Venture Capitalist: The Two Most Important SaaS Startup Metrics

Jason Lemkin, Managing Director of Storm Ventures, is one of the world's most popular and respected startup advisors. Lemkin's site and companion blog on Quora ( has more than 10 million views, generating more than 1 million views per month around core Software-as-a-Service (SaaS) topics with a particular focus on accelerating revenue and early-stage SaaS sales and marketing.

Jason Lemkin, Managing Partner - Storm Ventures

Michael Krigsman and I recently asked Lemkin a series of questions related to SaaS startup growth and key success factors. Below is a high-level summary of our discussion.

What are the characteristics you look for when investing?

Lemkin (Twitter: @jasonlk) said:

I just look for 2½ things - great founders, better than average in economics, and at least a space that in a year or two may be interesting.

Because I've been a SaaS founder myself, I look for founders that are better than me, adjusted for time. They don't know as much as you know I do or we do, but adjusted for time, they're better than me.

I also look for better use of economics than I had, because if you can sell something for $10,000 a year, for the same work as for $1,000, it's just 10 times easier.

And finally I look for something that's vaguely in a good space. Now a good space changes these days, but you do ideally want to have something or someone else who can also write a check further down the road.

What are the main challenges for enterprise SaaS startups?

What we see today is the very best SaaS startups grow than ever, the Slack's, the Zenafits, the TOPdesks. These are folks that can go from 1 to 10, 1 to 50, $1 to $20 million in cases in 12 months.

The best SaaS startups are faster than ever, but the flip side is that product market fit is harder than ever. So a great idea that used to be a dime a dozen, now I think they are like a penny a dozen.

Product market fit is actually more elusive than ever when there are lots of folks doing every SaaS idea instead of just five or 10.

What are the phases that a start-up goes through?

Phase-1 (Beer Money): The first phase is about getting 10 unaffiliated customers. Getting 10 folks who aren't your old friends, your ex-boss, someone down the hallway to actually pay money, pay money for your product because then you actually have something.

I'm not interested in viable products, I'm interested in sellable products as everyone who does enterprising, so phase-1 is 10 unaffiliated customers. We call it beer money. It's never enough money to pay your engineers or to pay income, but at least it shows that you should never quit if you have something.

Phase-2 (Initial Traction): The next phase, and it's a long gap, is what I call initial traction which is usually around $1 million revenues. That's when the engine starts to come together - you don't have enough leads, you don't have enough customers. But you know every month you're probably going to have more customers than last month and more revenue coming in. This is really the right time to build a lot of your management team - VP of sales, VP of marketing - around that initial traction.

Phase-3 (Viable Brand): Then, there is this long slug to what I call initial scale, around $10 million in revenue. At $10 million in revenue the brand starts to come together, and you start to have enough revenue. You can begin to hire directors, and Senior Directors, and extra engineers. The real lesson is that if you get to a $1 million in revenue you must work to get to $10 million, because it gets easier when you have a brand.

When should a founder kill the idea, because it's not working?

Lemkin has a somewhat controversial view on the topic of killing of walking away from an idea/product/solution.

I don't feel that you should ever kill something once you have those 10 unaffiliated customers. Once you have 10 people that you have never met that by your product.

If this is your passion and you're dedicated, and if you can get 10, do you think there is any chance you can get 20? Of course you can. I can tell you this almost 100% chance that you can get 100, and there is more than a 1% chance that you can get 1000 unaffiliated customers.

In SaaS, people quit too early, they kill things too early. Now, if you never get 10 unaffiliated customers after whatever, six months, 12 months, 18 months, 180 months, however long and however much patience you have as we were, then kill it. But don't kill it at 10 because product market is harder than ever.

Where do you see great investment opportunities?

I say don't look at the past and don't be jaded, because in SaaS, since everything has been SaaS-ified in a way that was even in a years ago, things that a couple of years ago would have been to niche or too small or not to niche, too small today.

So actually I have no prejudices, in fact what I don't want to do is invest in another CRM, ERP, HCM - I don't even like those acronyms.

