<< Chapter 5: Getting Your First Customers
So you’ve run dozens of ideas through the meat grinder, launched a few that went nowhere. Finally, you launch one that starts to attract paying customers. Congratulations, you’ve made it far farther than most.
What happens next?
Most SaaS businesses will at some point encounter “the long, slow, SaaS ramp of death.” Take a look at two examples. Baremetrics was a rocketship (by bootstrapped SaaS standards) going from idea to $8,300 in monthly subscriptions in just six months. As a solo founder, this is about as good as it gets for a SaaS launch. As the revenue poured in they raised a bit of money and staffed up for the hockey stick revenue growth to come. However, most revenue charts end up looking like this:
Baremetrics almost ran out of cash because of slow grinding revenue growth, but after making some tough changes, they found their way to profitability1.
Convertkit, an email marketing app, had almost the inverse experience. Nathan Barry spent over a year and a half with monthly recurring revenue (MRR) hovering around $2,000. His long, slow, grind happened right at the beginning because eventually they found the right product/marketing combination and took off. Two years later Convertkit is running at $600,000 a month in subscriptions!
My business, Storemapper, was a grind in the beginning, in the middle, and basically still is. Revenue growth has been more or less linear since it’s late 2013 launch date. While I certainly wouldn’t complain about a period of hockey stick growth, a consistent grind is not entirely a bad thing. For one, it’s predictable. I haven’t had to deal with any of the cashflow crunches that fast-growing SaaS companies seem to inevitably run into. It has also allowed me plenty of time to develop strategies for managing, and thriving, in the long, slow, grind that is SaaS.
The power of SaaS is that recurring revenue compounds, eventually yielding a very predictable stream of revenue. But it can take a long time to get there. For many Micro-SaaS businesses, it seems to take at least a year before the revenue can meaningfully affect your lifestyle: either allowing you to work full-time on it or hire people to help you run it. Before you launch, consider how you will manage your life if you have to keep your day job and run a growing Micro-SaaS on the side for a year. Here’s what the first year looked like for me.
Year 1: From beer money to rent money
On my Micro-SaaS journey, this was the full year of 2014. Monthly recurring revenue chugged slowly upward from $150 (beer money) to $2,180 (rent money… yes, in Brooklyn that is barely rent money after taxes). The funny thing is that is actually pretty healthy month over month growth. By all accounts not bad, but still, more than a year later, nowhere near enough to live on in the US.
During that time Storemapper was a side project for me. My main focus was a solar energy startup, which was immensely time-consuming. I wanted Storemapper to grow, but I categorically refused to let it become my primary focus. Except for a few minor crises, I capped my time allocation at 15-20 hours per month. That’s product development, marketing, and support. This is a kind of extreme test case as most folks will not build a Micro-SaaS while founding another startup and will have more like 15-20 hours per week to spare.
In my case the time constraint was mandatory. I was working insane hours already and literally did not have the spare time and energy to put more effort into Storemapper in the early days. But I think it’s a great idea to put a time constraint on yourself even if you have more time to spare. Setting a limit of something like 15 hours per week is beneficial for a number of reasons:
- You have set a manageable path for yourself. Telling yourself “I’ll do whatever it takes to make this successful” is a recipe for burnout.
- It’s not mutually exclusive with having a life, a family or a day job.
- You will build a tighter, simpler product and customer acquisition funnel.
- You won’t be tempted to over-fiddle. A big part of being successful through this stage is making changes and then doing nothing. Just waiting to see what happens and not overreacting to every single new customer, bug or feature request.
- Parkinson’s Law: if you allocate 60 hours per week (or unlimited hours per week) to this you will spend 60 hours per week, but 50 of them are unlikely to be very productive.
Most of the first year of Storemapper I spent refining the customer onboarding process. That meant setting up a little automated onboarding tips, making screencasts and FAQ docs, fixing endless bugs with the CSV upload process. It was a lot of individual customer support requests, devising a few technical solutions for scaling problems, and shipping maybe three or four major features over the whole year. For customer acquisition, I primarily doubled down on the few channels that had brought in the initial customers: posting in e-commerce forums and looking through freelance job postings. Over the course of that year, I launched two quick growth hacks. The first was adding the “powered by Storemapper” link to the bottom of the store locator app (a must for any embeddable product) and the second was integrating with the Shopify app store, which allowed us to be listed in their app directory. That was basically it for a year of work.
The rest of this chapter will focus on the mental strategies I developed and learned from others for staying sane through a period of long, slow, SaaS grind.
How to keep growing while staying sane
This is the part where you can easily drive yourself crazy. Relative to the actual value of the nascent business you’re building you will still spend a disproportionate amount of time dealing with grumpy customers, manually onboarding people, frantically deploying mission critical code at the last possible moment. Here are a few ways to keep sane during this period.
