Note: Value SaaS Talks is an interactive talk series hosted for the Upekkha Community where leading global SaaS leaders share their experiences and perspectives.

This talk with Christoph Janz, Managing Partner of Point Nine Capital, a Berlin-based venture capital firm focused on early-stage internet investments, was hosted by Upekkha partner Prasanna Krishnamoorthy. Edited excerpts.

Prasanna: Christoph is most famous for getting some animals on a chart and telling people, "Hey, are you selling to mice, rats, rabbits, deer, elephants, whales or dinosaurs?" And so that was when I first read that, and I had made the classic mistake of selling to elephants but charging them in units of deers. A classic mistake that a lot of entrepreneurs make. We've made sure that everybody in Upekkha sees that multiple times, not just once, and that they follow that. We literally have a column on how we work with these folks, saying, what is their ICP and which type of ICP. Christoph needs no introduction on that front.

Christoph has invested in Zendesk, Algolia, and a bunch of other SaaS companies. Christoph had his own SaaS company, which he sold before he became an early-stage SaaS investor. One of the few early-stage SaaS funds to stay early-stage, and not start raising. And so, staying close to early-stage entrepreneurs.

From Mice to Whales

I want to start with exactly what Prasanna mentioned. There's a concept that we came up with a couple of years ago - about the five ways to build a $100 million SaaS company. And I am very much aware that most of you are at a much, much earlier stage, so you probably are not and shouldn't worry too much about how you get to $100 million. The first goal is to get to product market fit, and then maybe get to a million, and then maybe two. So I'm very much aware that this is not an immediate goal, but if you have the ambition in general to build a very large company, it might still be useful to start to think about some of the implications that can be derived from this model.

You might have seen this chart already. I'll just explain it really quickly for anybody who hasn't seen it yet. I'm showing the ARPA here on the X-axis, the average revenue per account per year, on a logarithmic scale. So with each step, it's a 10x in ARPA, and then on the Y-axis, I'm showing the number of customers that you need for this given level of ARPA, which I represent using these animals here. And then on the Y-axis, you can see the number of customers that you need, again, using a logarithmic scale, to get to 100 million in ARR. And this is the result. It's very simple math, obviously. You have this $100 million ARR line, and if you are on that line or further to the top, alright, then you are across 100 million ARR. And again, the math is obviously very basic, and there are many more mathematical ways to get to a 100 million in ARR. I think what's more interesting is some of the implications of this.

Most $100mn+ ARR companies are going after deer or elephants

Alright. Let's continue. So first, let's take a quick look at what kind of animals are actual real companies successful with. In order to get a better understanding of that, I looked up a lot of data from most, if not almost all SaaS companies that went public. In most SaaS companies, with very few exceptions, that are at $100 million ARR or more, are public companies. So there's a lot of data available for them.

So I looked up the ARPA data of 74 SaaS companies at or around IPO. And I know there's quite a bit of data there, and I'm happy to share the slides with you all, or the raw data, if you want to dig in a bit deeper here.

There are a couple of caveats here. The data is, with one exception, your UiPath, it's based on S-1 filings. Most companies were around 75 to $200 million ARR when they went public, but there are a few exceptions. There are some minor inconsistencies in the way companies report data, but it doesn't matter so much for this analysis here. And this is a more important point that we can dig in later if you'd like to. Some companies sell to a broad range of customers. And in these cases, the average price for account can be misleading. If you have a small number of very, very large customers, and a very large number of very small customers, then the average maybe doesn't tell you anything.

But let's dig in further here. So I categorized all these companies according to this logic here. And then I'm going to show you just how many do we have of these very, very successful, very big companies for each of these categories. And as you can see here, the bulk of the companies are what I call the deer hunters and the elephant hunters. There is a significant number of what I call the rabbit hunters and the whale hunters. When it comes to the mice hunters, companies with an ACV of below $300, there aren't that many of them, it starts to become pretty consumer-y here. So it's somewhere between maybe consumer and more typical B2B SaaS pricing. So most $100 million ARR SaaS companies were going after deer or elephants, but there are successful role models for each type of animal.

