If you are a SaaS entrepreneur or someone responsible for profitability of your company, many times you have to take strategic decisions that has direct impact on your company’s growth. You need to decide whether to spend that limited budget on product development, sales and marketing activities, or allocate the budget between these two important investments. One way to model startup’s growth is bottoms up by team. Tomasz Tunguz from Redpoint Ventures created an excellent methodology to model the growth using the bottoms up approach. At the core of his methodology lies “Fundamental Unit of SaaS Growth“. In this article, we will look at how you can interactively plan for different scenarios by working with the tool developed at Vizually Labs. Before we begin, let us look at what is Fundamental Unit of Growth (FUG) and then look at the tool below.
“The Fundamental Unit of SaaS growth is the atomic go-to-market team of a startup. For example, one Sales Development Rep (SDR), one Account Executive (AE), half of a customer success manager’s (CSM) time. Of course, each company’s fundamental unit will vary in composition.”
–Tomasz Tunguz, Redpoint Ventures
For this discussion, one Fundamental Unit of Growth consists of one account executive (110k), 50% time of sales development representative (60k), and 25% time of one customer success manager (60k). In addition, our go-to-market team will need 50% time from marketing manager (75k) and a small marketing budget (5k). ( you can change these defaults for your situation). The annual expenses for the entire team is $197.5k or approximately $16.5k per month. The additional booking capacity we will gain after hiring one FUG is $3,700. Though, on the surface it looks like we are gaining only $3,700 per month in additional monthly revenue, the fact that it is recurring makes it $222,000 over five years and that is only for one month of booking capacity! The FUG team keeps adding new monthly revenue for months thereafter. This would explain why churn or rate of cancellations is such an important metric for a SaaS. As your FUG team grows, you may need to hire management ( may be VP of sales?) and we have assumed the cost to do this is $175k per year.
Product Development Costs
Early on in the life of the company product development costs are one of the biggest costs ( though, analysis by Tomasz reveals that most of the SaaS companies spend significantly more on sales and marketing costs). As many of you will agree, finding good developers in today’s tight job market is not an easy thing; however, modeling their impact on expenses is straightforward. To simplify, you would find average cost of one developer and decide how fast you would like to hire the team by selecting different hiring patterns.
How to use this tool?
The first chart at the top of the page displays your MRR ( monthly recurring revenue) against monthly costs. Break even point ( if any) is highlighted with a dotted line. Stacked bar chart in the middle page displays breakdown of expenses by category.
Parameters that you can change
Hiring patterns for different teams: You can change how fast or slow you would like to grow a particular team by selecting different hiring patterns.
Booking capacity: How much additional revenue one Fundamental Unit of Growth can bring in per month?
Annual or Monthly Costs per developer or FUG members.
Churn: Percent of MRR lost every month due to cancellations.
Example use case
If you were to follow typical cost breakdown of more established SaaS companies, by year five, your S&M costs should be twice of R&D costs. Changing booking capacity to less optimistic $2200/month, S&M ( or FUG) hiring pace of one unit per quarter, a new R&D hire per six months, and a management hire every year, will result in break even in month 28 from inception at 1% monthly churn rate. In this example, if churn were to increase to 8%, there will be no break even in 10 years. This shows why retaining your customers is so much important in a SaaS.
Here is the comment by Tomasz Tunguz on this tool: .
Here’s a great interactive post on how to model an early stage SaaS business with fundamental units of growth https://t.co/Ak6oLfhgq8
— Tomasz Tunguz (@ttunguz) May 9, 2016
Some of the design inspirations for this article came from Truth Labs.