Silicon alleys and valleys are littered with the remains of startups that dressed up to be SaaS. Some of them, to get rich quick, positioned themselves as SaaS platforms whether they were or not. In practice, you get a lot of runway when your valuation goes from not-SaaS to SaaS. Suddenly your company will be worth more than double!
Whether by deceit or naivete, the roots of failure go back to decisions made in the beginning.
Prototypes, Hamsters and Duct Tape
In early product development, it’s imperative to get into market. The normal approach is to cobble together a prototype that uses humans and patchy code. The minimum viable product idea, now best practice, dictates that a scrappy, cheap, prototype be built to test the viability of the product in real markets. Where I work, we affectionately call these prototypes Hamsters and Duct Tape.
The pivotal issue is this. Once you have a working prototype, how do you know when to build the scalable version? Wait too long, and you can get stuck with a system that won’t scale in time to meet the market — or maybe a competitor will emerge to fill the vacuum you left. Build it too soon, and you have committed major resources to uncertain business. In ad tech, the market changes faster than you can change the code anyway!
The problem starts because it’s tempting to leave the hamsters and duct tape alone. If it works, why change it? The answer is, it’s likely that non-scalable (human) elements will creep into your value equation, and pretty soon, customers will take those for granted. Then you’re stuck.
There is nothing intrinsically bad about either high-tech or high-service, but they both have existential pitfalls. A pure SaaS strategy can be easily copied, or cut off at the knees by rule changes in common APIs. Remember Buddy Media? How About Clickable?
The resulting problem is “churn.” In that scenario, a SaaS platform loses subscriptions to a competitor who simply cloned your system. Rapid death follows.
The fungible nature of software and web design makes pure SaaS systems easy to copy. Sign up, and give the screen shots to engineering.
Service-heavy strategies have advantages, though. They are sticky and responsive. When a human is in the loop, the process can adapt to change fast. If not, a client may have to wait until the next release.
The Pathology of a Death Spiral
Say, for the sake of argument, revenue declines because of a general market decline, or maybe a policy change at a big client. Not your fault. Still, you should let a few people go to put the P&L back into balance.
Who will it be? You gonna fire the dude fixing the aspect ratios, or the nice person down the hall who calls customers every day to tell them what’s up, or that contractor who reorgs the database every week to keep it running smoothly? Or maybe you trim the help desk.
So you let those folks go, and then what happens? The system becomes unstable, or the client is unhappy. Stories start to circulate. You lose more business. Fire even more people. Delivery gets even worse. Customers drop. Money dries up. You fire more people. Voila: death spiral.
That’s the lesson: Hamsters and Duct Tape scale up poorly, but you can survive that poor scale when you are growing. It’s very tempting not to invest in the tech. When things go south, however, all those little features you failed to institutionalize in technology can drag you down.
Entrepreneurs are optimists. Thank goodness, because without that optimism, nothing new would ever happen. However, correctly envisioning the downside is the difference between a graceful (if modest) exit, and a humiliating nose plant.
There’s a magic moment when you decide to put market before scale delivery. It will pay to make sure that’s not just magical thinking.