The real reason I like to do CRM,ERP, and HCM is that five or six years ago nothing else was being done, right. Look at whose idea it was, right. today, the markets are a 100 times bigger, so you can have vertical CRM's, and you have 100 things that are actually ERP's, but industry specific - they all do nine figures in revenue. Have an open mind and watch things that flow and just try to learn why because the world is different.

What are the characteristics of a great VC?

What a great VC means for founders, is a little bit different than what it means for LPs where the people who invest in VCs.

Venture capital is a financial product, it's like a mutual fund. Or it's just something that the VCs, own investors select all the people that they put money into VCs funds is that they care about is a number, results. What's your IRE, what's your return capital. That's all they care about, cash on cash returns.

What founders these days really want is a VC that were founders - someone who can go through the journey. They all really want that, but it turns out, founders don't actually make the best VCs. The best VCs are just grape pickers, and often times they are never an entrepreneur even for five seconds.

What are the characteristics of successful entrepreneurs?

What is a success? From a venture perspective, VCs can only make money out of unicorns. So VCs only care about folks that are at least trying, at least are giving it a shot to build something worth billions.

But if you are a VC, even a modestly sized fund, $150 million fund, a $150 million fund means you have to return $450 million back to your own investors. You can only do that with unicorns. So for a VC you want a founder who is insane and crazy (super ambitious). As soon most founders get lots of money - some refer to it as 'FU-Money' - they will sell and live a normal life.

If you are 500 startups or an angle or doing super early stuff there is a broader definition, but for bigger VCs you have to invest in crazy insane people, with crazy insane ideas to like turn empty rooms into like a house that disrupts the Hotel industry. I mean it sounded crazy but Airbnb's done okay - you have to invest in crazy.

Who is their customer in the enterprise, who is the actual buyer? How do you figure that out?

The majority of SaaS start-ups, the founders have not done enterprise sales, and basically you have two options and you're going to do both.

Try and connect with folks on as many levels of the oratory that you can. What's natural if you haven't done it before is to talk to a line manager - someone that might implement your product. But reach out to a CXOs. In the enterprise, a lot of innovation is driven from the CIO talk or some of the CXO talks and they will taint meetings with startups if it can have a profound impact on the company.

So my number one bit of advice is challenge yourself and don't just sell at the level of the organization that is comfortable for you. Try at every level, from line manager to Director, to VP from c-level and see at least if you can get a meeting at each, because if you can get a meeting. Just getting a meetings hard man, a 1000 SaaS products out there, like no one takes a meeting.

If you just get a meeting you can sell something if you are tenacious. So then do that and then do your best and then figure out over 12 months what organically works, and then hire a VP of sales that has experience selling to the fattest part of your existing customer ecosystems, to the portion that generates the most revenue.

When should a startup hire a salesperson?

In an ideal world, the CEO or co-founder should close the first unaffiliated 10 customers him or herself. Ideally at least the first five of those 10 unaffiliated customers, you've got to go out and close them. Otherwise you don't know. You cannot even hire the most junior sales rep if you haven't done it before, that's a recipe for disaster.

Close 10 sales yourself, and as soon as you are comfortable that you know how to do the next 10, then hire two sales reps. Go out and hire two sales reps, and don't hire one because you have got to AB test, especially if you haven't done before.

When your two sales reps are repeatedly acquiring 10 customers, month after month, then it is time for you to consider hiring a vice president of sales. Usually that is somewhere around $1-$2 million in revenue. Don't hire the VP of sales before there is at least some engine going, because the job of the VP of sales is to make that engine run faster.

What is your advice for closing sales to the enterprise?

My number one bit of advice for founders is don't be discouraged, because founders are naturally great middler's, almost all of them. Some of them are closers, but most of them don't know how to do outbound, they don't know how to pick up the phone, they don't know how to generate a lead, and they actually aren't comfortable asking for the money at the end of the day, but they're great in the middle.

