[Music]
all right good afternoon everyone very
pleased to be here is my second time at
SAS dock which makes sense because it's
only been happening twice I've been told
if anyone has questions while I'm
talking
I just realized oh another clicker does
anyone have a clicker for me yeah I've
been told that if you have questions
just go to slide oh and log your
questions there and I'll be happy to
answer them at the end thank you Green
is forward all right beautiful so I'm
here today to talk about scaling
strategies for SAS companies that sell
to SME so the small and mid-sized
business market I'll do a very brief
introduction to myself I'm going to talk
about the SME market talk about the
challenges and selling to SMEs and some
of the tactics that I've seen work over
the years in selling to SMEs first of
all who here is part of a SAS company
that sells to the small and mid-sized
enterprise market almost everyone
perfect everyone else you can go this is
not relevant for you beautiful ok quick
intro so as said my name is Mark McLeod
I've been in the venture back startup
world since the late 1990s I spent 14
years as CFO for a number of VC back
startups most notably Shopify and
FreshBooks
also spent three years as a general
partner at Canada's largest and most
active seeds today's venture fund where
I was investing primarily in SME staffs
companies you can't tell from my accent
but I'm actually Scottish and I lived in
Scotland for 11 years so I'm really
happy to be on this side of the pond
again I now run a company called sure
path Capital Partners so we are a
boutique investment bank we raise growth
capital for companies we exit companies
we have a very deep focus on SME SAS
companies we our headquarters are in
Toronto Canada and we have an office in
San Francisco as well perfect segue from
the last panel where folks were talking
about coming into the u.s. a big part of
our value to European companies is
helping them
either raise capital in the US or
ultimately get bought in the US what
I've seen over the years is that most of
the buyers tend to be North American and
the big outcomes from any part of the
world at some point end up having us
institutional investors on the cap table
so that's a big part of why I'm here
it's not just for the guiness just a
couple of deals that we've closed we've
been closing about a deal a quarter I
won't spend any time on that and get
into SME as I said we have a really
simple goal for our firm which is to be
the leading advisor leading boutique
investment bank to the global SME
software market we have very deep
relationships with all the buyers of
those companies and all the investors
who look at those kinds of companies and
SME is the market that we love the most
which is perfect segue into our talk so
let's talk about SME so this is um this
is us data but I think kind of the
breakdown here applies across
geographies there are 30 million small
businesses in the US alone 60 million in
the english-speaking countries and 600
million globally and as you can see the
vast majority of them kind of ninety-one
percent in the u.s. anyway tend to be
pretty small and that trend I think is
similar across markets we see a few
trends that are kind of driving as I
said it's already a massive market as
you can tell right 30 million folks 30
million businesses in the US alone but
it's actually growing a lot more in the
coming years and that's why we're really
excited about this market and it's
growing really for a couple of I guess a
couple of macro trends that we see one
is a change in the nature of work it's
increasingly rare for people to you know
graduate from university and join some
big company and go work there for the
rest of their lives people are wanting
more meaning more authenticity more
flexibility and they're choosing to work
for themselves either in whole or in
part the other is just a change in
demographics again I don't have a
European stat for this but in the u.s.
every single day 10,000 people turn 65
and so what you're seeing that obviously
spans us
just entrepreneurs that's everyone but
what you're seeing is that just a
turnover in entrepreneurial demographics
where older generations of entrepreneurs
we're very happy to run their businesses
on pen and paper and Word and Excel but
the new generation the people in this
room absolutely will not they're gonna
look on their phone first and if they
don't find what they like there they're
gonna look on their desktop browser
they're gonna find something and try it
and so whether they're its front office
software or back office we see just many
many categories of software that are
gonna go through big growth as a result
of these these two trends and the last
thing I'll say here is that unlike kind
of consumer and enterprise software
which tend to be winner-takes-all or
winner takes most kind of market
dynamics an SME software it's so
fragmented that there's always room for
new players and similarly there's always
room to to consolidate just one example
so prior to launching sure path I ran
finance biz dev & Corp dev for fresh
books we competed with Intuit you know
there's 30 million small businesses in
the US Intuit had a three decade Head
Start and they had seven million of
those 30 million small businesses so
it's not nothing but it's not the kind
of near monopoly that you see in other
market segments so that's just just a
little overview of the SME market and
given that most of you in this room
cater to that market hopefully I was
kind of preaching to the choir there so
let's talk about some of the challenges
that you see when when catering to small
business this is from Jason Lemkin mr.
