The transitional segment 🔄

Why startups shouldn’t start with mid-market customers, deftly allaying platform risks, and observations from building an email platform.

Welcome to the 93rd edition of The SaaS Baton.

A fortnightly newsletter that brings you hand-curated pieces of advice drawn from the thoughtful founder-to-founder exchanges and interviews taking place on Relay (curated with 💛 at Chargebee for Startups) and the interwebz. So, stay tuned! 

In this edition, you’ll find the following instructive and inspiring pickings:

#1: TigerEye’s (previously PlanGrid’s) co-founder and CEO, Tracy Young, classifies with great nuance, the three distinct types of mid-market companies and deduces essential clues on how/why (not) to approach this long misunderstood segment. 

#2: Arrows’ co-founder and CEO, Daniel Zarick, explains their early, all-encompassing bet on the HubSpot ecosystem and how they’ve anchored themselves — with deep relationships and enviable common sense — against platform risk. 

#3: Loops’ co-founder and CEO, Chris Frantz, delivers a candid, insightful peek into the “counter-intuitive” things they’ve learned while building amidst the busiest of SaaS categories.

---

Finding these discerning founder takes valuable? Please consider sharing this edition with an ever-curious teammate or a much-cherished SaaS friend. 🙂 New readers can sign up here. 

---

🗞 Recently on Relay:

➡️ Heuristics and Hunches (March 22nd) — Solving B2B Distribution with Viral, Persona-Focused Work Humor, Navigating Growth Plateaus, and Other Notes on Making Singular Bets with tl;dv’s Co-Founder, Raphael Allstadt

— Winning with a uniquely comic approach to awareness
— Why the best marketing is unattributable
— How PMF plays out differently in different categories
— tl;dv’s passionate stance on culture
— Why founders should open up about their struggles

---

#1: The transitional segment 🔄

(From: TigerEye’s Tracy Young) (Source: Tracy writes)

It takes very different skills to build for and compete in SMB versus Enterprise. The mid-market is the transitional segment between the two. Of course, businesses, including TigerEye, build and sell into the mid-market.

I just believe it should not be a startup's initial target market. I define mid market as companies with 100 to 999 employees, but how companies draw their mid-market lines will vary depending on their segmentation needs.

In my experience, mid market has three distinct flavors:

1. Ramping: Mid-market companies that still behave like SMBs.

2. Graduating: Mid-market companies in the process of, or those that have already spent millions in preparation for, scaling to the next level and aspiring to match their enterprise counterparts.

3. Autopilot: Mid-market companies that have hit a wall in terms of total addressable market and rapid growth. 

If you want to sell to the first two mid-market categories I've defined above, it's best to pick one outer lane first, either SMB or Enterprise, which will automatically include either ramping or graduating mid market, respectively.

What we don’t want to do is compete on two fronts, against well-resourced incumbents on one side and hungry startups on the other. Additionally, these different segments have different buying behaviors, so it's best to focus and excel at selling to one segment, refining the sales process before adding more complexity to your business.

Ramping mid-market companies, which have recently graduated into this segment, often experience growing pains. As a result, they are not afraid to make decisions quickly, and adopt new technology to make their days less painful. Most startups can successfully build for ramping mid-market companies by solving a single pain point really well then broadening their feature set later on.

…

In contrast, graduating mid-market companies have more decision-makers across multiple departments, with a greater number of internal processes. These factors often create a kind of red tape that can slow down the evaluation and deployment of new technology. To successfully sell to this group, there are minimum table stakes requirements that you have to meet to get past the front door.

…

Autopilot mid-market companies often have sufficient revenue to place them in the mid-market segment, but their growth has slowed. Typically, these companies are in cash conservation mode, focusing on strategizing new ways to accelerate their growth. When a company faces high-risk challenges like slow growth, it will be more cautious about every penny spent.

To build for the mid-market, early-stage companies need to determine who they want to serve: SMB or Enterprise. It's all about focus and strategically choosing the sweet spot. This doesn't imply ignoring the mid-market's potential; it simply shouldn't be the starting point.

Related Relay reading:

Tray’s founder, Rich Waldron, on how they’ve focused on mid-market from the outset (“I do think the world has changed somewhat from the MM perspective shared above, many of those orgnizations are not only growing faster, but have become more enlighten by what SaaS can provide for them”)

---

#2: Building with/for a giant ⚠️

(From: Arrows’ Daniel Zarick) (Source: Explore Podcast)

HubSpot is 7,000 people. They are over $2b in revenue per year. They have about 200,000 customers. And you start thinking about that and you go…they have a bunch of different products. They have a sales product. They have a marketing product. They have a customer service product. They have an operations/data product. They have a CMS product.

Inside those products are bunch of features, like inside the sales tools, a meeting scheduler like Calendly. There’s a quoting tool like PandaDoc. There’s all these features.

You dig in and you go, ‘alright, are these fully built out?’ Is there meeting tool as functionally built out as Calendly or Chilli Piper? No. Aircall. Gigantic French success story. They are a big partner of HubSpot. They have had a lot of success together. They work very closely together just like Arrows…

But with Aircall, all of their features, phone calling and stuff…HubSpot has phone calling, they have a 50-person team or so working on calling infrastructure. And it is not as good or built out or as mature as Aircall….

