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Hello, I’m Thijs from Amsterdam, and I just want to say hi to my three-year-old kid.
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I was watching on a livestream at the moment, so I lose, yes! Now, let’s get started.
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So imagine you run a SaaS company.
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It's like the third month of your existence; you wake up in the middle of the night and pageviews just keep calling you that the server is down.
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You're the only person who can actually fix it. There’s no holiday.
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It sounds easy, so you spend an hour fixing this, figure you go back to sleep, and then you wake up groggy.
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Then you find five support issues in your inbox, and actually, you can make no progress on the feature you were working on, something you were really looking forward to.
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Then, at lunch, you get an email from a freelancing client.
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They’re offering you a super lucrative job, and you’re thinking, 'Why am I doing this again?' This sort of emotional rollercoaster is what I want you to focus on.
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Let’s start with some definitions: SaaS stands for Software as a Service.
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It’s software you deliver over the internet, usually on a monthly basis.
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Somebody pays you some money, and you solve a problem for them; they have no hassle.
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They're just using the service without thinking too much about it.
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You’re all familiar with a number of these SaaS companies that you see; they all basically use the same business model we use.
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However, there’s a concept you might not be familiar with: the long, slow ramp of death.
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We’ll get a lot deeper into this in a bit, but it describes the revenue curve you will see in a SaaS business in the early years.
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It’s called the "ramp of death" because your costs are pretty high, and you have to slowly grow to meet your cost base.
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By default, you feel dead most of the way.
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This is my SaaS; it’s called Epic No, and it’s the best monitoring tool for Ruby for electric teams.
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They want to build a really high-quality application.
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So why am I here talking about this?
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I think if you were here this morning, Sam talked about this a bit already.
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I love the technical stuff; I've actually done technical presentations mostly.
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But in the end, it’s all about what technology is really doing in the world.
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We need to think a bit more about the context around it as well.
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So I see four ways for developers to make money, and doing SaaS is one of them.
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But let’s look at the other options first.
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You can work as an employee. I’m in a fortunate situation because I’ve never had a traditional job.
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I started a client service company straight out of college.
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I’m not super familiar with this route, but I hear it has its pros and cons.
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You always get paid unless your employer goes bankrupt; then you’re out of luck.
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A big upside is that if you play your cards well, you can find a team that helps you grow as a developer.
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Having a stable job means you can usually get a mortgage, and you won’t have to make tough decisions.
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If your stress tolerance is low, it can be nice to just close your laptop at five.
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On the flip side, this can also be frustrating.
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If you're the type of person who wants control over your work, it can be frustrating having someone else make decisions for you.
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If you get a new boss, it might spoil the pleasure in your work.
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The same goes for new hires; you might not have a say in the hiring process.
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So, you may end up with team members that don’t fit well.
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Finally, you're probably not going to achieve financial independence this way.
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The second way is working as a freelancer.
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The big upside is you can make a good income in the current market.
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I have friends doing this, paying off a house in Amsterdam, which is pretty expensive, within a decade.
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This comes from a lot of billable hours.
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You can move between projects often.
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However, this can also depend on your personality type.
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If you don’t set aside time for strategic work, you’ll just end up paying off other people’s technical debt.
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The first option is basically a scaled-up version of freelancing.
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This is something my co-founders and I did for years before starting a product company.
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In this business model, you get projects from your clients.
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They pay you for deliverables or hourly, and then you send a bill after doing the work.
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The pro here is that you can get paid pretty fast and make a lot of money.
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If you do this as a small team, you can be really profitable.
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But if you scale up to 20 or more people, it can become complex.
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There comes a point where founders spend too much time managing projects.
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If you don’t have enough clients, you might make no money.
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The biggest downside is encountering what I call the client services dragon.
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This dragon represents the pressure to constantly find new jobs to cover salaries.
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You hire people and pay their salaries, but you need new projects to keep the dragon fed.
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This leads to what I call the great people paradox.
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You need to sell projects to your clients based on the great people you have.