I think that's important. And then maybe the most important implication of this, you talked about this very briefly before, Prasanna, is that you have to align your customer acquisition costs with your ARPA/LTV.

So, if you look at LTV, meaning the lifetime value, and the CAC (the customer acquisition costs), if you look at it on this simple two-times-two chart, then you can build a viable, profitable, scalable business for each of these animals if you manage to align your CACs with your LTV. But if you're not, then you'll end up in what we like to call the SaaS or Startup Graveyard Quadrant. If your LTV is not aligned with your CACs, then you're just not going to build a profitable business.

And it's probably quite obvious, but I think despite the fact that it's obvious at a theoretical level, it might be less obvious what it means in practice. And we've definitely seen companies that use almost enterprise sales, like whale or elephant-hunting tactics to acquire customers, with a pretty low ACV. And that might make a lot of sense in the beginning, where you consciously do unscalable hacks to find out what works and to get to product-market fit. But you just have to keep in mind that if you have to keep doing that, if you have to keep doing 10 meetings with a customer who will then give you $20 a month, that's just not going to work.

If we dig in a bit deeper in here and look at some of the specific numbers, it's obviously a big range, and every company is a little bit different. But I try to come up with some very rough benchmarks here, or rules of thumb for these key metrics here. The ARPA is basically the going-in assumption here, where the whole model starts with.

If we look at the annual churn rate, the churn rate tends to be much higher for small businesses than for large businesses. One reason is that smaller companies just tend to go out of business more frequently than larger companies. And the other reason is that larger enterprises usually give you more potential for expansion revenue because you usually start with a department or a team or some users, and then you can often expand these accounts significantly.

And what this means in combination, lower ARPA and a lower churn for the smaller customers, is that if you look at the lifetime value you have many, many orders of magnitude between these different animals, from just a few hundred dollars for a mouse, all the way up to hundreds of thousands, maybe even millions of dollars for elephant or whale customers.

And now, the last point here is, if you assume that you want to spend up to about 25% of your lifetime value on customer acquisition costs, or about 18 months worth of gross profit, and if you look at it from a payback period perspective, then you get to these dollar amounts. If you look at these numbers, then you can think about what kind of sales and marketing tactics might I be able to apply to acquire customers that scale at these costs? And I'll provide a little bit of additional data for each of these animals regarding the implication on your sales and marketing strategy here.

What does it take to sell to each type of animal?

The Mice: So, starting again with the mice, if you need to acquire a million mouse customers, and let's assume you have a 10% trial-to-paid conversion, you need 10 million trial signups to get to that number. Based on the calculation on the previous slide, this would then mean that you can spend $4 on a trial signup, assuming you have zero sales costs. And the implication of that is that in most cases the leads have to come organically; you probably need a viral loop. There are some exceptions, and the exceptions are maybe even actually the most interesting part of this, because maybe the rules are more or less clear.

But it's always interesting if there are companies that somehow manage to break these rules, and we can take a look at those. But most companies that have been able to acquire so many customers have done it because they've had the advantage of a product that has virality built into it, and Dropbox is a great example or Slack, where people really invite their colleagues. And the last point on this is that the conversion needs to be completely self-service. If you need to employ salespeople to convert these customers, it's almost certainly not going to work profitably.

The Rabbit: Now, if we move to the next animal here on our chart, the next bigger one being here - the rabbits. Let's assume you have a 10% trial-to-paid conversion again, and you wanna acquire 100,000 rabbits, then it means you need million trial signups. Now, for these types of customers, I am assuming that you are going to do some sales, so you'll have to think of your total costs as consisting of marketing and sales. And if we just assume here - to keep it simple - that that is a 50-50 split between sales and marketing. Then it means you can spend about $35 per trial sign up on marketing and about $35 on sales. If you then do the math, what does it mean for a salesperson, an account executive (AE) with a on-target earnings of $80,000? It means that he or she needs to close almost one customer per working day, which is not impossible, but I think it's pretty ambitious.

