Hollow SaaS Startups

The superficial culture that’s dominated our culture in recent years has encroached into the world of VC-backed startups. These startups are raising hundreds of millions of dollars, spending it lavishly on sales/marketing, and frantically trying to build a product in hopes of finding product/market fit.

I don’t have a problem with startups failing. To give something your all and fail in pursuit of changing the world is a worthy endeavor. Invention rarely happens without failure…but you need a product first.?

This high stakes game that some entrepreneurs are playing hurts employees, distorts labor and fundraising markets, gives legitimate startups a bad name, makes a lot of noise (thereby drowning out legitimate startups), and is causing end-buyers to be less likely to take risks and buy new technology. Sure a few will succeed, (hence the survivorship bias many of us have), but most will unceremoniously fail.?

A Concerning New Trend

Driven by the era of “free money” we're in, a few entrepreneurs are following a playbook that's deceptive at best:

1. Start with a well-known, well-pedigreed, and/or outspoken founder. Bonus points for a founder who races cars, skydives, dropped out of Stanford, shitposts on Twitter all day, or manages to get glowing puff pieces written about them by non-tech magazines

1. Raise a massive seed round and start hiring marketing and sales, offering employees exorbitant pay packages that distort the market

1. Quickly proclaim the (non-existent) product is the best on the market. Spend lots and lots of money on sales and marketing

One former employee who requested anonymity out of fear of retaliation, "It was like, 'how quickly can we set money on fire?'"

1. Frantically build the product in private according to the specs of the first few customers. First customers therefore pay to fund the development of the product
2. Raise lots more money (which sucks up the time of the exec team), enriching the founders personally through secondaries . I'm totally fine with secondaries - so long as the company and its product are legit
3. Hope that the fundraising market holds while they try to search desperately for product/market fit

At this point, the funding dries up and the business folds. Or if they're lucky, the company is able to shake off the near-death experience and continue on as a real business with an old-fashioned thing called “revenue.”

This playbook works as long as money is “free” and the entrepreneur is skilled at raising it. Many of these entrepreneurs raise money family offices or less sophisticated VCs/PEs that have no ability to assess the product or market. There are trillions of dollars that need to be put to work and in the era of $10 billion dollar funds, it’s not much for these funds to buy what amounts to $100 million in lottery tickets in these massive A, B and even C rounds that we now see routinely.

Funding Can't Expedite Product Development

You can’t expedite product development by spending more money, like you can with sales and marketing. Software development is a craft — you need to build a culture of excellence over many years. You need to figure out how to recruit and retain the developers you need, split those developers up into small teams, establish product management/architecture and design functions, define your product's architecture and procedures for evolving it over time, define job levels and promotion paths, develop a roadmapping process, write documentation, build a support organization with 24/7 coverage, build a culture and practice of security (including audits), establish a CI/CD pipeline and culture of release management, put in place policies to deal with technical debt, establish procedures around outages, etc. There are literally thousands of things that have to be in place to build a product. How, for example, do you compensate SRE and support engineers for being on call over holidays? Does the compensation you're offering violate labor laws or create tax headaches for employees? These things all take time to resolve. Have a look at our tech blog for a small fraction of the things commercetools has had to figure out over the years. Money cannot accelerate these things. Money often has the exact opposite of the intended effect.?

If you throw $100m at a CTO/CPO to build up a team, it typically quickly results in deadlock. This is why large government tech projects nearly always fail.?

Let’s say a vendor manages to build out a team and these supporting functions, and is then able to make the team productive. It will then take years and years of hard development to add the features required by the market. Have a look at ModernCommerceRFP.com for a list of 400+ requirements for just commerce.

At commercetools, we’ve been laser focused on core commerce. We’ve been building our product for 11 years, and we’re still missing features (though we have rock solid scalability, stability and security). For any vendor that has only been in the business for a couple of years to have all the features mainstream customers require in place would be highly unlikely. As an example, the various SOC, ISAE, and ISO standards required by large enterprises each take years.

Marketing and sales, on the other hand, scale quite linearly. You can throw money at Google AdWords and it (roughly) keeps producing results proportional to how much you spend.

Given the hundreds of thousands of real enterprises around the world, you can generally add sales people and get a linear return provided your product is market-leading. This is why huge B/C/D rounds make sense – you’re scaling a real business and are generally able to do so linearly.?

Start by Building Your Product

I firmly believe it's best to start by building a product.