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But if you’re not careful, you end up needing to take on less exciting jobs that can lead to unhappy employees.
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This can lead to a situation where you have neither good customers nor good employees.
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So, the first option is the one I like best, but it also has its issues.
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This is running a product company.
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When we got started, we looked at Basecamp like everyone does.
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We tried to emulate what they do.
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They had a great presentation back from 2008 that went against the venture capital model.
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It emphasized functioning without the constant pressure of needing to grow.
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I think this is a pretty good message.
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So, what’s the thing in between? Pricing.
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Having a price is crucial to running a product business.
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In the beginning, we thought this whole SaaS thing would be easy.
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We actually had no idea how to make a successful product.
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We started with client service agencies and had other product ideas.
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Eventually, we tried to combine those things before we transitioned to a product.
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For example, we created an e-commerce engine that we sold to fashion companies.
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However, that became a spaghetti codebase and we were unable to sell it or open-source it.
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Secondly, we attempted to do projects with partners, thinking we would market together.
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Often, we faced the issue where the marketers we partnered with were not good at selling.
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We made investments and ended up with nothing productive in return.
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Thirdly, we started several projects but didn’t actually ship them.
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We all know the first 80% of a project is easy to do over a weekend.
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Finishing the last 20% is what takes weeks.
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So we often just gave up.
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We thought let's just become a really good client services firm, but we were secretly unhappy.
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To keep our people happy, we introduced 20% time.
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Even if they weren’t working on the most amazing projects, on Fridays they could do interesting work.
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This is when we had the idea for four products.
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I realized, listening to David yesterday, that this concept is about complexity compression.
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In Rails 3, exception notifications were introduced which let us plug into the instrumentation framework.
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This allowed us to do a product without a lot of monkey patches.
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I think you can see the complexity of compression principle at play here.
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Now we’re finally getting to the actual topic: the long, slow SaaS ramp of death.
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This is the woman who coined this concept; she is the CEO of Constant Contact.
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They started at a time when you had to do your own credit card processing.
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She gave a presentation that introduced a concept which really inspired us.
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Let’s look at what this looks like.
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This graph represents a typical long, slow ramp of death.
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You can see there's no instant growth here; that's an important aspect.
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You see a slow curve trending upwards, which represents costs in your business.
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These costs include salaries, product development, and housing.
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In reality, it looks a bit more complicated.
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Your costs slightly increase as you grow, but the bulk of your costs are salaries.
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This is the reason most SaaS companies fail.
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You start with high costs and low revenue, and no amount of marketing will rescue you when you’re not close to breaking even.
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Many products fail to make it out of the first red corner.
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This is because people are expensive. As a developer or employee, if you're not billing your hours, you'll end up losing money.
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The second part explains the revenue, which tends to grow slowly.
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There are some theories here that are useful to understand, especially if you're talking to investors.
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The first one is Customer Acquisition Cost (CAC). This is a combination of all costs related to getting new customers.
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It includes marketing expenses, Google Ads, sales time, and everything you spend to attract customers.
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You aggregate all your direct and indirect costs and divide it by the number of customers you acquired.
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For example, if we spend $5,000 on acquisition costs in a given month, offset that by our discounts, we arrive at our net customer acquisition cost.
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The second key metric is Average Revenue per User (ARPU). This describes how much money you're making per customer.
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To calculate it, simply divide your total revenue by the number of customers.
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Next is Gross Margin, which measures your remaining revenue after accounting for direct costs.
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You make a distinction between direct costs and product development costs.
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For instance, customer support and hosting are directly included, whereas new feature development is not.
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So if you have $10,000 in revenue but $2,000 in operational costs, your gross margin is 80%.
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Churn describes how many customers cancel each month, expressed as a percentage of your total revenue.
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If you lose $800 in revenue monthly, you calculate churn as a percentage of the total revenue.
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Retention represents how long customers remain with you; the longer they stay, the better.
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You can calculate retention by continuously deducting churn to see how many months your customers stay.