And maybe one thing to talk about here, and I'm very keen to hear your feedback is that these numbers are mostly from the US and Europe. My understanding is that in India, you're able to hire good AEs at significantly lower costs. So actually, this might give some of you a chance to break some of these rules. If you can hire AEs at a fraction of these costs and then still enable them to close customers in the US where they pay these prices, then I think that's actually a very interesting competitive advantage.

Nevertheless, I think at this pricing range, a large part of your leads need to come inbound. It's great if you can do paid marketing to amplify that. But if you have a business that relies exclusively on paid marketing, in our experience, it's usually not a good sign. It's expensive, but when you have a great product, you usually get some amount of inbound demand. And on the sales side, again, if you have salespeople in the US or in Europe, it probably needs to be a very efficient. Like, almost one-call close process, but maybe some of you have seen that you can make it work with a somewhat more complicated sales process because you have access to good AEs with lower salaries.

The Deer: Now, moving on to the next kind of animal here, which is the deer, and what does it take to acquire 10,000 of them. Let's assume, for this example here, that we have an MQL (Marketing Qualified Lead) to win a conversion rate of about 5%, in which case, we then need 200,000 MQLs. Here, now the LTV is big enough to spend significantly on marketing and to build an inside sales team. Usually, what we find with these companies is that the biggest challenge is to find scalable ways to generate leads. The early data is usually not very easy to extrapolate. If you spend just a little bit on marketing, you basically, by definition get the hottest leads. You'll buy the cheapest keywords first. That's just natural, right?


So the challenge is how you can scale that, and outbound which, in theory, is a great way to scale marketing because if you know who your customers are, your potential customers are, you can just call all of them. So in theory, this is almost infinitely scalable, which is great. The difficulty is, of course, to make the economics work because when you do outbound, you talk to very low... Like very cold leads, and if maybe they are not at the right time, maybe they're not the right ones in the first place. So it usually takes a lot of optimization and quite a lot of sophistication in terms of lead qualification and prospecting and setting up the team to make that work. But when you have customers of this size then, there is a realistic chance of making it work.

The elephant & the whale: Now, lastly, what does it take to acquire 1000 elephants or 100 whales? And I've put them into one category because the tactics for these customers are quite similar. With an LTV of $1 to $10 million, you can obviously spend a lot of money on customer acquisition. Traditionally, most enterprise SaaS companies have done a lot of outbound sales, field sales, field marketing, account marketing and events like dinners. Interestingly, almost none of this is happening right now, and so these companies had to switch their sales and marketing motions from a lot of in-person stuff to doing everything online almost overnight. And I think it's been a challenge for some of these companies and I'm very happy to hear if some of you had to go through this too. And so if you are really dependent on events or field sales, and then obviously with the world going into lockdown, that can be a huge challenge.

On the other hand, we've also seen several companies be really, really successful at doing everything online; those are usually companies that were already quite successful before where there's already some credibility like Algolia or Contentful, so there is already a mini-brand and some trust, and which makes it easier than to do sales conversations just over Zoom and close those deals.

We've heard the same from Salesforce and other big companies, that they are now closing bigger deals than ever over the distance, and this can actually make the sales process more efficient. It'll be interesting to see to what extent the world is going to come back to where it was before when Corona will hopefully be over sometime next year. I'm pretty sure that some of these efficiency gains, which companies were kind of forced to make, will persist.

I'll definitely tell a lot of people who want to meet in-person somewhere where I have to fly, and I definitely say more often than usually than I did before, "This should also be doable with a video meeting." And I think people in enterprise SaaS sales will try to do that too. So I think in general, for elephant and whale hunters, the scaling playbook is clear - there are many, many public SaaS companies worth hundreds of millions, billions of dollars in market cap, who have developed and proven these playbooks. But obviously, it's also very hard to get a company like this started in the first place. It usually requires more funding, it takes a lot of time to get the first real customers and to go through endless pilots with them sometimes.

So my sense is that once you have a couple of happy customers paying you, like these hundreds of thousands of dollars of ACV, then the path from that to becoming really, really big, is relatively clear, but just getting there in the first place, is very, very difficult. And therefore, I also cannot say that you should go after this animal or this animal. There are successful examples for each of these, and there are pros and cons for each of those, too, and the right strategy always depends on a lot of factors.

