Episode 80
· 23:24
Hey, everybody. Justin Jackson here. This episode is all about whether or not you should start a software as a service company in 02/2016. A lot of people, programmers and designers and founders, are attracted to the recurring revenue benefits, but there are some potential downsides. And this is actually a cross post from my other podcast.
Speaker 1:I know a few of you have still not subscribed, so if you are subscribed to Mega Maker, you can stop listening here and just go listen there. But if you are not subscribed, listen here, and then as soon as you're done, go and subscribe at megamaker.co. Alright. Let's get into it. Hey, folks.
Speaker 1:How's it going? It is summertime, so I am recording this episode from home, not in the the vault like I normally am. It it literally is a bank vault. I had two separate people visit me from the Internet this past week. Antoine from Montreal driving across Canada in his VW Westie with his girlfriend, fi Frederic.
Speaker 1:I think that's right. And, Paul, who is biking all over the place. He's originally from The UK. And I was showing Paul around my office, and he looked at the bank vault where I have my recording stuff, and he's like, it literally is a bank vault. It is.
Speaker 1:It is. That's where I usually record the show. But it is summertime. Kids are home. And so I'm sitting at the kitchen table hunched over my laptop, drinking coffee at 03:52PM on a Friday.
Speaker 1:How are you folks doing? It's summertime. For a lot of people, things slow down in the summer. I am feeling like I've got so much to do. The book Jolt is out.
Speaker 1:It's sold over 666 copies so far and I would really like to get to a thousand copies by the end of the month. And I'm going on vacation next week. I don't know how I'm gonna work all this. But if you are a podcast listener and you would like to dive into this book I've been talking about for months, go to gum.co/joltbook/podcast. The show notes for this will also be at megamaker.co/30four.
Speaker 1:But I if you're looking for ways to support the show or support me as a maker, that's the best way to do it is to buy something I've made, and this is the most recent thing I've made. Jolt, it's a bunch of really surprising ways to market the things you're making. And I know a lot of you don't like marketing. This is a book for people who don't like marketing. I think you'll really dig it.
Speaker 1:Actually, just now I don't know if you heard that that text message, but just now, Antoine, that that Quebecor I was telling you about, says, dude, I'm high on your jolt book. You're taking me up, up, up, but will you ever take me down? He loves it. So Antoine loves it. Hopefully, you'll love it too.
Speaker 1:If you wanna see the reviews, go to justinjackson.ca/jolt/reviews. Okay. Enough of that. I promised you last week. I know there are a lot of software developers that listen to the show, and I know a lot of you wanna know about building software products and specifically building software as a service products known as SaaS in the industry.
Speaker 1:Now, for all of you who are not software developers, please do not go away. I'm gonna make this as as entertaining as I can. And there's lessons here for everybody no matter what products you're building. And if you're a musician, an artist, someone else who's creating something else, you will be able to, learn from this because I think we can learn from the recurring revenue nature of SaaS. And, also, I think we can learn about how sometimes certain business models can become like religion and people don't kind of explore other ideas.
Speaker 1:So this is what got me in trouble. Yesterday on Twitter, I tweeted something, and it ended up creating this kind of avalanche of discussion. It's a huge kind of tweet storm. That's where you, you know, I I tweeted the first thing and then I replied to the first tweet and I kept going. String of thoughts and tons of interaction and it was amazing, but also it sucked because as an independent maker, I've realized I can't waste very much time.
Speaker 1:And so I spent basically all of yesterday arguing on the Internet, and then I spent all of last night writing down my thoughts in a blog post. And then I published it this morning, and I've just been kind of, responding to the folks that have been interacting with it. And so I didn't want all that work to go to waste, though. I'm gonna talk about it on the podcast because that's one of the things we said we would do here. If you wanna read it, you can read it on my blog, justinjackson.ca/saas,saas.
Speaker 1:But I'd prefer if you shared the Medium article, that's mega maker dot co slash s a a s. We'll take you to the Medium post. And if you can click the green heart, that would be amazing. But that's what we're gonna go through today. We're gonna talk about whether or not the SaaS business model is ready to be disrupted.
