As investors focus more on profitability, product-focused startups may hold up well – TechCrunch
Product-focused companies are twice as likely as their sales-focused counterparts to grow more than 100% year-over-year, new report finds
Should SaaS companies contact as many users as possible in the hope of converting them from free to paid?
Best-in-class companies don’t, according to a new survey-based report. According to OpenView’s third annual Product Benchmarking Report, which the venture capital firm featured in a blog post, “the most outstanding PLG companies achieve just 14% of signups on average.”
PLG stands for product-driven growth, which has been exemplified by companies like Calendly and Netlify, and which OpenView defines as “a growth model where product usage drives acquisition, retention, and expansion. client”. The venture capital firm considers the most outstanding PLG companies to be those that “are experiencing consistent growth of 30% or more at scale, have surpassed $30 million in revenue, and are household names.”
There appears to be a strong correlation between PLG model usage and raw growth, according to OpenView’s report.
“Respondents from product-focused companies, especially those with a freemium model, are more than 2x more likely to experience rapid growth (over 100% year-over-year revenue growth) than sales-oriented models. The latter refers to the opposite of PLG, ie models in which new customers are brought in by sales teams.
The fact that PLG is driving growth may explain why the sales model has become increasingly common among SaaS companies. This fact is reflected in OpenView’s survey sample, but also more broadly. Asked about Bessemer Venture Partners’ Cloud 100 Index, Partner Marie d’Onofrio told TechCrunch that “over the past few years, the proportion of product-focused companies has increased in the Cloud 100, both on a cumulative valuation basis and on a count basis.”
This increase in PLG adoption occurred at a time when markets were rewarding growth. But as we reported, public market data compiled by Battery Ventures shows that in the current downturn, investors have reversed their weighting of growth versus profitability. Is PLG a bad choice for these new times? Probably not, it turns out.
To understand how PLG can perform in changing market conditions, we spoke with OpenView’s report authors, VP of Growth Sam Richard and partner Kyle Poyar. We also collected notes from D’Onofrio and former editor of TechCrunch Josh Constine, now a venture capital partner at SignalFire. The consensus is that now is the time for the kind of lean growth that PLG can achieve.
Growth or profit?
“Investors have forgotten all about the rule of 40,” which states that growth rate plus profitability in percentage terms must equal 40, OpenView observed last November. How quickly things change! We were reporting on the company’s annual financial and operational benchmarks report, which showed that at the time, software companies were being rewarded for 30% or more revenue growth, with profitability rising in the background.