1. Don’t compare the hourly rate
If you’re transitioning from freelancing or consulting where you charge a healthy hourly rate, a great way to drive yourself bonkers is to start adding up the hours you’re working on your Micro-SaaS business and divide by the revenue you actually get from that customer. Do that arithmetic right in the middle of a particularly frustrating customer that is taking 4-5 hours of your time, spread out across two weeks to finally subscribe to a $20/month plan. Early on that number will be hilariously smaller than your hourly rate. Don’t do this math. It’s a complete apples-to-oranges comparison. When you do one hour of freelance work, you get paid exactly that hourly rate and that’s it. The hour is gone forever and you just have that cash. By contrast in SaaS, every single frustrating minute with a problematic customer in yields a better understanding of the onboarding process, shaving time and headache from every subsequent customer for the rest of time. Every customer that you successfully onboard is another happy potential referrer of new business. SaaS is much more scalable than consulting and every new referrer can compound nearly infinitely. Tell yourself that, then go back and edit your 35th email to that customer and make it just a little bit more polite and friendly 🙂
2. Become a stoic, mentally walk thru disaster
One benefit of building and launching a product extremely fast is that you don’t have much sunk cost, time and energy already invested. If the app explodes and everybody angrily demands a refund, you really haven’t lost that much. Remind yourself of that when things become really tough.
Take a moment and visualize just walking away from it all. Visualize it in detail, what would you do? Write a pleasant email to all your customers, thanking them for their trust and suggesting some alternatives. Add up how many refunds you would have to issue. What services you would shut down and so on. Then look at that, compare it to your current stress levels and decide which one you want to do. Maybe it’s shutting it down, but more likely you’ll convince yourself that it’s still worth it. Then get back to work 🙂
3. Don’t spend a dime on marketing
The very tired cliche that “marketing is like sex, only losers pay for it” applies in Micro-SaaS. Everybody who writes about SaaS startups will talk about how you calculate your customer lifetime value (CLV) and how much it cost to acquire that customer (customer acquisition cost, CAC). As long as CLV is some nice multiple higher — say 3x — than CAC, you should spend, spend, spend!
And this makes total sense… if you’re sitting on a pile of VC money with no other mandate than to grow as fast possible. But Micro-SaaS doesn’t work like that. To build a defensible and profitable business with reliable, low-risk income you want a CAC of $0.00 per customer.
I’ll admit, I am strongly biased here by my own experience. I was reading those growth-hacker blogs and I did think in terms of CLV/CAC. The appeal is that once you find one acquisition channel with a great ratio, you can breathe a sigh of relief. Nothing to do now but re-invest profits or pile more money into that channel and you’re golden. I wasted a lot of time looking at Adwords, Facebook and Twitter ads. After giving up myself, I set out on a hunt to find a consultant or partner to help with it. I cold emailed the most well-connected marketing and SEO blogger I could think of asking for help. To my delight, they sent back a few introductions and shortly thereafter I struck a deal with one of them to do Adwords marketing. We set a steep growth target, but if they succeeded, they’d get a bit slice of equity and revenue from the business. Five months later Adwords barely moved the needle over organic search and we shut the whole thing down.
Maybe it was coincidence, but every time I tried a strategy that involved buying customers I’d waste a few hundred dollars and dozens of hours to get nowhere. Maybe you’ll find a paid marketing channel that works great, but my experience is that it’s not worth the time and frustration, particularly at this stage of the business.
4. Don’t build features until there is a revolt
While building Storemapper, I kept a detailed backlog of features to build. Both things that I thought would be a good idea and things that customers requested. It was — and still is — hundreds of tasks long. This is intimidating but ultimately a good thing. Resist the temptation to grab a 4-pack of Red Bulls and power through everything in the backlog. Every new feature you build adds an exponentially larger time commitment to supporting and explaining that feature to new customers. It’s much harder to remove a feature than to never have it.
Don’t build a feature until a very large number of potential customers refuse to sign up without it, or a large number of existing customers threaten to cancel without it. That’s the very high bar for actually writing code. If your customers aren’t outside your castle keep with pitchforks and torches over the lack of a feature, it’s not the time to build it yet.
5. Don’t Pre-build For Scale.
Your Micro-SaaS business is not Kim Kardashian’s naked backside and it likely won’t #BreakTheInternet.
If you’ve done the work right to this point. The business idea is solid and the MVP delivers real value. The speed at which you get new customers increases linearly with their patience for scaling problems.
What does that mean? Well, Storemapper had some small scaling issues here and there that I had to solve quickly and under pressure. Store locators went down a few times. Our geocoding back-end was overwhelmed when our customers went from having 100s of stores to 1,000s. But it was clear to customers that this was the solution they needed. I emailed them and was open and honest about what was happening and thanked them for their patience. Almost universally these customers stayed paying customers and actually often would write me little notes of encouragement.