Founders are great at doing the demo, explaining the value propositions, bonding with the customers, right. Building out the business process change map, even management change and management doesn't even know what management change is these days.

If you are a great middler, you can be at least a great mediocre closer, so don't worry about the fact that you're not any good at closing sales. Just be a middler - build relationships with the customers, as the CEOs. The customers want to talk to founders and you'll close as many as a real rep could, but that's okay because you have to learn. And once you've closed 10 deals, get closers to help you learn to close.

What makes a fast startup fundable?

Of course it depends on the stage. But let's break up the sort of tried standard two buy two matrix - there's traction and team. Traction plus team has never had a higher premium than today.

The mistake that founders make is that they don't realize that no team, no traction is no check. So if you are not proven and you don't have customers in SaaS, do not ask VCs or even sophisticated Angels for any money. It isn't going to happen. You have to have some sort of social proof on your team or something to make it happen. Otherwise just to whoever will help you and knows you and take a bet that's not going to go anywhere.

Is it possible to build a SaaS startup without significant funding?

Absolutely, but almost certainly you have to focus on premium and the low end of the business. The enterprise is ultimately the most profitable part of SaaS. If you can close seven, eight figure deals, those are inherently highly profitable. But you need a salesforce. You need to invest money, you need to pay six figured salaries. It's hard.

If you're going to do that without any capital or with minimal capital, it's almost always that you come up from the bottom. You don't have to stay premium for life, you don't have to stay a very small business.

Box started off not as a premium product and now premium is less than 1% of Boxes revenue, so you can go upmarket. But for most of us it is almost impossible when you are true enterprise without capital because we just need all the headcount.

What advice do you have for founders who want you (Jason Lemkin) to fund them?

The best advice is send me the most detailed email you possibly can with a presentation deck, with every single metric, and with why you are building something that's great. I only meet with one founder a week max, but I actually read and looked at almost everything. And I can process a lot off-line because I've done it before, so the trick is not a punchy line, and don't send me a pinned document or teaser.

What are the most important early day SaaS startup metrics?

A lot of SaaS people actually - and I am clearly a SaaS guy - care more about the metrics than I do. I've learned that a lot of them don't really matter in the early days. I don't really care what your customer acquisition cost (CAC) is, because if you have a good start-up it's always low in the early days and then it gets high. I don't really care if your customer lifetime value (LTV) is - I don't really want to know what it is.

If you have true enterprise customers, they're going to last like five or seven years. If you sell to various small businesses on a credit card, they're going to churn out three or 4% month, like I know this like clockwork.

I don't care what your CAC is, I don't care what your customer lifetime value is. I don't care about any of these things, but one of the reasons is that I can distill it all just from two metrics:

1 What's your top line growth?
2. How much money are you burning?

With these two metrics, I know the whole story. So I'm interested in startups when they get to a $1 million in revenue - and most of all my investments have been before that stage - I'm interested in one thing; when they get to $1 million in revenue, they'll grow at least 15% month over month, without hemorrhaging cash. As long as the burn rate is tolerable, you can grow 15% or more, million dollars in revenues and you have great founders and a great space, I'm probably going to write a check.

Amazing founders, who are better than me, and then the ability to go from $1m to $10 million in ARR in five quarters or less, that's what gets my attention. And beyond that I don't really care what your SaaS product does.

The Slacks, the Zenifits, the TOPdesk's, the Abloy's do it in five quarters or less. I didn't do it, like no criticism to me if you didn't do it because I didn't do it. But the best ones do it, they find a way. And it's not just because the founders are better, the founders actually aren't a lot better.

The markets are bigger than we all started this, right. They're all bigger. The percent of the CIOs budget that is going to SaaS is higher. A 1% transition of the CIOs budget to SaaS is a market size to fund many unicorns.

You can watch the full interview with Jason Lemkin here. Please join me and Michael Krigsman every Friday at 3PM EST as we host CXOTalk - connecting with thought leaders and innovative executives who are pushing the boundaries within their companies and their fields.