Speaker 1:So here's the story. I was born in 1980. And my first computer was a Commodore VIC-twenty, probably around '85. Second computer was a Tandy 1,000. Third computer, March PC clone.
Speaker 1:Fourth computer, a Pentium clone. And as a kid, I think the first software I ever bought was Commander Keene. Any of you guys remember Commander Keene? It was like a little kid that jumped on a pogo stick. He had a football helmet on.
Speaker 1:And I sent $44 in a as a check to Apogee Software in '91 for Commander Keen. And the only way to get it is you could download it from a BBS. I don't know if any of you remember those. Or you could buy it in a box from a retailer. And for most of the nineties, that's how you would buy most software.
Speaker 1:You'd get it. You'd install it on your desktop. The most popular business applications at the time were Microsoft Office, Adobe Photoshop. A lot of you who were teenagers during the nineties probably, illegally downloaded and cracked Photoshop so that you could use it because it was so expensive. And companies, because they couldn't download things illegally, would spend hundreds of dollars to license software like Office and Photoshop for each employee's machine.
Speaker 1:Hold on, gotta take a drink here. Stay with me. Alright. In 1999, a new type of software company launched, and it was called Salesforce, and they were using a different licensing and distribution model. Software as a service.
Speaker 1:Instead of buying individual licenses, you paid a monthly fee, a subscription for each user. And the software wasn't installed on people's machines, it was accessed via your web browser. You'd go on Chrome or you'd go on Internet Explorer or Safari, and you would access things that way. Now nowadays, none of this feels new because we're used to Facebook and we're used to all of these different web apps that we, use via the web browser. But back then, this was a really crazy thing.
Speaker 1:This had never been done before. Five years later, in 02/2004, these crazy guys at a company called thirty seven signals launched a project management, web application called Basecamp. And if you haven't this these guys, David Hanenmeyer Hansen and Jason Fried, were what inspired me to wanna make digital things. Their book Rework kinda goes through all this, and I highly recommend it. But their launch was different for a number of reasons.
Speaker 1:First, they built this web app Basecamp with no funding. They just done it on the side themselves. And up until that point, if you wanted to build software, you needed a huge team, you needed a lot of venture money. Salesforce itself had a bunch of investors. They'd done it on the side just while they were running their design studio.
Speaker 1:And the second thing that made them different is they'd created a framework on top of the Ruby programming language that made web app development faster. They called it Ruby on Rails, and they open sourced it in 02/2004, which allowed anyone in the world to build web apps really quickly on the framework. And a lot of the things you use today, like Twitter, started off as Ruby on Rails apps. And this is where the pendulum begins to swing. You see, if you were a software developer pre 02/2004, you were likely building stuff for desktops and servers.
Speaker 1:But post-two thousand and four, this began to change. Because developers loved the flexibility and philosophy behind frameworks like Rails, And business people, jackasses like me, saw the potential for building revenue generating products on the SaaS model. The other convergence, of course, was increase in Internet speeds. Up until that point, it was all dial up, but now high speed Internet was faster making, you know, all this web software much more realistic. Okay.
Speaker 1:This is what started the SaaS Gold Rush. Seeing the success of products like Basecamp, there was a rapid increase in the number of people making web apps. And for distribution and pricing, they used the software as a service model. Users paid a recurring fee to access the application in their web browser. In 02/2007, this guy named Ryan Carson started doing Future of Web Apps conferences, and thousands of developers and aspiring founders flocked to these events.
Speaker 1:And many of the SaaS companies we recognize today were launched during this time. FreshBooks, have you heard of them? Heard their ads on podcasts? Launched in 02/2006. Zendesk, another big, really popular one in 02/2007.
Speaker 1:Wufoo, Wufoo forms, 02/2006. Xero accounting, 02/2006. Mailchimp is even older than these. They were 02/2001. But now the number of SaaS based companies has grown from a few 100 to tens of thousands.
