In most of my discussions with software startups, founders try to downplay their services revenue. I often hear “close to 100% of our revenue is SaaS” or “we are transitioning away from services by the end of the year.” When I dig in further with these entrepreneurs, they often admit they’ve been coached by investors to focus on recurring, lower-touch software subscription revenue. More broadly, in venture capital and growth equity, there is a notion that services offer no value to—or worse, are problematic for—these companies.
At Elsewhere Partners, we think this advice is misdirected. Services have a place in SaaS companies. This was always true, but the unpredictability of this year and the realities of a post-COVID world have shown that revenue diversification and flexibility are critical for financing your company. In addition to the defensive benefits services revenue offers, we see a number of advantages around bolstering growth and expansion and improving the end software product offering.
Services revenue should be complementary to the product you are ultimately building, but require humans to deliver vs. a software sign-up that can be used immediately without any human intervention. Examples of professional services that fit into B2B SaaS companies include: IT and infrastructure consulting, detailed integration work, high-touch troubleshooting and diagnostics, and strategy guidance.
The majority of our portfolio companies were bootstrapped before our investment and funded their software development through services, and many continue to maintain some level of services revenue as part of their business model. Here are some of the advantages.
Professional services can help fund your company without forcing you to raise outside institutional financing before you’re ready to. This capital-efficient mindset preserves ownership for founders, helping to extend the amount of time you can remain bootstrapped. Let’s unpack this.
Building a product suite from scratch requires real money for talent across product, engineering, and design roles, not to mention sales and marketing to get the product out to customers. Founders have a few choices when getting started: raise a friends and family round (which requires close relationships with people who have that type of capital for investment), seek loans or government financing, or secure seed or angel investment. Many of these still beg the question: how do you build a product to pitch?
Companies that have a vision of the problem they want to solve but are just getting off the ground can use professional services revenue to bridge this gap, building relationships with companies through offering consulting. This brings in real cash, key insights (more on that below), and an audience to ultimately sell the software product to once it’s built.
And this revenue doesn’t have to go away once the product launches. It can provide a source of stability amid unpredictable macro environments. While recent data show venture funding volume held relatively steady amid the uncertainty this year, the arrival of COVID-19 was so abrupt that many venture and growth firms reacted by slowing the pace of investing and new deals and going into conserve mode. This would be especially problematic for a company that was expecting to raise a new round or exit in this period and was on track to run out of cash. These risks could be buffered through a diversified revenue source such as services. Recently the life sciences cloud company Veeva announced a 34% YoY growth in its services revenue, suggesting that some customers may even have a stronger appetite for services in unpredictable or demanding times.
While we are all hoping to see the chaos associated with COVID-19 resolve in the next year, this pandemic will certainly not be the last source of stress and strain in the financial markets in the years to come. Having a plan in place to protect against that uncertainty will always be a good idea.
Services revenue is attractive in that it provides financial security, without necessarily distracting from your core mission and offering. In fact, we think the services component of any business can and should make the software product stronger. A key element of that is in customer affinity and retention.
Services (including implementation, onboarding, and ongoing engagement) help to get your customers up-to-speed on your product, learn best practices for using it, and realize ROI faster. This prevents a key issue that kills many companies down the line: customer churn, or when a customer doesn’t stick around after their initial contract is up.
Churn is sometimes caused by your product truly not being valuable, and sometimes from customers not understanding, adopting, and engaging with your software. A more high-touch relationship through professional services solves for the latter, enabling your company to guide the customer through integrating your product into their workflow and to pinpoint any issues or roadblocks.
This ultimately improves your software product so more people can adopt it seamlessly and informs your marketing team on how to best tell the story around the product value.
The professional services team works hand-in-hand with your customers and generates valuable market insights and product feedback. While your product should be built with robust analytics and dashboarding to understand how customers are using it, professional services will always provide a level of insight and access that technology alone cannot.
Services teams get a firsthand view of customers’ business challenges, along with insight into the suite of tools and technology they use (beyond yours), operations, and practices. The teams building your software can use these insights to refine the product so it better meets customer needs.
When you have a clear customer persona in mind and a target customer you’re building for, it’s likely that solving one company’s problems will improve how the product can serve others like them. The result is a stronger offering and minimal development time wasted building things people don’t need or want. These observations can help fuel your product roadmap and ensure ongoing product-market fit with your customer base.
Working closely with a subset of customers to solve their problems also allows you to grow champions, who can vouch for your offering, lend their voice to testimonials, and serve as a strong source of word-of-mouth marketing.
Services provide an avenue for testing potential new features and product lines before expending engineering and development resources to completely build them out.
They can also help you get a foot in the door in more complex industries. While the best case scenario is a product that is easily experienced quickly via a freemium model, the reality is that anyone playing in heavily regulated, high-stakes areas such as life sciences or security is going to be more cautious about integrating a new technology into their stack.
Engaging the customer through professional services can be a viable way to win trust and build a relationship, through which you’ll ultimately sell your software.
It is time to change the narrative that services are “bad” for scaling startups. COVID-19 has shown how disruptive a macro event outside any company’s control can be. Given this shift, all scaling startups need to focus on extending their runway and retaining their customers.
Professional services can help with these initiatives, while also generating valuable, ongoing product feedback that ultimately gives your company a competitive edge. While they get a bad rap for not being as scalable as software installs or signups, we’re confident there’s an important place for services in your company strategy.