What actually happens is, it’s a thing that makes sense. A lot of people wonder this question. ‘Why won’t HubSpot just do this?’ And, frankly, we expect that someday they would want to do what we’re doing. But the reality is we know all the people who would evaluate it.

We have very close relationships with the product teams. We have very close relationships with business development teams. It’s a 7,000-person company. There’s a lot of competing priorities.

A lot of competing teams that have different goals.

So, things actually end up moving much, much slower than a startup can. So, a 20-person team, or a 50-person team working for one year, 1) actually they wouldn’t apply that many people, they’d put like a three-four person team on it unless it’s obvious to them that it’s a big, necessary thing.

If it’s a big, necessary thing, they’d come knocking our doors and say we need to partner somehow. In reality, they just can’t build as quickly, because there’s so much other stuff going on. They’re not building in isolation in a brand new codebase. They are building in a very big, older codebase that has to integrate with a bunch of stuff.

There’s a certain expectation when you build a new feature at HubSpot or any company of that size. So what we’ve found is the thing that we’re doing if you think back to that e-signature like thing. It’s still early. Platforms like them are interesting in partnering with somebody like Arrows.

Because, they go, ‘our customers need this. But it’s not something we can build. We can’t build everything…We’re not actually sure how big of a market this is…’ With $2b in revenue, $500-600m of that is their sales tool. They would need to feel confident that Arrows could add a 100m or 200m new revenue very quickly.

And it’s just not true that that’s obvious yet. It’s not obvious. So we have time before they will feel that they’re missing that functionality in the core product. We hope to prove that the market is big enough that they should want to.

But then, at that point…it’ll actually be mutually beneficial. Because, most likely, they’ll build a lightweight version that will expose a lot of people to using that and then they’ll go, ‘I want more features, more functionality, how do I do that?’ ‘Oh, I should upgrade and add the Arrows add-on.’

It’s like having a stock app, the calendar app on your iPhone and then going I want a more powerful one and you go buy a different one later.

And, in reality, what we’ve done. The thing that people don’t know and we don’t talk about is we’ve built an incredibly close relationship…A great partnership comes from building one-on-one human relationships across the entire org. We’ve done that for the last two years.

We’ve worked very closely with them because we have a shared story of when Arrows succeeds, this is why HubSpot succeeds. Arrows provides this value to the HubSpot platform and their customers, everyone there is bought into that.

For us to eventually get to a point where they’re competing with us, we’d get a heads up, because we’ve built a close relationship.

Related Relay reading:

Daniel on the beginning of this bet and how they deleted a third of their product to make it 10x better (“So while it felt stressful at first to not improve the part of our product we felt was weakest, it became clear that it was more important to spend as much time as possible improving the core product.”)

Rodeo’s co-founder, Ben Fisher, on even-handedly assessing a platform despite having seen the worst from one (“…the reason why I decided to still build Rodeo on top of Shopify was because I really understood the platform. I get, probably better than most, what Shopify cares about and how they make decisions. To add to that, I had built a deep network of merchants.”)

---

#3: “Killer features aren’t real” 🎬

(From: Loops’ Chris Frantz) (Source: Twitter)

counter-intuitive things learned from building an email platform:

- friction is good. a bit of friction during onboarding (domain setup) discourages spammers which gives us more time to support great users. high correlation with platforms with fast onboarding/shared domains and poor deliverability.

- very hard to build nice simple things. we spend much time making sure things look great on all breakpoints on all browsers, is zippy at any contact count etc. once you layer on complexity, api, integrations etc the edge cases abound and it becomes more difficult to build a nice simple thing. but that's where the joy for the customer is so important to keep chasing it.

- the giant metrics dashboard. we have large companies using loops. zero have asked for that huge dashboard with metrics as a homescreen like every other email tool. instead our app looks more like a project management or notes tool which we think is nice?

- sending based on opens/clicks. this is a flawed metric. users want this, we'll probably add it to stop the requests but not looking forward to the support for this one. don't do this.

- split testing. most users think they want split testing then test against flawed metrics (open/click rate). the best teams test against calculated metrics in a dedicated attribution tool and manually run tests. by just not building that automated feature we've weeded out users running crappy tests and coming to the wrong conclusions and not impacted our best users.

- free plan. it's important, we stand by it but best users will always be switching vs starting which means they send an email and go through their checklist. most of our cancellations come from free to paid users who end up shutting down their company.

- integrations good. not all "partners" good. most are tho.

- making general scalable ui components is great till you realize you need to rework an entire feature that requires you to then rework another component then check every component it touches. lots of trade-offs.

- any time a user asks "what's the killer feature" it's an opportunity to pitch the whole app. killer features aren't real, the entire experience needs to be real.

that's it, just a brain dump, back to work

Related Relay reading:

Chris on why they’re building in a “won and done” category (“You’ll find remarkably low NPS scores across the category. Nobody actually likes the tool they’re using. And as it’s also difficult to quit or migrate from these, a customer sticks with terrible solutions and pays through their nose for way too long.”)

---

🤝 Founder social:

---

Thanks for reading! 🌻

Team Relay (Chargebee for Startups)