SAS sir he says that you know SMBs churn
at a very high rate and so you're
usually forced to go up market finding
larger customers but if you can get the
math to work then that's when the magic
happens and some of the biggest outcomes
are in SME so that's just setting the
stage so churn is the single most
important metric in any recurring
revenue business that applies to
enterprise consumer and SME so this is
just a really simple illustration of the
impact of churn just take a cohort of
100k of monthly recurring revenue and
what happens to it over time at
different churn rates if your churning
at 5% a month that very quickly goes
down to nothing
where's on the flip side if you can even
modest negative revenue churn then you
have a growing annuity so that cohort
just keeps growing in value in time and
that is when investors kind of back up
the Brinks truck and ask you how much
money they can give you because you have
a really valuable asset this is what
I've seen over the years in SMB and and
here's the thing SMB incorporates again
selling to like freelancers and all the
way up to kind of 500 person businesses
but closer to the low-end more the s
than em this is what I've seen kind of
work over time in terms of best-in-class
unit economics you know kind of a two
two and a half percent logo churn which
equates to kind of keeping a customer
for about four years and where you pay
no more than a quarter of that customers
lifetime value on a fully-loaded basis
so kind of programs and sales and
marketing bodies so it gives you a four
deck for Excel TV to CAC ratio so let's
talk now about scaling strategies I'm
kind of blasting through this but and
you know these are kind of seven
strategies that I've seen kind of work
over time to really build a big company
when you sell to SME you know product is
super important but most of the value in
your startups journey will be created
through distribution through finding
customers through getting kind of large
amounts of revenue and if your venture
funded you know your VCS often will push
you to kind of move up market and chase
larger customers and higher are poo and
the thing about SME is if you can just
tough it out and kind of leverage one or
more of these channels then over time
you can you can build a really large
business so let's kind of go into the
each strategies and I should mention
none of these are mutually exclusive
obviously you know it's not like you
pick one and that's your strategy but
you know different strategies apply
either kind of either different stages
in the company lifecycle kind of
different segments of the market etc
so the first one is to have a low cost
of acquisition that is usually driven by
some kind of viral loop so companies
that come to mind include a drop box
where if you refer folks you get kind of
more and more space SurveyMonkey a
MailChimp right you either fill out a
survey or you receive an email
newsletter and you think hey that's a
really cool tool I'll sign up you know
type form is a more modern example of
that and what I've seen with these kind
of viral loop driven business models is
they tend to have there's a period where
it feels like it's kind of going super
slow and then suddenly boom there's this
inflection point and it and it shoots up
and you see that with kind of Dropbox
user growth where it was flat for a
while and then just took off and if I
had a graph of linkedin's kind of
network user base over time it would be
the exact same pattern so creating viral
hooks in your product to turn recipients
you know users of your your users into
your users that's confusing
any of it fire hooks is one strategy
second and not unrelated is freemium
where and there's kind of two flavors of
freemium one is the products entirely
free and it's monetized indirectly
usually through advertisements and then
the second is where you have again a
free base product but then there's
basically incentives or you know those
most engaged users are going to
basically convert and become paid
subscribers over time freemium was super
hot a few years ago and then folks were
like hey it's actually really hard to
make freemium work I can't get the math
to work I still think it has a role to
play but there are certain prerequisites
for freemium to work in my books one you
know very very large market second the
incremental cost to serve each of those
free users is near zero
and third you know very kind of
differentiated upgrade path so that your
most engaged users will just naturally
become paid customers so there's lots of
examples of companies to do that again
MailChimp survey monkey ducks and the
here just a bunch of companies strategy
three this is a busy slide but cross
selling products so the thinking here is
you kind of just tough it out for a
bunch of years with one product and then
get enough scale that you can either
build products or buy other companies
and and get new products that you can
cross sell to that same customer base
GoDaddy is the quintessential example