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All these numbers combine to produce the key metric for a SaaS company: Lifetime Value (LTV).
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LTV is calculated by multiplying ARPU by retention and gross margin, then subtracting customer acquisition cost.
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Imagine a situation: You spend $200 to acquire a customer.
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She signs up for a $50-per-month plan and uses it for 28 months before churning.
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The total revenue from this customer would be $1,400.
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You spend $10 a month on running the service, adding up to $280 in operational costs.
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In the end, after 28 months, your total margin from that customer is $920.
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This is pretty cool; e-commerce companies would be thrilled.
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However, you must wait until month five to break even, which is challenging.
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The revenue in SaaS is truly about keeping customers happy for a long time. Once they pay off their acquisition cost, the longer they stay, the better your margins.
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So you need to ensure your churn is low and provide an awesome service.
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Otherwise, you’ll spend a lot of money acquiring new customers only for them to drop out before profitability.
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This can lead to situations where you feel victorious closing a $10,000 customer lifetime value deal...
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...only to find that your monthly revenue looks no different or even dips in the following months.
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This situation, despite doing everything right, showcases the struggle.
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It highlights the need for patience.
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So, how can we survive the ramp?
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The world is awesome, and once you climb the ramp, you find yourself in a great position.
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You just keep adding revenue as you progress.
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However, you need to find a way to survive the initial phase.
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To illustrate how dire the situation can be, here are the first two months of EPs.
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Notice in the first month, Clement, a friend of ours, signed up.
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We made just 50 euros. The next month, we doubled that revenue, which seemed good.
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However, those earnings couldn't even buy lunch for the whole team.
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So how do we survive it?
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I don’t have all the answers, but I will share useful strategies.
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First, we freelanced a lot to finance our SaaS.
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We decided to do this on an individual basis; we weren’t hugely passionate about pursuing a product company.
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That’s essentially why we made the choice we did.
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Second, we learned to be super frugal.
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We didn’t have an office; I used the same laptop for over two years.
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We held meetings at the train station, really trying to limit spending.
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If you can get clients to pay upfront, it’s like securing an investment.
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If they pay for the whole year upfront, you can recover acquisition costs immediately.
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This also allows you access to cash flow you would otherwise lack.
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This approach helps assess whether you're on the right track.
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Modesty can be a challenge for us Dutch people.
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We often worry about being too bold before truly executing.
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For example, when we had an issue where our infrastructure collapsed, we had to reassure the customer.
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Afterward, we worked hard to fix the problem.
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We also sought advice and small investments from local startup folks.
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This helped us scale the company faster.
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Now, let’s touch on some classic startup advice.
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As developers, we're tempted to solve early business problems with code.
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But sometimes, it's better to tackle tasks manually rather than over-engineer a solution.
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Talk to your customers regularly.
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This will keep you motivated and let you improve your product with their feedback.
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Build something people love. It can greatly influence your motivation.
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Writing content is essential, particularly for marketing towards developers.
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Pushy ads may not yield good results; quality content can draw customers naturally.
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Lastly, focus on vision.
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Understanding how the human brain works can benefit you.
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Humans differ from animals as we can envision a better future.
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This can keep you committed to your goals.
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When navigating a tough path, remember your vision to stay motivated.
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Consider your business dynamics, as they greatly influence success.
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It’s important to find where you fit best.
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Once you find your bearings and stabilize, your journey can become rewarding.
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So, to conclude, patience is crucial.
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The early part of the SaaS ramp can be brutal.
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After overcoming that initial stage, your revenue can become your ally.
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Without financial pressure from the start, you can focus on improving your service.
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Also, make sure you're building a product for people you understand and enjoy working with.
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Finally, continually reflect on the type of company you want to be and how to get there.
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Reflecting on team dynamics is essential for the business’s success.
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So I’d like to wrap up with an inspirational quote, though I forget who said it.
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I think it goes like this: "Planting a tree takes time but is worth the effort."
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Thank you!