Speaker 1:AngelList alone lists about 10,000 SaaS startups. And like any Goldrush, there's been winners and losers. So the question I asked in the post is, are we at peak SaaS? Is there so many people doing this model? Are there so many subscriptions that there's just no more opportunity to get into the game?
Speaker 1:And I think there's a lot of programmers listening to this, a lot of people that want to have software as a service business, a web app that earns recurring revenue, so you you have thousands of dollars coming in every month. And I don't know if we're at peak SaaS. My my friend Ruben Gamez, who's way smarter than me, says we have tons of upside left. And he's probably right. But the the more I kinda dig into the data, I it just leaves me with more questions.
Speaker 1:You see, if you look at the research, the enterprise is spending a little bit more on SaaS. So they've increased their spending 17.6% since 02/2013, but they've only decreased spending on traditional software by 2.8%. And we don't know what they're doing. Are are they paying for new services they weren't using before? Is the will the trend continue?
Speaker 1:Are these like, you know, are they not buying traditional software anymore? Or are they just like decreasing that a little bit and buying a few extra SaaS services? We also don't know where that money is going, like, who's benefiting from all that enterprise growth. Is it a small five person software startup that's getting all that, you know, enterprise revenue? Or is it Salesforce who have about 20% of the CRM market and they keep growing about 21% a year?
Speaker 1:So is it the big dogs gobbling that up? Or is it the little guys like you and me? The small business market is even harder to figure out. This stat blew me away. In Intuit's study, the average SMB spent $630 a year on software.
Speaker 1:Now in the old days, that might have meant, you know, upgrading to a new version of Microsoft Office. Like, you'd pay, okay. I'm gonna I'm gonna buy. Here I go off the shelf. But now that's like that translates to $52.50 per month.
Speaker 1:That's a very small pie. If you think about Mailchimp alone, a decent sized list can cost you hundreds of dollars per month, and that's not including web hosting and accounting software and everything else. $52.50 feels very low. Nobody really knows when the market for SaaS will become saturated. So is it harder to start a software as a service company now?
Speaker 1:Now this is where a lot of the debate on Twitter kind of centered around. And the truth is using things like Amazon Web Services, you can get started for pennies and scale your web app as your business grows. And web development frameworks have gotten better. User interface frameworks like design interfaces have gotten better. Services like Stripe make it easier to accept payments.
Speaker 1:So in the old days, to build a web application, it might have cost you hundreds of thousands of dollars, but now it really is cheaper. And my buddy Marty and I, if you've been following the show from the beginning, this is really what we did. We bought a domain. We got a free hosting credit on DigitalOcean, and we fired up a web app in a day, remoteworkers.club. Super cheap and easy.
Speaker 1:However, growing a business has always been hard. And there are we have to accept that there are certain times in history when growing a particular type of business is harder. Just ask Microsoft right now, or ask a flip phone manufacturer. Ask Nokia. Is it harder to run the flip phone, running the flip phone market right now?
Speaker 1:Sure is. It's it's gotten harder. So we have to ask ourselves, is this a good time to get started in SaaS? Yes. It's easier to, like, get a a web application up and running, put something up on the on a server, but is it easier to get a business, or is getting harder?
Speaker 1:And Mattermark's update from June 2016, they do a bunch of studies on this. They say it's getting more expensive to build SaaS companies over time, not because of, the infrastructure cost, although those can become more expensive, but because of the high cost to acquire customers. See, that's where people don't realize that that's how a SaaS business works. Right? You have a low upfront cost, like someone can sign up for $10 a month, but to make your money back, you need them to stay a customer for ten months.
Speaker 1:It's like a a gym membership. Right? The gym doesn't make money when you sign up in January. They make money when you keep your your membership for, you know, six or seven months and then give up in June or July. That's how those places stay in business.
Speaker 1:And it's the same thing for software as a service. I think Rob Walling articulates this challenge well in episode two ninety two of the startups for the rest of us podcast.