and the largest probably kind of pure
SMB SAS company that sells multiple
products you probably think of them as a
domain name provider but they do a whole
bunch of other things they are the
largest reseller of Microsoft Office
online globally they have about seven
different products that they resell you
know HubSpot was a one product company
for a lot of its history but then it had
enough scale that it could you know
build new products it's become an active
acquirer now as well and same thing for
for Zendesk so it's not something you
want to do when you're just starting up
because you don't have the scale you
don't have the resources you know not
all of your customers on product one are
gonna buy product two so you need a big
enough base that you can cross sell but
over time as you get bigger you know
cross selling is a very valuable
strategy number four build a channel you
know there's only so far that direct
response marketing goes before your
incremental cost of you know acquiring
that end customer it just becomes really
high and starts to approach the lifetime
value of that customer and so you need
to start thinking about building
channels and again if you do it really
early it's probably tough because no one
else wants to sell your product is hard
enough for you to sell your product so
kind of not at the beginning but more
kind of wants your product is
established there's clear product market
fit you've got some kind of brand
awareness that's when you start thinking
about building a channel again HubSpot
is an example here
they have agency partners who bring in
about a third of their revenue and then
the big accounting software guys like
you know zero zeros main go to market
strategy as through accountants they go
and give accountants a whole bunch of
practice management tools and like here
run your business on zero
and then go and convert all of your
clients onto zero and so you'll see for
every accountant you get you may get
five ten fifteen
you know fresh new customers so a lot of
leverage there number five give great
customer support this is sort of a
counterintuitive one many companies
think that they cannot afford to give
great service when they sell to small
business because the customers are so
small but here's the thing you know
first of all small business owners
they're super stretch they have no time
they don't have an IT department they
and the other thing is is that they talk
to each other right so if you give great
customer support they tell their peers
they tell their friends and that kind of
just leads to kind of more customers so
at FreshBooks
this is really a core part of the
culture every single person in the
company no matter how junior or senior
introvert or extrovert spends the first
30 days of their life as a fresh books
employee in customer support you know
picking up the phone responding to email
learning the product learning the
culture when you call customer support
at fresh books today if the phone is not
picked up in three rings literally every
single phone in the office will ring
until someone serves that customer so
what that has bred over the years is
just an insane customer first culture
and a very high Net Promoter Score at
act Apple level territories and a high
NPS just gives you so much leverage for
your marketing because there's just so
much kind of free love that's coming in
so something to think about there next
is to add payments so this is not going
to apply to all software categories but
anything that's kind of well you see
front office examples like Shopify you
know I'm gonna run a store and now I
need to collect payments you're gonna
see back-office examples like Xero and
fresh books where I send an invoice and
now I want you to pay me you see it with
vertical specific applications like mind
body where I can open up a yoga studio
and you know collect payments online but
for a small business owner kind of
there's only so much they're willing to
pay for software
but the payments piece kind of
psychologically comes out of a different
pocket and so you add it together and it
can actually add up to kind of
meaningful revenue and so it's hard to
see here but the graph at the bottom is
Shopify's quarterly revenue and over
time you know the merchant services
that's their payments offerings is now
50% of the business or a little bit more
actually as of today and if they had
just stuck with software there the
growth really what it tapped out but
because they've added payments they're
now a company that's worth over ten
billion dollars so not saying if you add
payments are gonna be worth ten billion
dollars don't quote me on that but you
know for many businesses adding a
payments product is super important and
from that small business customers point
of view the thing they care about the
most those two things one is finding
customers but second kind of getting
paid on time and so having a payments
offering is actually super valuable
strategy 7th segmentation so remember
