How to Navigate Strategic Change for Growth with SaaStr CEO and Founder Jason Lemkin (Video + Podcast)

"No matter what you do, you’ll hit TAM issues."

Nov 14, 2023

Welcome to Part Two of SaaStr founder and CEO Jason Lemkin’s Ask Me Anything session at this year’s SaaStr Annual.

Catch up on part one here, where he deep dives into what he really thinks about AI, Sales and lead Gen for SaaS in 2024.

Jason re-takes the stage in Part 2 of the series to answer questions about the right time is to invest in a new product line, building vertical vs. horizontal, multiples in 2024, and much more.

Building and scaling a startup isn’t for the faint of heart and often comes with many ups and downs that SaaS veterans have experience in.

So, let’s jump right into Part Two.

Q: When Should A Slow Growth Company Hire a Head of Sales?

One attendee purchased a company with $11M in ARR. They have one salesperson but want to skip having two scaled reps and immediately hire the VP of Sales.

Is that a good approach?

Typically, you have to have some kind of sales team or sales engine to run before you can hire someone to run it.

But when you have an established sales business without an established sales process, you can hire the VP of Sales.

With two caveats…

They have to close a significant amount of revenue themselves.
They have to hire two more reps, ideally, before the quarter is up.

Jason wrote long ago that, in some senses, too many founders get cheap in the early days and want a VP of Sales that pays for themselves.

As a sales leader, you can’t own a full quota and manage eight reps. If you can’t afford it, you can’t afford it.

Should a VP of Sales hold a quota?

Sometimes, yes. But they can’t hold it forever.

80% of VPs of Sales today should close when they start, ideally for just a quarter or two, and then assist and join deals with the team.

Otherwise, your company will never grow.

Q: How Do Founders Ramp AEs Faster?

The short answer?

They don’t. This is the VP of Sales’ job.

Until then, you can’t do it. There are no shortcuts. It’s the VP of Sales’s job to take a month off AE ramp.

A great VP of Sales creates more urgency, listens more, and talks to stakeholders early in the process. They realize when an inbounder isn’t buying and a million other things that cut sales cycles by about 20-30%.

Whether you’re a slow-growth company or a rocketship, a great VP of Sales will make everything a little bit better quickly.

Q: What About Success for Founders Who Don’t Have A Network?

Some pre-seed founders don’t live in popular SaaS areas or have access to networks or capital to make it to popular conferences or events.

How do they succeed?

For Jason, he doesn’t invest in a company before $10k MRR plus 10-15 customers.

If you’re a great founder with 40-50 customers, he can figure out if you can get to 4k customers.

But if you don’t have any customers, that doesn’t give investors much to bite into.

If you don’t have traction or come out of Stripe or have the perfect connections, how do you get funding?

Revenue.

If you can’t check all of those boxes that definitely make things a little easier for you, then the only box you can check is revenue.

VCs are looking for outliers, so make yourself an outlier as much as possible.

So, if you really need money and you’re not yet an outlier:

Find angels.
Get as much traction as possible as quickly as possible.

Venture capital is a niche niche niche asset class only designed for outliers. It’s not designed to be fair because it can’t be. Most VC firms perform terribly, and it’s a brutal industry, so numbers and connections matter.

If you don’t have connections, get the numbers.

Q: Should You Build Vertical or Horizontal?

A first-time founder of a Generative AI startup is struggling with the question of going vertical vs. horizontal.

When you have a lot of sub-use cases, it makes sense to go horizontal, but after two or three of them, the product can become weird.

Should founders like this stay laser-focused or expand horizontal?

“As product builders, we enjoy horizontal products,” says Lemkin.

Monday, for example, was built horizontally at first and then found that insurance companies, churches, and construction performed best. So they leaned in there.

For the broad-based platform with a self-serve element, you’ll have the biggest TAM horizontal.