Speaker 2:Because you outgrow stuff. These are not you know, we're not building these basic crud apps like we we used to be able to and compete. I mean, the stuff's too competitive now that I I think of, like, a project management tool or even, like, time tracking or invoicing software or something. You obviously want a lot of UX. There's a lot that goes into building the product, but on the back end, the performance implications of it are really small compared to something that is sending a lot of email or doing a lot of analytics, tracking opens, tracking clicks.
Speaker 2:Both of our apps do that. Any type of I can't even imagine what apps like Mixpanel and Kissmetrics have to do on the back end because they are the next level. Now I understand why those types of businesses had to raise funding. You just couldn't get enough boxes and enough people to scale that up without having a big outlay in advance even with a tool like Amazon EC two or Rackspace Cloud.
Speaker 1:In many ways, the first CRUD what are you saying? Is Zeke said CRUD apps there? If you're not in from software, that means, like, a simple, like, thing like an address book would be a CRUD app. Right? Something where you're just, like, creating an entry, saving it in a database, retrieving it, editing it, saving it again.
Speaker 1:Those are very simple from a programming standpoint to build, and those were really the low hanging fruit. The opportunity to be first in one of those segments has passed. And, Andreessen Horowitz has this quote where they say, technology markets tend to be winner take all. The leaders in any given category will get an unfair share of the overall economic pie. So that means maybe if you are not first, if you weren't first, you don't really have a chance to get in now and start something.
Speaker 1:Now should you start a software as a service in 02/2016? Sure. I mean, just remember that SaaS isn't a destination. It's just a licensing and delivery model in the same way that streaming music is a licensing and delivery model as compared to buying a CD or as compared to downloading an m p three. Don't treat it like a religion.
Speaker 1:You know, and founders have different goals. If you're venture backed, you want a big exit or great dividends. If you're a self funded solo founder, you just might want a $100,000 a year as a paycheck. But my warning is that regardless of your goal, the SaaS model, and really any business model, has weaknesses and threats. Many founders choose SaaS just because they want the recurring revenue.
Speaker 1:Or they might like the simplicity of being able to deploy to one server as opposed to issuing updates for thousands and thousands of clients. But just because you like the model as a founder doesn't mean it's the right model for your customers, your product, your niche, or the current market conditions. Also, SaaS might not be a good fit for you as a founder. The idea of being a solopreneur and running a software as a service by yourself is mostly a myth. Now there's exceptions.
Speaker 1:I get into those in the post, so go read those. Megamaker.co/saas. But almost all of the SaaS companies I know with more than 7 figures in revenue have a team. And a lot of SaaS companies, like I say, need a lot of cash at the beginning to sustain them through the first twenty four months. So if you don't run a team, and you don't want to invest a bunch of cash upfront, the software as a service business is probably not for you.
Speaker 1:Now, I'll leave I'll leave us with this. I realize that for some of you this is way more heady than we normally do on the Mega Maker Show, But I think this piece is applicable to all of us no matter what we're making. Business models are fallible. They can be disrupted. Customers will buy SaaS or download music or stream music or, you know, do whatever they want as long as it suits them.
Speaker 1:SaaS is not right for every product, and it's not the best solution for every customer. And the question I wanna ask you is what other options are out there? Maybe everyone is going to into, you know, making web applications. But if everyone's doing that, maybe there's some opportunities in the other direction. You don't need to always follow the crowd and do what everyone else is doing.
Speaker 1:I promised you guys an update on the projects Marty and I were working on our two SaaS apps. So, networkeffects.me so far has 17 customers and a total sales volume of $225. Remoteworkers.club has, let me see here, has 18 paying customers and a total sales volume of about $1,800. So and that's all come in the last, well, it's probably the last month, basically. So quite a bit of difference in terms of revenue.
Speaker 1:So we we can't quit our day jobs doing that. But, you know, there's a a clear kind of difference between the two in terms of traction. So we're gonna keep working on it, keep exploring it. Thanks, folks. You can find me on Twitter, Instagram, and Snapchat.
Speaker 1:I'm the letter m, letter I, Justin. See you next Friday. I hope I'll be on vacation, but maybe I'll get an episode out. We'll see. Talk to you then.
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