SMB customer, right?

Mukund: I think five years is tough, Lakshmi.  I’m going to say six months and one year.  I am going to talk about the challenge of six months and one year.  The five year challenge is what I had mentioned before, right?  Market – market, market, market.  If you don’t target the right market in SaaS, then you would be stuck in five years, trying to get to one million dollars.  You target the right market; even if you link a lot of mistakes, you might end up at ten, twenty million dollars in five years.  So I think if you get the market right, if you go after something that you know and it’s a fairly large market…well, you know, it’s hard to figure out in some cases the market is large or not, but I would say for most part, it’s B2B SaaS tends to be that way.

Business to consumer SaaS – the biggest challenge you will face more than anything else is financing.  B2B consumer is a subscription business; this is more what people call ‘eCommerce’, right?  In some stances, subscription business by giving you some kind of content or giving you may be even a physical product – biggest challenge you are going to face is funding.  B2B SaaS funding models I have known, I think the only challenge is scale capital.  You might get the initial seed-round, per seed round; you may even be able to make it to a fairly significant seed round like a two, five million dollars seed round, but scale capital requires someone to believe that the market is going to be very very large for SaaS.  So that would be the challenge, primarily because you know, companies like Slack and other companies…for example, if you remember, there is one company here, you know, FreshDesk, for example, and in Chennai, right?  They have proven that the market that they are going after is very very large and they are able to get the thirty-fifty million dollar investments.  But if you want to scale it to that size, you need to have money; funding is a big challenge and on the B2B side, biggest challenge is target the right market and you will be…half the problem solved.

Lakshmi: You mentioned Stack and FreshDesk.  I was going to ask what is that one SaaS company that each of you refers to as a great example of a company with a great growth trajectory that makes for a good case study for anyone entering the space, to sort of look at, understand and draw lessons from?

Ravi: Yeah, so, you know, I think I am going to pull out one that may be, by now, was a (inaudible 0:18:04) example of SaaS success, is (Zetafits 0:18:07).  You know, they are a company that has…literally been able to bootstrap themselves initially to massive success in the SMB market and it could serve as a great example of how to go after a market, with a laser focus.  What’s particularly significant is, the founder of this company is not really even a techie, right?  And they started out very very small; they started out very focused.  They started off engaging with their early customers very closely and then have been able to scale. Now, of course, they have got tons of money being poured into them because of their growth, but, you know, they went after very niche space, very interesting product; then, you know, building a real growth engine there.  Yeah, I would say that’s an awesome case study for people to go out there, take a look at and then reputative other areas.

Mukund: I like two companies I am going to mention; both of them are companies in India – WebEngage, which is Avlesh’s company – phenomenal company to be able to go ahead and emulate, and another one is a company in Chennai called Chargebee.  I am going to mention one more as in a company that has graduated from selling to India and selling from India and selling in India to selling abroad, which is Unmetric.  Laksh has done a phenomenal job of taking Unmetric.  He has moved it to New York, grown a large company, got investment from (Jaffco) as (SeriesB), took the initial (Series A) from Nexus and then he has gotten another round after that as well; grown it very well.  So Unmetric, good example, good one to emulate.  Chargebee also another one and WebEngage.

Lakshmi: Fantastic!  Okay.  Now, the future – the next few years as you see it, what are the big opportunities for SaaS startups in India?

Mukund: As you see more and more small and medium size companies in India starting to get phones, that is their first computing experience, so I would assume that within the next three-to years or so, almost everybody in India who can afford a smartphone will have one and people who can’t afford a smartphone also will have one.  Now, there is a possibility really of getting software in front of them to help them automate things like inventory management; to help them automate things like taking payments, to help them be able to do customer service online, support online and that is possible to do now versus before than any other time.

So SMB opportunity in India for marketing, for customer service, for sales, for delivery, for HR, I would say the biggest opportunity would be that in India.  That’s one of the areas.  I am not necessarily sure that’s the only area, but that I think is a great area for SaaS companies and another area for SaaS companies in India is also how do you go about trying to take Indian software practices and solutions to the rest of South-East Asia and grow the business in Singapore, Malaysia, Indonesia because even they are fairly similar and you are much better off running a company from India doing that than, for example, a company in the US trying to target those markets.

Ravi: Yeah, so I think, you know, a few things for India…to come to mind to me, what I think Mukund’s already mentioned, you know, the smartphone revolution – clearly I would build a SaaS company that was mobile only and I mean, everything mobile, including the admin. dashboards, including the set-up of a product – everything, okay?  So there would be an opportunity to do that.  I think, you know, lot of SaaS entrepreneurs think that, you know, atleast the admin. has to be on a web console or on a larger screen format; I think, you know, there is a huge opportunity to do it mobile-only.  That’s one.

I think the SMB will become more and more tappable as a structured reachable market over the next few years and so there are a huge range of problems to be solved there and opportunity to go after a pretty big (inaudible 0:21:50), right?  And then the third would be in the language SaaS which is: Can you build SaaS that is very very easy to customize in native lanugages across India, right – local languages across India and that would be, I think, again a big area of growth and potential opportunity for entrepreneurs, in addition to everything that Mukund has already mentioned.

Lakshmi: Fantastic!  Thank you so much.  That makes a very very insightful Episode #10, a special on ‘How to Launch and Scale a SaaS Startup’ and to the listeners, I would like to say, if you have got suggestions on what you would like us to talk about in the next ‘How-to’ episode on the IndiaStartUpChat, please tweet to us or leave a message to us the Facebook page.  We are on: @instartupchat on Twitter and on Facebook, we are on: Facebook.com/IndiaStartUpChat.  Thank you.  Thanks Mukund, thanks Ravi.

Mukund: Bye Lakshmi.

Ravi: Thank you.

And that was this week’s IndiaStartUpChat podcast.  Get in touch with us on Twitter.  The handle is: @instartupchat and then our Facebook page, IndiaStartUpChat.  Send in your feedback, suggestions and lots of retweets and likes.