The article below is taken from SaaS Mag Issue 4. To order your free copy, click here.
A crucial business decision for entrepreneurs and founders is whether, when, and how to reinvest in their companies. Reinvestment is one of the best ways to scale a profitable SaaS company. For many SaaS founders, the decision to reinvest profits in order to grow their business is obvious. But what may often be less evident is the best strategy to deploy, what priorities should come to the fore. Should funds go to marketing or product development or hiring? Or another priority altogether? What percentage should go to each? How much should be allocated for a founder’s own salary, for staff salaries, for a contingency fund?
Entrepreneurs, executives, and founders in the SaaS sector and beyond might all provide different answers to these questions – based on their experience, what they found has worked for their respective businesses, on their growth stage, and on whether or not they have taken on outside funding. SaaS Mag spoke to five founders and executives about their individual strategies and what they’ve found has worked for them.
Dave Smallwood: Cofounder and co-CEO of Roleshare, a site that matches people who want to share professional roles
In your view, what are the primary benefits of reinvesting?
Increased acceleration. The fact that you are able to add new features and enter new markets and the fact that you’re able to hire more quickly, grow faster, and do more is critical. If you’re not reinvesting at least a portion of your revenues or profits, then you’re extracting them, right? And extracting them would slow your business down.
Do you think that the strategy for reinvestment should change based on a company’s growth stage?
If they are early stage, every dollar is about product-market fit and trying to work out how to get that customer live and how to improve what you’ve got to a point that you say: “Okay, we’re there. We’ve got a product-market fit.” I heard a really good definition of product-market fit. It’s the point in time when you realize that your customers want more from you than you can actually deliver, and you stay awake at night not being able to fulfill your customer’s demand. Until you’re there, you don’t have it. And up until that point, everything you do needs to be aimed at trying to get there.
As soon as you’ve got product-market fit, it’s then investing in things to make it possible to meet your customer’s demands properly so that you’re fulfilling on the promise. Next, it becomes about recruitment and resourcing, making sure that your servicing is in the right place and your customer service is spot-on and that you’re not just handling the initial transaction, but you’re also following up on the dream and the promise.
Once you’ve got that sorted out, it’s about, “Now how do we take it to another market? How do we expand beyond the initial thing that we said we were going to go and do?” Then you start the cycle again: “Okay, how do we get to product-market fit in this other vertical, industry, or country?” All of those things could be the next step. It depends on the lifecycle of the company as well.
What is your recommended strategy for deciding on how much to reinvest and how to allocate the money?
The formulas that we’re using are closely tied to our business plan. You say: “Okay, so what’s our tax or revenue per visitor and by segments? How do we improve that? What can we do to drive that?” I think revenue per visitor or acquisition cost per customer are the main drivers for us. If we can increase revenue per visit and reduce the cost for acquisition in any way, that’s the thing that we’re going to give priority to.
Some of it is a gut feeling. You never know until you’ve actually tried it. You have to build it first. We also look at what our competitors are doing, what the market or adjacent industries are doing. We’re not in e-commerce, but we’re learning a lot from e-commerce players. We’re not in the business of doing application tracking systems, but we’re learning a lot from them too. Adjacent industries and competition are helping us shape our decision-making.
So are our customers. When we talk to our customers, they tell us what they want and ask us questions that we know we don’t have the answer to. Those are the people that, generally, you need to listen to. But sometimes you also don’t need to listen to them because they’re asking you for something so complicated and specific that it’s going to take you six years to build. And it’s not worth it, so don’t.
You need to have good instincts too. What’s going to work and what isn’t? I think that just comes with practice and A/B testing. Go and A/B test some stuff. Find an A/B testing partner to work out what does and doesn’t increase or reduce those things.
It’s increasing revenue or reducing cost and dedicated campaigns where you clearly have a very tight brief and a tight customer and a very defined budget. You can work out, “Okay, this is working for me,” or “It is not.” That’s critical.
What have you learned that you can pass along to others?
