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Try and toss
First-generation SaaS meant huge implementations and executive decisions, with a high cost of failure. The second generation added a better adoption model: a nicer user experience, easy to consume, and cheap to abandon if it did not work. Adoption moved from macro, where the whole enterprise buys in, to micro, where an individual or a small group decides to try an application. Zendesk, New Relic, Wix, Asana, and Twilio all grew that way.
Slow growth, then wildfire
Micro adoption changed the shape of growth. These companies landed with a much lower initial price and a much larger customer base, so revenue compounded slowly at first and then, in recent years, grew like wildfire. They also turned out to be more capital efficient in some ways, and they reward patience. It resembles how Facebook and Snapchat grew: for a long time people asked when they would ever make money while they piled up enormous user bases, and Google had not settled on its revenue model either. Then the revenue model went on top of that base and took off.
The mid-market opens up
The model also opened up customers that old venture advice had written off. First-generation SaaS served the Fortune 2000, and the standard view was that there was no money in the mid-market. Shopify and Wix proved that wrong. Small and mid-sized businesses could try the software themselves, so vendors no longer needed expensive salespeople and could switch from sales-led to low-cost marketing-led selling.
Why does a low starting price compound later?
Customers often begin with a small team and add seats or usage as the software proves useful. Companies track this with net dollar retention, which compares this year's revenue from last year's customers. A ratio above 100 percent means existing customers spend more each year even with no new signups. A large base of small customers can therefore grow into much bigger revenue over time.
Why did expensive sales teams suit the Fortune 2000?
Enterprise contracts ran to six or seven figures, enough to pay for field salespeople, long sales cycles, and customized demos. The cost of winning a customer has to stay well below what that customer will pay over its lifetime. Small business contracts worth a few hundred dollars a year cannot carry that cost. Self-serve signup pages replace the salesperson with a web form.
How did Facebook grow before it made money?
Facebook launched in 2004 and spent its early years adding users, first at colleges and then to the general public. Advertising revenue was layered onto that audience afterward. It reached one billion monthly users in 2012, the same year it went public. The pattern let the company build the audience first and the business model second.
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