Companies that broke the rules

CJ: Now, the last couple of slides slides here are about companies that were able to break some of the rules or best practices or rules of thumb, at least that I talked about in the previous slides. And it'll be interesting to see what we can learn from some of these rule-breakers.

Canva: A lot of you might have heard about Canva, which is a company out of Australia that got to 20 million active users apparently without paid advertising and with a product that is not really inherently viral. So what they do, in case you don't know them, it's a simple tool to let you create good looking graphical design for things like business cards or letter heads, as well as online materials like banners and so on. So I think the product has a lot of word-of-mouth built into it, because people might ask others like, "Hey, how did you create this beautiful banner or this wonderful logo or whatever?" But it's not a real viral loop like with a product like Dropbox or Slack or WhatsApp where you benefit from adding others and inviting others.

Based on what I've learned about or from the company, the reason why they are so successful is that the product is really awesome; it's a pain-killer for a very universal need.

Every company in the world needs this kind of stuff and there's a lot of search volume like, how can I create this or a template for that, or looking, you're looking for a designer. So I think the reason why they are so successful is that it's a very, very big universal need. They have an awesome product that addresses that need, that leads to a lot of word-of-mouth; they can amplify that with SEO. And so it's interesting that this company acquired so many users without having an obvious, really strong, viral loop built into the value proposition of the product.

Clio: Clio is a company based in Canada, which has developed and operates a web-based practice management solution for small law firms. At least, they started with very small customers. Meanwhile, they have also acquired some bigger law firms, but the majority of their customers are still solo lawyers or very small law firms. It is not inherently a viral product, and the ACV is in the rabbit ballpark. Nevertheless, they are now on track to be at $100 million ARR in the near future. And the reason why I think it's been working for them is that they have super high NPS, Net Promoter Score. The people really, really love the product. They've made big investments in content, customer conferences, partnerships.

The fact that they are so vertically focused helps them, so they understand exactly who the customers are, there is less competition, and maybe importantly, it took a lot of time and patience. The company is about 10 years old, so it's not the kind of rocketship growth from companies, like what u've seen from Dropbox or Slack or Zoom.

Contentful: Contentful have become an enterprise SaaS company; they serve some of the biggest brands in the world with their API-first Content Management System, but they've started from very, very humble beginnings. It was started by a very young founder out of Berlin, the first seed round was pretty small, at least compared to today's standards. So it's not the typical enterprise SaaS playbook where you usually have a pretty experienced founding team, which raises multiple million dollars in a seed round.

So, why did it work out? The reason is that it started as a developer tool. It started with a very small ARPA, and the product complexity was still small enough for them to bootstrap the company and then iterate. So it was very agile and iterative, and it took many years to slowly but surely go up market. And it took at least one complete rebuild of the product along the way, which is always painful. But in the end, it all worked out very well. So they continuously built out the product, they increased ACVs, and they basically went from mice to rabbit to deer or elephants, now all the way up to the whales.

Docplanner: Docplanner is a platform that allows patients to find doctors and book appointments, and for doctors to receive these booking requests and to manage their calendar and in practice. Docplanner is a rabbit hunter, and yet they are able to acquire many, many doctors using field sales. So this is something which according to the book, shouldn't be possible, because it's not aligned in terms of LTV to CAC.

So why is it working nevertheless?

I think a couple of reasons, one is that they have a laser-sharp targeting. They know exactly who their customers are. So, any customer who they reach out to or visit, is in their ICP, which is not always so easy when you have a more horizontal product. But in this case, it's very clear, it's certain types of doctors in certain types of geography, so that is very clear.

Then there is an interesting marketplace/lead-gen element here. What I mean by this is that they can go to a doctor and tell him or her 'this is not just a SaaS product, this is actually a new business for you', we have patients that want to book an appointment with you but they can't unless you start to use the product. And I'm exaggerating a little bit, I'm sure they say this in a nicer way, but the point is that there is something that they can sell initially, which is not a complicated SaaS product, but it's much closer to the money, so that reduces the complexity in the sales process. There is also patient demand driving doctor awareness, because they have the marketplace with this consumer dimension, they do marketing which is geared toward consumers but also raises awareness and interest for our doctors.