Something we’ve learned in this process is: Don’t try and build everything yourself, even if you’re trying to do something unique. We started by building our own platform for the front end and the back end of what we were doing. About three-quarters of the way through it, we realized that us owning part of the experience was actually hindering us because we weren’t able to focus on the thing that was most important, which was the back end of our platform and the matching algorithm—the stuff that is unique to us. We partnered with HubSpot and started using its content management system for the front end. They’ve been doing this for years and they’ve got a very powerful platform that it would take us years to catch up with.
Home in on your unique selling proposition, and reinvest in that stuff. That’s probably the strongest message I can give. Don’t reinvest in things that other people are already super-expert at. Go and use those solutions if they’re available in the market already. Invest your dollars only in the thing that makes you unique.
KC Goundiam: founder of B2BeeMatch, a platform connecting small and medium-sized businesses needing services with providers of services
What have you found to be the primary benefit of reinvesting?
The primary benefit is scaling. You’re able to scale because you’re able to increase your revenue stream. You’re able to double up additional offerings. You’re able to invest in technology. You’re able to have better control over the destiny of your company. When a company generates enough revenue that it has profits, it can use the funds in very different ways—and the one that I’ve found most beneficial is reinvesting it to increase growth and to scale and accelerate, including creating new revenue streams.
The situation with COVID has shown that companies that managed to keep afloat also had the most cash flow, so strategic reinvestment is essential. You have to manage debt as well. In my experience, companies that don’t reinvest tend to have a limited and short-term vision for their company. There has to be a balance between spending for quality expansion and healthy cash flow.
What are one or two of the most beneficial things that you’ve done in terms of reinvestment?
I’ve reinvested in international business development. That is a long-term view, something that is not going to give you results overnight. It can take two to three years to get a return on investment but it’s a necessary step to establish a diverse portfolio of clients. B2BeeMatch is actually built on the foundation of reinvestment. I was able to self-fund the platform because of the reinvestment approach I described in my first point. Strategic cash flow and vision for other business products would also help and benefit SMEs around the world.
The second thing I’ve found very useful, long-term, is investing in qualified resources. To build my platform, I decided to go with higher-level, higher-skilled, and more expensive resources, which allowed us to build a more robust platform. If I had chosen, for example, cheaper or less qualified resources, I would have had issues with development but also with just executing. Investing in high-quality labor was something that was very important to me because, in the end, this factor impacts the quality I want to build for my clients and customers.
What are the main business priorities that you recommend reinvestment be used for, such as marketing, engineering, or sales?
It depends on the strategic priorities and phases of development of your product or service. For example, for my platform B2BeeMatch, I prioritized technology and engineering first, followed by marketing and the whole suite of growth techniques shortly after. We are currently continuing to actively invest in both and in customer service as the platform keeps on expanding and reaching new markets.
Something our readers might definitely be interested in knowing is how you think reinvesting strategy should adapt during this pandemic. Should SaaS founders be reinvesting differently and have different priorities?
It’s definitely important to adjust your priorities, but with one caveat. In my consulting business, Red Dot Digital, many times I have seen companies change strategy just after their initial investment, which is a major waste of resources. Any investment should be made with sound planning, you can’t wing it. And once you’ve chosen a direction, it’s important to keep it. I don’t mean you shouldn’t make adjustments or be flexible, but that’s not the same thing as simply getting a new idea and abandoning your previous one.
With B2BeeMatch, my platform, we spend time planning, laid out the strategy, and followed the plan. We stayed flexible and nimble, and we made adjustments with an eye on external and internal events. Nobody could have predicted COVID-19, but even before 2020, every company needed to have a robust digital strategy. Those that did were able to adjust much more quickly to the pandemic. Good planning, especially for contingencies, makes it much easier to manage when unexpected world events arise.
Dan Hubert: founder and CEO of AppyWay, a curbside management and mobility technology firm
Can you talk about the main pitfalls of not reinvesting?
I think not reinvesting just makes you focus on the short-term— what you’re used to and your existing frameworks and contracts. So that could get a bit saturated or harder to sell, and just makes you a little stagnant in the market. Down the line, it could make you a bit prone to being taken over by other companies.
What’s your suggested strategy for deciding how much to reinvest? And in terms of allocation, do you recommend using a set percentage?
