Will your startup become a unicorn?

How to increase the odds of building a Unicorn in b2b SaaS

Pré note: Talking about this on the main stage at Traction Conference today, 8/10/2022. Will post video when its available.

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I’d been working in b2b saas for some time as a product builder and operator before I noticed a pattern, a certain symmetry to the winners and losers. I did some more observation, research and hypothesis testing to confirm my intuition. And that has resulted in this strategy framework for increasing the odds¹ of extraordinary outcomes for a b2b saas software business. 

The core insight

The core insight of this unicorn framework is that by selecting the workflow (which kind of department or worker whose problem you solve) properly, you can predict how successful your saas startup can be, assuming great execution. It’s a very different idea from the ‘addressable market’ (all invariably large when you are in the b2b space) and has more predictive power.

This insight rests on the idea that all SaaS software digitizes the productivity workflows of a subset of workers. These workflows are literally ‘how they do their jobs today’. By removing the drudgery and accelerating these workflows - a) by speeding them up b) by making them more accessible to non-experts who can produce great output without extensive training c) by injecting expert help that levels up most workers who utilize those workflows with less effort; software that addresses these workflows, create value.

So how does this core idea help? Well workflows have some key properties that are important to the size of economic returns. The first is frequency (I also interchangeably use the word ‘intensity’) - how often is this workflow performed on average by anyone who needs to do it? The second is how many people perform this workflow? Is it isolated to a specific department? If so, how large is that department (think ratios) in a typical business? Is it done by everyone at work (for example, email)?. By considering these 2 things it is possible to predict the eventual size of the resulting b2b saas software business, all things being equal (capital, technology, execution, etc). By thinking through the workflows you are trying to solve for -  how frequently it occurs in a week and how many people have to go through that workflow to produce work, you can - a) Get a sense of the value of a successful software company in this space relative to other potential investments b) help inform your product strategy, no matter what problem you started with in b2b saas.

This framework is not predictive of execution risks at all. Many software companies can attack the same problems and some will come up short - I see this every day as an adviser. There are all kinds of risks related to building software businesses. However, it's a winnowing function that will let you decide on what to focus a startup on. And if you’ve already started one, how to focus your product strategy to grow as fast as possible.

Explaining it

We can break every software company into a 4-box  - high intensity, low intensity; everyone workflows, niche workflows. High-intensity workflows are any tasks done by affected workers every day to every week. They’re high frequency. Low-intensity workflows are any tasks done by affected workers about once or twice every 2-4 weeks. They are low frequency. 

Everyone workflows are tasks done by almost everyone in the company. They are horizontal and not complicated. For example, communication, calendaring, some kind of long-form writing, etc. Niche workflows are specialized and done by people in some kind of department or a subset of the people in that department. For example, things that support techs do vs things that designers do with specialized tools.

Combining these ideas results in a classification system for what a b2b saas software business’ main focus is.

As you can see, you can derive 4 types of b2b saas companies - those that focus on low intensity-everyone workflows (LiEV), those that focus on low intensity-niche workflows (LiNi), those that focus on high intensity-niche workflows (HiNi) and those that focus on high intensity-everyone workflows (HiEv).

The most valuable saas software companies build software for HiEV workflows. They dominate the mundane and widespread. Usually email, collaboration, writing, calendering, information organization, and search, etc. They can extract value from this widespread participation to the tune of billions given enough distribution. This is a very competitive space thought dominated by the likes of Google and Microsoft. They have strong network effects, a large installed base, and many resources for sales and distribution. This kind of business is the nirvana of all software companies but it's very tough to gain traction for a startup.

The next most valuable companies and really fertile ground for startups are HiNi workflows. The companies will take a departmental ‘workload’ and remove its drudgery and realize unseen opportunities within it. By focusing they can gain a competitive foothold, a strong brand, and grow quickly if they solve major problems or realize major opportunities. Once these companies are established they can also try to expand into the HiEV space by extending their value proposition. These companies take smaller capital to start and are distinguished by the quality of their insight into the problem, the customer experience of their solutions, and their ability to innovate. Here are some famous HiNi companies - Zendesk, Salesforce, Adobe, Figma, Avalara, and HubSpot. All of these focus on a specific type of worker and give them tools they didn't have before or save them time for the same work output.

Low-intensity workflows come in 2 varieties - Everyone and Niche. You can still build big businesses in both of these categories but you have to a) charge a lot for your software b) Deliver massive productivity gains with few alternatives. For example, most people have to file expenses probably once or twice a month (LiEv). Or the marketing department has to send out a survey monthly (LiNi). Some of these tools are very valuable or irreplaceable; the nicheness and the frequency of use make it hard to build unicorns out of the workflows they enable. Those companies that dominate these businesses can erect strong moats if they are mindful and work hard to build toward more high frequency and more widespread workflows over time.

The proof

I set out to find out if this framework had some predictive power and it does! I analyzed the top 50 and top 100 b2b saas companies in terms of their revenues and market cap. 

I predicted that the total rev and market cap for HiEv companies should be higher than those in every other quadrant. Moreover, that return should be possible on fewer companies in the HiEv space (dominant companies with scaled moats). 

I also predicted that there would be a higher profusion of companies in HiNi. I have not analyzed this yet, but in general, you should see more startups being formed in the HiNi sector at a greater rate than any other sector and definitely more than the HiEv sector. 

LiEv and LiNI companies should have much more modest valuations in comparison to the first 2. And they are more amenable to an enterprise sales model and much higher per-customer prices.

These predictions have largely been borne out in the data set for top 50 and top 100 b2b saas companies by revenue and market cap. You can download some of the analysis below.

What it means and how it can help you

This framework is useful when thinking of starting or investing in a b2b saas company. It’s for founders and Product Managers and helps you bracket the growth potential and expected outcomes of building a successful software business or even prioritizing a product feature.

It also helps existing companies think of how to formulate product strategies as they expand their business. Learn more about it here - where to fish to land a unicorn. 

If you find this framework useful, hit me up oji@productmind.co and tell me how. I also have a google sheets workbook for the validation section in case anyone is interested in the actual numbers.

1. Worth noting that this is a predictive framework but it’s not a) saying that it’s the only set of factors that go into what makes a Unicorn b) In fact, I don’t know how much i.e. % age of a factor this is. It’s a correlation.