earlier I said there were thirty million
small businesses if you try them if you
have built a product that you think of
is applicable to all thirty million
small businesses you've really built
something that's applicable to no one
you know no business owner just thinks
of themselves as I am a small business
owner they think of themselves as
whatever industry they're in I'm a
plumber I'm a dentist
I'm a doctor whatever and so you know
the best SAS companies and ironically
some of the biggest have started out and
spent a meaningful amount of their
history being super narrow and focused
on serving one customer or one vertical
and you know FreshBooks again today I
keep going back to that just because I
know it well only thinks about five
verticals and if there's customers that
come in from elsewhere that's fine but
you know they're when they are thinking
about product decisions thinking about
messaging thinking about marketing
channels events whatever they're only
thinking about it through kind of the
lens of a small number of verticals so
just kind of some lessons learned over
time from scaling SMSs the first is
business owners have no time and that's
not going to change any time
soon and I think that kind of has
implications for how you build products
for SMSs with AI a machine learning kind
of getting more and more reliable I
think you have the opportunity to build
these black boxes that just kind of do
one thing really well and I as a
business owner can just trust it and off
it go or on the flip side have a complex
product that is supported by services
that either you provide or an ecosystem
around you provides you see that with
Shopify where they have people who can
build and design your stores you see
that with Squarespace where you have
website builders who can you know take a
template and then customize it for you
the commonality there kind of one
extreme you know a pure AI or two
software with managed services is still
I as the business owner do not have to
spend time in the product because I
don't have that time so that's that's an
important thing second you know growing
superfast is is actually expensive SME
is a huge market but it tends to grow at
a certain rate there are three million
new businesses started every year some
number of those have a common set of
needs they need a domain they need email
marketing they need accounting software
so on and so on but if you try and grow
at kind of 2x or 3x the natural growth
rate in your market then your
incremental cost of acquisition kind of
goes way up and this is the challenge
probably that many of you feel when
you're dealing with early-stage VCS who
want you to 3x your business every year
and I was talking to a CEO today you
know where we agreed that kind of an SME
like it's great to raise some initial
capital but then you actually have this
sort of desert you have to cross between
kind of 1 million and 10 million ARR
where you're not growing fast enough to
be really appealing to the VCS which is
often why they try and get you to move
up market but kind of 10 million AR
beyond you get into more growth stage
private equity territory where again
your business won't grow 3x a year but
it could probably grow 50 to 75 percent
a year more or less in perpetuity
because many categories of SME software
have been around for a long time and
they're gonna be around for a long time
so
thinking about the natural growth rate
in your market and then thinking about
how long you know the opportunity you
have to build your company and just
aligning that to the capital that you
bring in that's kind of really the point
here Third Point really is around Net
Promoter Score I've talked about that
with the fresh books example do not
underestimate it I think it's a critical
metric invest in kind of getting you
know real customer love and you know
help your customers grow and what I mean
by this is again if I go back to the two
things that an entrepreneur cares about
most it's finding customers and then
getting paid by those customers so if
you have built a product that helps me
save time like yeah I don't really care
whereas you've built a product that's
gonna help me grow my business I care a
lot last thing is and this goes back to
my point about evergreen markets you
know good things just take time if you
think about some of the biggest SME
software companies they've been around
for a long time so Ho's been around for
since 1996 Basecamp and survey monkey
you know 1999 and so on you don't have
you know if you read kind of TechCrunch
all the time then you think like inside
three years you're gonna sell your
business for 300 million dollars
sometimes that happens more often than
not it doesn't and you know with SME in
particular you really do have an
opportunity that just hunker down and
build a very meaningful business but
over decades not years that's it thank
you very much I think we're out of time
but if there's questions up on the board
I'm happy to take them
[Applause]
[Music]
you