And the last point, and I think this might actually be particularly interesting for some of you, is that Docplanner is active in countries such as Poland and Brazil for example, which have significantly lower salaries than, let's say, the US or Germany or the UK. And that allows them to have significantly lower tax even for their field salesforce, and at the same time the ARPAs which they can get might be somewhat lower but not as much lower. That seems to be just in the nature of the market, that in a country like Brazil, doctors still make comparably much money and so they are willing and able to pay significant money, but sales people are disproportionately lower paid in comparison to a doctor, so that's interesting. That's something which I think would be much harder to do in Europe.

New Relic: this is not the last one, but the one before the last one is a company which probably most of you know. Application monitoring in the application performance optimisation space. They really morphed from a deer hunter into an elephant hunter.

When they went public a couple of years ago, I think their typical price or the typical ACV was maybe $10,000 or maybe a bit more or less but they really increased that by 5X on average in the last few years, and they are getting more and more $100,000 plus customers now. They really go after these customers very aggressively, and when you hear how they talk to investors they're really focused on how many customer of this size in this segment did we get in the last quarter. And they did this by focusing on these types of customers, putting all the sales and marketing effort behind them.

They also did it by adding more products so when they went public it was one product and now I think it's three or four products. So it's getting bigger customers but it's also getting more and more dollars from these customers by selling them more and more. So they have several dimensions in which they've been able to grow, and the majority of their ARR now comes from pretty sizeable companies and they are now also closing more and more million dollar deals.

Xero: The last example is a company called Xero out of New Zealand, which you probably have heard about. It's a very large business by now - about half a billion in ARR with a very low ARPA at about $250. It's a web-based bookkeeping / accounting solution.

So how did they achieve that?

There might be a little bit of virality built into their invoice portal. So if you write an invoice using Xero, you send it to somebody, the recipient might be exposed to the Xero brand, but I don't know, to be honest, if that is a big driver of growth. I think the biggest thing that really stands out for Xero is that they are one of the not-so-many SaaS companies that made the channel work for them. 60% to 90% of Xero's customers, based on what I was able to find out, come from their accounting partners, which basically means they have built a large, successful enterprise salesforce to acquire all these accounting partners and all these accounting partners then acquire all the end customers.

So in a way, they are also an enterprise sales company. The difference being though that the enterprises here being the accounting practices are not their customers but are their partners or resellers. I think it's an interesting case study because so many SaaS companies think about using channel partners for distribution, but I've seen very, very few cases of companies where it was really successful. I think Xero is the one that keeps being mentioned whenever you ask people of SaaS companies that have been successful with that.

The takeaway:

Most companies that went to $100 million in ARR go after deer or elephants, where you have proven playbooks to scale customer acquisition.If you are significantly below that in terms of your customer size, you're going after mice or rabbits, it usually requires a viral product.

There are always companies that break the rules. So I think you should take all the rules and playbooks and the conventional wisdom with a big grain of salt because maybe you are one of those that managed to break the rules by coming up with creative ideas, such as Docplanner or Canva which I spoke about.

If you're really struggling to grow in your current segment, and that's also something we've seen multiple times, it's worth considering going upmarket. New Relic did this very successfully and we've also seen it with several companies in our portfolio that they have reached a ceiling went to maybe $5 or $10 million ARR serving SMBs, but then growth got lower and lower, and churn kept getting higher and higher and then we've seen a number of companies that then managed to go out of the segment and increasingly get bigger and bigger customers, and that can be very promising.

You don't need $10 million in seed funding to start an enterprise SaaS company. I've mentioned Contentful got off the start with a much, much smaller amount of funding. You don't have to be at $100 million ARR in five to eight years. Remember the Clio story, it's probably going to be 10 or 11 years when they have reached $100 million but doesn't make it any less exciting.



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