10 lessons I learned from David Hauser’s $0 to $30M B2B SaaS interview
Last night I was listening in to an interview from David Hauser, a serial B2B SaaS entrepreneur based out of Las Vegas who:
- founded Grasshopper in 2003, then sold to Citrix for $30M in 2015
- founded Chargify in 2009, and continues to build it today
- is an angel investor in Intercom, Unbounce, Groove, plus many others
- was awarded 2011 Inc 30 Under 30 Entrepreneur
The interview is focused on how B2B SaaS companies can grow to $30M ARR.
David is best known for growing and scaling his own B2B SaaS companies.
Lesson #1: Prove it can be sold before building a fully-fledged system
When David wanted to launch Grasshopper he threw up a web page and started driving traffic to it with paid ads.
His goal was to see if they could sell their product package to the segment of the market that they believed no one was really selling to.
David believed in finding a process where they could close people online (he didn’t want to talk to them on the phone or go over proposals).
Very quickly they started seeing customers with a paid acquisition cost around $20-$40 per customer, so they then quickly started building the product.
Their base plan FreedomLITE started at $9.95/mo and their top plan FreedomPRO started at $19.95/mo, but their pricing was super complicated with lots of add-ons.
Here is a screenshot of their web page from back in January, 2003 that I was able to dig up (Note: Grasshopper used to be called GotVMail):
Even with the complicated add-on pricing, Grasshopper had a compelling unique value proposition that enabled them to sign up about 1,000 customers in the first 3 months from this website.
Key Takeaway: At the start it doesn’t matter if things are scrappy, they are meant to be. The most important thing is testing ‘message-to-market’ to see if there is a real need for your product idea (and validating it by having people pay).
Lesson #2: Start with paid traffic first
In the beginning most of David’s customer acquisition was from paid traffic. After David saw where things were working with paid traffic, then he started spending time on organic.
David doesn’t like to start with organic traffic because it often takes longer than 3 months to optimize for important keywords.
He says too many people in Silicon Valley feel like it’s bad if you say you had to “pay for marketing”. David believes it’s actually the best thing possible… you know you can put $1 in and take $2 out.
David’s opinion on paid traffic goes against what almost everyone says, but have you stopped for a second and thought about whose saying paid traffic is bad? Do those people have any track record of growing $30M companies?
It doesn’t matter if you’re doing $1,000 or $100M… if you’re not talking about paid marketing, it’s a lost opportunity. Get out of the “Silicon Valley trap.” — David Hauser
Key Takeaway: If you’re looking for fast, early growth (or want to scale your current growth) you don’t need to growth hack your way to success. You can (and should) actually start with paid traffic to get early user growth which will fuel viral word of mouth referral if you have a great product.
Lesson #3: Look for gaps in the market to find early paid traffic opportunities
David says to look at paid social media channels beyond Facebook.
Even though the click costs on Facebook haven’t gone up a lot (yet!), it is a very saturated ad platform.
Look outside the box at other self-service ad platforms like Instagram, Pinterest, etc if your product has some sort of visual representation.
Or if those aren’t a good fit, research other niche paid marketing channels you can exploit to find affordable, early stage paid growth channels.
Key Takeaway: If you’re just getting started with paid marketing, spend some time researching alternative low-cost paid advertising channels. Try to find the best one where you will be able to reach your target customer most cost efficiently.
Lesson #4: You can’t scale paid traffic without a great product
At the start of the company 30% of David’s customers were referring Grasshopper to others via word of mouth because they had a great product solving an un-met need for their segment of the market.
Even today referrals are in the high 20–30% range, even with a very large customer base.
Essentially, David calculated that for every 100 customers he acquires with paid traffic, he would acquire another 20–30 from word of mouth referrals.
Key Takeaway: Word of mouth referral drives down your paid marketing cost. Most people don’t take this into account when thinking about paid marketing, which is also a reason why they don’t pay high enough attention to the impact of investing in paid traffic early.
Lesson #5: Your paid traffic costs will vary over time
As David scaled Grasshopper past $1M ARR and through different inflection points they drove their paid traffic costs up quite a bit (from acquiring customers at $20-$40 to $150-$180).
But then they hired an agency, got very good at optimizing and drove their customer acquisition cost back down under $100.
They learned what channels worked and developed a culture of testing by hiring the best agency talent they could.
Key Takeaway: You can’t expect your customer acquisition cost to be consistent month-over-month, but if you hire A-level agency talent then they will know what to optimize to keep your CPA at a profitable level.
Lesson #6: Before you invest in paid traffic, know how much you can afford to acquire a customer
David was collecting $30-$60 on average from a customer (their monthly price plus add-ons).
David knew his profit margin was around 70%.
So on a $45/mo customer, David was making roughly $31.50/mo.
With the lifetime value of a customer obviously being well over $31.50/mo, and the company being bootstrapped, David was comfortable spending 3X that to acquire a customer (ie: $94.50).