First, identify a very specific business problem that is not well served by the existing products on the market. Building a large suite, inclusive of commerce, content management, order management, search, CRM, etc., as a complete package, choosing every enterprise in Europe, North America, and South America as your target market, isn’t a niche. Building a gift card API for Digitally Native Vertical Brands in the U.S. ? Yes, that’s a niche that is not well-served.

In 2013, commercetools identified our niche as selling headless commerce (the product) in Europe (the target audience). By decoupling frontend platforms from backend platforms, we gave marketers the ability to build compelling engaging experiences regardless of the channel. Sure, a few companies bought commercetools in the beginning because the technology was new and cool, but it wasn’t until we went hard after the ATG install base that we started to get any mainstream adoption. VTEX defined their niche as midsize brands in LATAM. Voucherify defined their niche as coupon code management. You can’t start by building a product for everyone that does everything, as many of our competitors are now doing. The best choice is to start small and deliver the best product in the world for your specific niche. Today, in 2022, headless commerce is decidedly no longer a niche.?

Once you’ve identified your niche, build your technical founding team and raise a reasonable ($10m-$25m) seed round. Use the funding to quietly build your product. Hire product managers, architects, engineering managers, developers, UX designers, QA testers, agile coaches, documentation writers, etc. Toil quietly for years to?build your market-leading product for the niche you’ve identified. Own that niche. Be the only product in the world to consider for that niche.

Only once you’re sure you’ve identified product/market fit, start thinking about scaling and seek successive rounds. If your goal is to take down McDonalds, you don’t immediately open 38,000 locations in 120 countries. You open one. See if it works. Then open 10. Then open 100. Keep going incrementally.?

How to Spot Fake SaaS Companies

It’s pretty easy to spot a company that doesn’t have a product. Keep in mind, it does involve some research and collecting multiple data points.?

Start with your personal networks. If you have friends/former colleagues who are working at?the company, reach out to them to ask what it’s like and what’s?really going behind the scenes. Explore websites like Glassdoor.com to find what employees are saying anonymously.

Take a look at LinkedIn Insights (part of the $10/month Premium subscription) to check the company’s median tenure and the distribution of employees in product vs. sales vs. marketing. The majority of employees at an early stage startup should be working in some type of technical function that’s focused on building the product. LinkedIn Insights can quickly provide this intel.?

Ask people you know who work for systems integrators (SIs) if they’ve been?hearing about implementations of the vendor’s product. If they say yes, your next question should be, “How are things going?” Ask if the large SIs are building practices around the new vendor, or are they taking a “wait and see approach”? Companies without real products tend to do their own implementations for the revenue as well as to mask problems related to the (lack of) product.?

You can also ask friends who work for competing companies what they’re hearing. All vendors keep close tabs on their competitors and most are happy to tell you what they know.

Check Gartner, Forrester and IDC for research notes that point back to the vendor in question. Is there a Gartner Magic Quadrant, Forrester Wave or an IDC MarketScape that has evaluated the product? How many years has the vendor shown up on these reports? Companies without products tend not to participate in analyst reports.

Also, check out G2 for real-life customer reviews. Those reviews can be useful in determining whether companies have real products.

Finally, every vendor has what we in the business world call a “NASCAR slide.” That’s where they showcase the logos of supposed customers. Pick a few of them at random and ask for the back story. If you see McDonald’s listed, ask about the actual use case. Is the vendor being used to power their flagship app or website? Or is a McDonald’s franchisee in Uruguay paying them for a proof of concept? Ask to speak to the supposed customers. Real companies with real products are usually happy to introduce you to their customers.?

The Coming Reckoning

I think we're heading for a market correction. As Warren Buffet famously said:

“Only when the tide goes out do you discover who's been swimming naked.”

I’m fairly certain a few vendors in our space are ultimately going to be left stranded, wishing they had built their product first and then scaled responsibly.

About commercetools

commercetools ?is the world’s leading platform for next-generation B2C and B2B commerce. To break the market out of being restrained by legacy suites, commercetools invented a headless, API-first, multi-tenant SaaS commerce platform that is cloud-native and uses flexible microservices. Using modern development?building blocks in a true cloud platform provided by commercetools, customers can deliver the best commerce experiences across every touchpoint on a large scale.

commercetools ?has offices across the US, Europe, and Asia Pacific, with headquarters in Germany. Since 2010, commercetools software has been implemented by Fortune 500 companies across industries, from retail to manufacturing and from telecommunications to fashion.

More information at?commercetools.com .