We have the 20/80 rule, with 80% going to business-as-usual and then 20% going to quoting new market products or additional features to add to the business-as-usual.
Do you think the priorities are different for a tech company, as opposed to those in other categories?
What I say to anyone who is doing any kind of business is that they should put money back in for continuous improvement. That should be in their DNA if they’re innovating and evolving and problem-solving. I would say any type of company should generally reinvest to some degree.
Do you think that the strategy would change depending on a company’s growth stage?
We’re seven years old. At the early stages for us, it was all R&D. That’s all we were doing. We were just trying to build things and failing and learning and building again, and there was continuous improvement. We were 100% investing in the company. All the money we had went to reinvesting, essentially, and then toward marketing once we started to monetize some of the products.
Things do change fundamentally from when you’re a start-up to when you’re a 10-year old company, where you have mature product lines, a customer base, and then new R&D stuff, then hopefully getting further client retention and more profits.
Hannah Feldman: cofounder of Kidadl, an app and website that helps families find personalized activities in London
What are the main business priorities that you recommend reinvestment be used for, such as marketing, engineering, or sales?
You have to work out what moved the dial for your business to get to the stage you’re at. For us, at the moment, it’s absolutely about technology and making sure you have the development firepower to achieve your roadmap and beyond. It’s about marketing because you need to tell people about your message and what you’re bringing to the market which, right at the early stage, you often don’t have the budget to do. It’s about people because you need, as you scale, the caliber of people to deliver against the marketing and technology objectives and get things done.
Technology is the lifeblood of an online business. You need to make sure that your product not only delivers on the promise it makes to consumers but is also developing ahead of consumers to best serve them. You have to be really strong. If you just exist and you don’t market it, nobody knows what you’re doing and you don’t get your message out there. For any consumer technology, you need to be able to communicate with your audience, and you need the staff and a team with the expertise to both market and present your business and run your business in a way that all of the bases are covered so that you get your message out in the market. As we scale, getting the right caliber of team members with the right expertise is absolutely critical.
How do you think a company’s strategy changes if it takes outside investments?
It would change the strategy in terms of reinvestment because the purpose of taking on investment usually means you’re building out a business and you need the firepower for more capital to scale out the business. You would generally not be taking a level of profit, for example, and reinvesting in the short term. You’re reinvesting not in profit but in growth. So when you look at putting money back in the business, it would be about how far that provides growth capital and then how much you and your investors think is needed to move the dial for the business.
Do you recommend that some reinvestment money is saved as an emergency fund or as retained earnings, so that if there are any emergencies a company can cover them?
Companies should always have a buffer whereby they’re accounting for every penny of the money either reinvested or raised so that they can make sure there is a contingency for a rainy day or any operational needs. Otherwise, you can find yourself very tight on cash flow if unforeseen circumstances come up.
Do you think that the reinvestment strategy should be different for a SaaS company than for other kinds of businesses?
I imagine it should be since a SaaS company can see very quickly if there is a return an investment, based on the way it sells its product B2B. Perhaps there is more of a clear connection between the reinvestment and the outcome than there would be for companies in other niches.
Ben Cohen: Partner at MailTag, an email tool that provides email tracking, scheduling, and follow up to sales teams
Once a decision is made to reinvest, what areas would you suggest as being primary targets?
Usually, you want to reinvest to scale your current business, so that would be marketing and sales efforts. Sometimes that is buying more ads, so a higher increase in your spending. Sometimes it’s hiring more people to be boots-on-the-ground salespeople. Sometimes it’s hiring engineers to make the product better, which could improve your bottom line or your speed or your efficiency. Or it can be a workforce reduction thing if you have software in place.
There are so many ways to do it. But usually, you should be investing with a goal of increasing revenue or profit or both. And then you work backward.
Do you think that the strategy changes at all depending on the growth stage of the company?
Yes, I do think so. I think really early on you want to invest as much as you can. Later in the day, when the company is established and safe, you probably focus more on paying people out and reinvesting differently. At the earlier stage, where I am, you’re usually trying to put as much back in as you can.