Pitfalls of running a growing side business
In this last section of this chapter, I want to go through a couple of problematic areas of running a growing side business. These are tangents that can suck up a lot of time and energy along the way if not handled correctly. As a side-business starts growing the most important thing is to keep focused and executing on the core business. Running a growing side business, particularly if it is your first real side business, has a number of distractions. I handled almost every one of these badly, so I guess you can make it out alive but you may as well learn from my mistakes.
Accounting, Bookkeeping, and Legal
This one is worth dealing with as soon as your business starts to get at the “rent money” level. Accountants will advise you to setup a separate bank account and business entity for every project from the very beginning. This is probably extremely impractical, especially if you are using Lean principles and expect to launch several MVPs that are likely to fail. But once you get to a decent level of revenue and it looks like the business will be around for a while, you should definitely get a basic checking account and bookkeeping started.
It is going to be very helpful to at least have all the revenues and expenses in their own accounts, separated from your rent and burrito transactions, even if they are not technically business accounts. I would recommend getting a separate checking account and credit card that you only use for transactions on any and all MVP businesses. Once you start to see real traction you can create a simple business entity and open accounts in the business’s name. I made the mistake of going about two years mixing business with personal checking and credit card accounts and the resulting bookkeeping was a huge nightmare once I finally started to clean up my books.
I’m not at all credentialed to give real advice on this topic so do your own research and talk to an accountant.
I made the decision fairly early on to be transparent and open about my business. That meant a steady stream of inbound emails of people looking to partner with me. Everything from cross-selling, affiliate deals, content marketing services and consultants. When your product is young and fast-growing lots of people will propose integrations and synergies and all kinds of strategic relationships that sound vaguely appealing at first glance.
On the whole, these were a giant waste of time for me. Partnerships are messy. Ideas that initially sounded sensible turned into a quagmire once we started digging into the weeds, discussing how risk would be allocated, and discussing in advance what would happen if the relationship didn’t work out. Most of the time people actively reaching out about a partnership of some kind are looking for a quick win or looking to get someone to agree to a disproportionate amount of work without realizing it. I would advise moving those discussions to the bottom of the To Do list or straight to the trash.
I wasted a lot of time discussing potential sales of Storemapper. Partly I brought it on myself. I learned a lot about staying sane during the long, slow, grind but there were times where I did a bad job of it. Running it along side a startup was difficult and I often thought about selling it to re-focus my time on the startup company I was actively working on. I wrote a short post on a forum soliciting offers and quickly got dozens of responses. This turned into a continual giant waste of time for the next 12 months. Fairly early in the process, I figured out it was not worth my time but I kept taking the conversations out of a curiosity to see what buyers thought and what kind of valuations they had in mind. Let my pain be your gain and save you a ton of time.
There are many people in the business of “buying websites” that made their money flipping ad-supported sites or simple e-commerce and drop-shipping businesses. Those businesses have historically been available for as little as 6-12x monthly profit, less than one year of the expected revenue in your pocket. SaaS businesses are much more valuable and a good estimate of value is closer to 3.5x yearly profit. Although it’s slowly changing, many buyers are anchored to the old valuations and even though they sound very confident they can get a deal done, it turns out on the fourth or fifth call that you are miles apart on pricing a deal. If you are going to engage with a potential buyer, firmly mention your target valuation multiple early on in the first discussion.
If you have traction and good solid growth there is a huge mismatch between how much you value the business and a buyer’s willingness to pay. You see growth in revenue every month and all the possibilities for new features, new markets, new customers. You view holding on to the business and growing it yourself as an extremely low-risk way to pocket more profits and grow the value of the business. Your buyer, on the other hand, sees and unproven business without a track record. There are two likely situations where you would actually sell a Micro-SaaS side business. The most likely is that something changes in your life situation where you just don’t have the extra time for it. You’ll take a hit on the valuation but a reasonably priced Micro-SaaS side business is a very sellable business with many potential acquirers. The second possibility is a so-called strategic acquisition. This is where a larger business buys you not just for the cashflows from your existing business but because you either compliment their products or compete with them. In these cases, pricing is more about willingness to pay rather than a multiple of profits and likely much more attractive. These seem to be exceptionally rare in Micro-SaaS and the only recent example I can find is Drip, an email marketing SaaS, getting acquired by LeadPages.
The bottom line is that it is extremely unlikely you’ll get an attractive enough acquisition offer during this phase of your business to make it worth the time suck of talking to buyers. Much better to spend the time on growing your business.
- Props to Josh Pigford for putting all this out in public as a lesson for others entrepreneurs. It is much appreciated. ↩