You have to get to $1M and get momentum…

So, build an elegant, easy-to-use PLG self-serve product that meets people’s needs, and wherever there is any concentration of customers, lean in.

You still have to find areas of strength, and everyone is feature-poor in the early stages. But you also have at least one magical feature because you have customers.

The biggest mistake from $2M to $10M is over-diversifying. You’ve rarely exhausted your TAM at $2M.

We don’t all think about horizontal to vertical to horizontal, but most startups kind of do that.

You pour energy into what’s working, and when you have extra, you do experiments.

On the march to $10M, don’t do it.

Q: When is the Right Time to Invest in a New Product?

Many companies invest in multiple products on the way to $100M ARR. But it can be distracting for engineering, product, and GTM teams.

When is the right time to invest in a new product line?

“The simplistic answer to all of this is 100, 1000, 10000,” Lemkin says.

No matter what you do, you’ll hit TAM issues.

Your initial product exhausts the market, and once you approach 10% market share in your core ICP, things will start to slow down.

The good news at this stage is that the brand picks up at 10%.

So, it becomes easier in some ways and harder in others.

You’re in every deal, but things are slowing down because you’re exhausting your micro-TAM.

In Enterprise, it’s often around 100 customers, mid-market is about 1000, and in SMB, you’re lucky to get to 10000 customers without hitting significant headwinds.

Before you get halfway to those numbers, you need a plan to go multi-product.

If you go multi-product before TAM exhaustion, you may be stressing the team too much.

Ask yourself, am I approaching 10% market share in my core ICP?

Be rigorous as a founder and define your TAM narrowly on where you get the majority of your revenue.

Before exhaustion, you’re a mini-brand where word-of-mouth within your core ICP is magic — an inbound viral loop.

As a real brand, you’re in every deal. Not everyone picks Salesforce, but they talk about it.

So, don’t go too early and burn the team out, but don’t wait too long and exhaust your TAM and slow your growth.

Q: What Do You Think Multiples Will Be In 2024?

The IPO window is opening in 2024, and that’s a good thing. It means VCs will do more deals, and the cycle of money flowing between LPs to VCs to startups to LPs and round and round continues.

But what about multiples?

If the average multiple is 6x ARR, it’s not going to inflate valuations. It’ll create more appetite for deals, but only at the margin will it increase valuations.

What will be the biggest impact on multiples?

As a founder and investor for over a decade, Lemkin never looked at public multiples until 2021.

Everyone came up with a rule early on that good startups were always valued at 10x ARR.

Sometimes, a rare one was off the charts, but typically, if you were the elite, it was always 10x.

That’s the world we’ll be in again.

Public multiples are 6x, but startups don’t have to be 6x. It’s back to a 10x world unless you’re a crazy outlier.

Key Takeaways

This year’s AMA with Jason Lemkin had plenty of takeaways. The key takeaways during part two included;

Hiring a VP of Sales: For a slow-growth company with an established sales business but not an established sales process, it’s appropriate to hire a VP of Sales. However, this VP should initially close a significant amount of revenue themselves and aim to hire two more sales reps soon after. A VP of Sales should hold a quota initially, but not permanently.
Ramping Account Executives: Founders shouldn’t focus on ramping AEs faster; that’s the job of the VP of Sales. A good VP can cut sales cycles by about 20-30%.
Success without a Network: For founders without the right connections, the key to attracting investors is revenue. Venture capital is particularly selective, so aim to stand out by generating impressive numbers.
Vertical vs. Horizontal Build: If a product has many sub-use cases, it’s better to go horizontal until you find specific areas where the product performs best. Diversifying too early or too much can be a mistake.
Investing in a New Product: It’s optimal to invest in a new product line when approaching 10% of your core Total Addressable Market (TAM). Going multi-product too early can strain the team, but waiting too long can stunt growth.
Multiples in 2024: Public multiples will hover around 6x ARR, but startups will likely be around 10x unless they’re outliers.

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