Key Takeaway: If you’re going to invest in paid traffic, know how much you can afford to acquire one customer. This will be your reference point to know which channels work and don’t work.
Lesson #7: Do everything you can to increase cashflow
David billed customers a month ahead for their product, then he negotiated deal terms with his telecom vendors for 1–2 month payment terms because he was able to sell them on the idea of what they were doing.
Essentially David wasn’t paying vendors for 30–60 days, plus 30–45 days for vendors who took credit card payment.
This gave David a cash cushion of at least 60 days while they were investing in paid traffic to grow the business.
Key Takeaway: Cash that isn’t tied up with vendors can be used to grow the business and invest in paid traffic so you can build traction quickly and find what channels work.
Lesson #8: Double down on marketing that works
When the company was $20M+ in revenue David decided to take on some debt capital.
The intended use for the debt capital was to take their $2M per year marketing budget to $14M per year.
It turned out to be a great decision and David paid off the debt way faster than expected.
The reason it worked out so well was because David knew he was only going to spend it scaling proven “$1 in, $2 out” marketing that was already working.
Key Takeaway: Once you know what marketing works, double down and invest in it heavily if you want to scale fast.
Lesson #9: Each level of ARR growth hides different problems
Throughout the interview David talks about different inflection points throughout the growth of his company. These are some of the insights David has for each stage of the journey to $30M ARR:
$0 to $1M
- Getting to $1M ARR is one of the most difficult things in business. The only thing more difficult is getting to the first few customers.
- The idea doesn’t matter… the implementation, packaging and marketing does.
- Nail down the niche you want to help (for David that was small businesses and entrepreneurs). He had the opportunity to go up-market to enterprises, but he stay focused on SMBs.
- Paid marketing works no matter what people say. Use paid marketing from Day #1.
- You may not be able to scale your paid channels at this stage, but you need to know directionally what channels (AdWords, social ads, native ads, etc) work and don’t work.
- If you want to raise money from investors post $1M ARR, knowing what paid channels work will make investors certain you can invest their money in those channels and scale them
- Never hire for a function or a job you didn’t spend time doing yourself. Only hire someone for something you’ve done (ie: if you’ve done customer service and know the process, then hire the customer service person). If you haven’t done it, then dive in and start from best practices.
$1M to $10M
- Start to hire your first layer of additional management
- Start to scale the paid marketing channels you tested in the $0 to $1M stage
$10M to $20M
- Shift from needing “doers” (ie: go do this and come back to me) to “strategic thinkers” (ie: we need to get 1000 customers in the next 2 days, figure out what that looks like, how are you going to do it, what’s the budget needed and how are you going to accomplish it).
- Performance management, evaluation and compensation becomes more complex
- When growth slows down and you start hearing statements from people like… “you can’t keep scaling that fast” and “you’ve just about saturated the market” be very cautious. Lots of people told David that and it took them off course for 1 year, then they realized there was much more to optimize on the business and grew past $20M to $30M.
Key Takeaway: Nail a niche, use paid marketing and get sales fast. As you grow hand off your daily jobs to new hires and start to create a well-defined corporate structure. Hire A-player managers in every critical area of the business. Become more and more strategic as you grow and hire specialist talent where needed.
Lesson #10: You can’t use these 10 lessons to grow your SaaS, unless you have this
Towards the end of the interview David talks about a Grasshopper Labs program they launched to incubate new SaaS businesses and how it lost $1M in cash, plus more in terms of the time and focus they dedicated to it.
David thought they could apply what they learnt at Grasshopper to other SaaS projects and mentions all different kinds of failed SaaS projects where the product and market weren’t the right fit.
Interesting…
The only successful project to come out of Grasshopper Labs was Chargify.
David used paid traffic again to validate Chargify (with display ads on niche websites).
David didn’t have a dedicated marketing person for Chargify, so all the traffic they sent was to their home page (not a landing page).
Their idea was… we know we can convert more people, but let’s just get them to the page and validate we can get paying customers now.
Key Takeaway: There is a process you can use to launch, grow and scale SaaS products…. Paid Traffic > Unique Value Proposition > Validate Paying Customers > Build MVP > Repeat
But it won’t work if your product isn’t solving a very painful, un-met need in the market, and the implementation, packaging and marketing of your product doesn’t immediately cause people to want to take action and buy.
Conclusion
Don’t get brainwashed by the Silicon Valley methods for hacking growth and and scaling a B2B SaaS company.
David built his entire business on paid advertising.
As an angel investor, his advice to SaaS marketers and entrepreneurs today is… if you ever want to raise money, you’ll be in a much better position by being able to prove to investors you have paid marketing channels ready to scale.
If you are serious about building a highly scalable B2B SaaS company then you need to find what paid channels work for your business.
David is one of the best B2B SaaS marketers out there, I implore you to check out his stuff and subscribe to his social profiles.
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