On this episode of the podcast, I interview Arthur Nobel and we discuss scaling SaaS companies.
Arthur is a Principal at Knight Capital – an investment firm that specialises in B2B software businesses. He is the author of the best-selling book Leaders of Growth and host of the Leaders of Growth Podcast. He is passionate about enabling entrepreneurs to realize their vision.
The inspiration behind his book
I co-authored it with two people from our firm. We have all been entrepreneurs and now in our roles as investors we talk with many companies. What we discovered is companies sometimes struggle with scaling so we dived into the reasons for that. We found out that there is a lot of content surrounding product-market fit, there is also a lot of content around a company doing an IPO and the founder reflecting on the journey.
We have seen that there is not a lot information on the stage of going from $1million – $25million ARR (annual recurring revenue).
The structure of the book
We interviewed about 47 founders, operators and experts that are well known in the SaaS community such as Sean Ellis, Mark Roberge and Nathan Latka. We looked at Tribes of Mentors from Tim Ferriss which is a really great book and we chose the Q&A format which makes the book easy to read.
Levers of scaling a SaaS company
We tried to come up with a framework where we set marketing, sales and finance which we call heavy burdens of the company. We then look at the dimensions you can scale as we examine scaling from the organizational angle rather than something like do more SEO or do more paid ads.
If you really look at it from the department or company perspective, you find out that there are six dimensions you have to plan ahead for. In our case these are:
What is the main function of a department in a given stage. For instance, in an early stage company HR is focused on recruiting whereas if you are at a bit later stage you are more focused on HR process.
- Umbr (5.15):
What KPIs are important for a department and a company at a certain stage. If you are in a product-market fit stage or early scaling stage, LTV/CAC ratio is not so important whereas if you are a Series B or C stage company, it is very important.
3. What people do you need and for what roles:
People in a Series A type of company are very different from a Series C type of company which is different from a seed company.
You need standardized documentation so that everyone is on the same page. If you grow from 20 to 100 people, you really see companies getting more siloed and from there you will see the performance per employee really dwindle
- The processes we need at the various states:
When people think of scaling, it is often perceived as if you have to do scaling and there isn’t a lot of flavour in it so you need to know the state you are in the scaling continuum and do you need to have repeatable or predictable processes.
- Tooling for each stage:
If you are a customer success department you might need insights when you are in Series C state while if you are in Series A state you might do well with Slack for instance.
What triggers should founders be aware of?
You have to understand what makes sense for your business however I think there are some fixed trigger points such as the number of customers for instance. If you are in customer success you can do everything even in Excel or Google sheets for about 50 customers. When you move up to 100 customers, that is a trigger point that perhaps it is getting too complex and you need more people to manage it properly.
You also have revenue, if you cross the $10 million ARR mark, it opens different levers of growth for instance you can do acquisitions whereas if you are in the $2million ARR type of business, you can still acquire companies but it is not very logical. When you cross a certain level of revenue, you can hire different type of people, the really great people don’t usually want to join early type startups because they find it too risky.
The customer segments also matter for instance, if you decide to serve the enterprise segment, you have to be very professional right from the start as there is less room for trial and error.
How to enhance growth between the seed stage and the Series A stage
If you look into objectives, for HR it is very important to focus on recruiting because that is what you are going to need in the next 12 months. If you look for finance, you might need a controller because you want to start focusing on the reporting for the Series A. If you look from a sales perspective, it is very important to show some repeatable processes so that you can raise your Series A.
If you look into data, it is important not to put so much weight on certain metrics. If you are Pre-Series A, it is very important to focus on retention and on engagement. It is good to measure LTV/CAC but it is very hard to explain that if you are 2-year-old company, to say that you have a lifetime value of 8 years. Focus more on things that show you have product-market fit and afterwards go-to-market fit and some other metrics can come later.
In terms of people, one of the things I have seen is usually in the beginning you initially start with “T shaped people” which refers to people with a broad skillset but it is not very deep. Once you move across stages, the “T” gets really deeper and the roles are a little less broad till it eventually becomes like an “I shape form” which is very deep but not broad at all.
In the stage where most of the listeners are, I feel they should focus on the trailblazer type of people who have an entrepreneurial type of background and who have a broad skillset. Up to your Serie A, you start getting a few more senior people in your team who have done it before.
If you are in the seed stage, It is very important not to promise someone who is doing well in marketing that he is definitely going to be the CMO or the CFO because someone you need at a $5million – $10million ARR company is a different type of person with a different type of skills so take that into account with the titles you give.
Other important observations listeners need to be aware of
I think you need to define what you need to have in order to raise a Series A round because I feel there are some misunderstandings in what the entry points are. In your seed round, it is important to demonstrate product-market fit so you need to show minimal size of replicability in terms of sales. You should also be able to explain that if for instance you invest €5000, it will lead to X and Y in growth and you have a certain defined process for that.
You also need to show that you have a strong position to win in your niche going forward because that is important to raise Series A.
From Series A onward, it starts getting more about building replicability and expanding your market and really scaling.
I have seen that once you pass $1 million ARR and you start raising your Series A, there are usually lots of options and you get into the paradox of choice where it seems like you can do everything but you need to focus.
A simple growth framework is if you define your strategy, always start with a winning aspiration. What is your vision? What do you want to achieve?
You need to define how you want to win and where you want to play.
There are a couple of options to grow concerning where you want to play, given the audience is early stage, you can focus on organic growth and growth you can do yourself or together with raising capital.
You need to look at the industries you are in now and where you intend to go. You need to look at the customer segment such as SME, Mid-Market or Enterprise. You also need to look into distribution models such as how do you do sales, are you more marketing focused or product-led growth or are you more channel sales and map those.
In terms of products, do you perceive you will go more deep or wider.
After you have written these down, you start looking at how many things are you going to do. Investors usually expect you to keep doing the same thing and maybe add a few bets on top on that.
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