It seems like all we hear about these days is the amazing product ideas, visionary founders, and unicorn startups. It’s like every startup is a guaranteed unicorn. But we all know great product ideas that were never able to get that coveted $1B valuation.
Having been a part of several unicorn exits, I can tell you a good product is only the beginning. Great products require a solid go-to-market and financial strategy to succeed.
Cybersecurity is a vital sector but rarely flashy. Duo Security is a much less well-known unicorn that succeeded, exiting to Cisco for $2.35Bn in 2018. The Duo Security team built a strong go-to-market plan connected to their financial operations core, with my help.
Do you want to know how we did it?
Your Go-to-Market Plan is Your Foundation.
I’m not a marketer but when a team can’t articulate to me how they are connecting the dots between their product’s value proposition and their customers, I know I can only help them so much.
With thousands of MQLs in their pipeline, Duo Security had this figured out. They knew how to speak to their customers and where to go to find their ideal customers.
Even when startups spend time on defining a go-to-market plan, they often stop at acquisition. They get their initial funding on the strength of their product and value proposition. Then it’s full speed ahead investing in product development and signing up new customers for new and better features. That may be enough to get early rounds of funding, but it won’t elevate you to be a unicorn.
What are these companies missing? In later rounds, investors will look for Annual Recurring Revenue (ARR) and Net Dollar Retention (NDR) when valuing their company. A strong financial strategy underpinning a go-to-market plan will ensure these metrics get the $1B valuation.
Your Financial Strategy Is Your GTM Partner.
A go-to-market strategy defines how you will acquire customers, but that’s not all. Let’s think about the customer acquisition and retention process as filling up a bathtub, ARR is like a bathtub itself. Your faucet is your customer acquisition funnel filling the tub, and NDR is the drain plug on the bathtub. The customer acquisition faucet is not the only piece of the puzzle to getting that bathtub full.
In other words, a startup can be very good at acquiring customers, but that doesn’t mean they translate into value for your company or investors. This is why ARR and NDR are vital to sustainably scaling your business and driving value.
Consider these examples:
- Building new product features that don’t support your GTM plan. This leads to missed opportunities to ensure these features are helping retain or upsell your customers and losing opportunities to increase your valuation.
- Your pricing and contracts haven’t been optimized. An overreliance on implementation fees may help your cashflow in the beginning, but ultimately it will hurt your cashflow later. Valuation multiples on this type of revenue are typically 1-2X whereas multiples of recurring revenue are significantly higher. This may generate a lot less revenue from each customer on your road to unicorn status, hurting your ARR. You must pay attention to what your contracts say.
- You lack a customer journey plan. This leads to losing as many customers to attrition as you gain, gradually dripping value out of the tub and decreasing your NDR.
- Your sales operations systems aren’t automated and timely. Your cash flow will suffer. You won’t get invoices out the door and will struggle to collect payments to be able to invest back into your growth. You need to set up your core financial systems and processes to ensure that these fundamental steps run smoothly without leaders having to spend their time on it and so you can easily measure ARR and NDR.
The quote to cash piece is vital to ensuring you don’t lose money. With one client, we took Panda Doc as our quoting system, connected it to HubSpot as our CRM, then to SaaS Optics for our billing and invoicing which was then integrated into QuickBooks. A configuration like this can accelerate the quote to cash timeframe almost overnight.
Your quoting system needs to be purpose-built and standardized to reflect what you really want to be selling with a consistent pricing model. Capturing the account payable information from your customer as early as possible greatly enhances your ability to get paid in a timely manner. Connecting that to your CRM prevents you from constantly chasing documents. This creates a single source of customer information and a single source of information about the deal. With this clarity and simplicity, there is no question about what needs to be invoiced to whom, when, or how.
Your CRM then needs to be integrated into your accounting system. When a deal is closed in the CRM, finance automatically knows to pick it up, turn it into a new customer and get that invoice out the door as soon as possible. A customer can’t pay if they don’t have an invoice which causes delays and can kill your cashflow.
Winning at the Annual Recurring Revenue and Net Dollar Retention Game
The value of SaaS businesses is primarily influenced by ARR, and right behind it NRR (Net Revenue Retention), also known as NDR (Net Dollar Retention). Typically, investors and acquirers are looking for NRR numbers at 115% or higher. Below that, they may drop the valuation multiples on your ARR and if it’s below 100%, they will certainly drop it. Leadership teams need to be closely tracking these metrics together with the current customer expansion and upsell pipeline.
One way to help yourself increase your NRR rate is to not include any price increase caps in your terms and conditions. One client we worked with had all their contracts written with a three percent increase cap. Because of this, their profits were shrinking while their costs increased. They were leaving money on the table and reducing their NRR.
It’s better to leave the percentage blank. This will cover you when there are things like economic changes, or significant increases in the interest rate, or your costs increase. Locking yourself into a fixed increase rate can hurt you in the future. If you leave that language out, then when renewal comes you can uplift them 10-15% protecting your profit margins while simultaneously increasing your NRR.
Take these steps to make sure you are driving value with your go-to-market plan.
- Map out and implement your customer journey. Make sure you are keeping customers happy at every step. Take advantage of opportunities to retain and upsell. You might introduce in-product discovery, on-boarding support, 6-month account manager check-ins with customers, or personal training for power users. Your customers should renew their contracts every year without a lot of fuss.
- Review your contracts to ensure they aren’t giving away your value. Contracts shouldn’t make it easy for customers to walk away. While SaaS Gurus is not a legal company, some common ways we have seen SaaS startups give away their value is by including money-back guarantees, refunds for unused subscriptions canceled midterm, or other generous cancellation clauses in their contracts.
- Make sure your FinCore is in order. Your financial and sales operations should be set up so that leadership can set it and forget it. Invoices and renewals should go out automatically. Metrics should flow into your reporting systems so you can see ARR and NDR at a glance.
Not sure where you stand with your financial systems? If you are worried or are feeling uncertain about the numbers you are given to make decisions, then it’s time to fix that. SaaS Gurus can help. We offer a free FinCore Audit which looks at your financial, sales, and HR operational core. We’ll show you where you have gaps and how you can get on the right path. So, whether you have secured your first round of funding or are on track to be the next unicorn company, our FinCore Audit gives you the roadmap to fix that and keep it that way.