Why product eats go-to-market for lunch

The most important thing I've learned about software investing.

The chart above shows two actual SaaS companies¹ from Toba's portfolio that were launched within a few years of each other. The y-axis is ending ARR by year (in millions); the x-axis are years from inception. Let’s call these businesses Company GTM (go-to-market) and Company Product.

Company GTM was a company that had an incredibly potent ability to close new customers quickly and efficiently. It had especially fast sales cycles and multiple effective sales channels, all of which delivered new customers in high volume. Its founders came from various high-growth enterprises (though none in the current business's target market) and knew everything there is to know about Always Be Closing. Unfortunately it also had a product that was, although in no way "bad," not especially differentiated or difficult for competitors to replicate. As a consequence, retention started off decent but became progressively worse as new competitors entered the market at lower price points. Despite the fast start, this business's category eventually commoditized, and their R&D engine was not strong enough to innovate its way out of the churn trap.

Company Product, on the other hand, had a highly differentiated and complex product serving a use case that no other vendors had thought to solve. The founders had been practitioners in the market that they sold into, and so deeply understood the pain that they had built the product to fix. By the time new competitors had entered the space, the company and its reputation were solidified enough that retention never really dipped from the place it started from, which was excellent. At the same time, the company didn't possess much inherent "sales DNA," and it took them an exceedingly long time (and a succession of VPs of Sales and VPs of Marketing) to finally crack the code on how to efficiently grow revenues. Compared to Company GTM, sales cycles and CAC payback periods were always a lot longer, and consequently the company burned a whole lot more capital in its early years, making it seem like a much less efficient business.

So what happened?

Company GTM obviously grew quite quickly in its first 4 years. Headcount expanded exponentially. VCs jockeyed for a chance to be introduced to the CEO. Although churn was extant, the sheer pace of new bookings meant that it really didn't seem to matter. Company GTM seemed to be on a collision course with >$50m revenues and eventually total market domination.

Conversely, Company Product started out as kind of an enigma. Growth was okay but unspectacular. Existing customers might have been very happy (and rarely churned) but prospects didn't seem to be in a hurry to buy. To the extent that VCs were interested in even taking a meeting with the company, virtually all of them passed, citing poor sales efficiency metrics and too much cash burn coming out of R&D.

For the first 3 or 4 years, it felt like Company GTM was an early potential fund-returning home run and Company Product was probably just a base hit. But something interesting was happening underneath the surface of each company, something that you could feel long before you could prove it with numbers — at Company Product things were getting easier over time, and at Company GTM everything was getting harder.

• Company Product had built up a base of hundreds of happy customers that not only loved the product and renewed/expanded, but brought the product into new companies whenever they changed jobs. Because they had built up a constituency of raving brand advocates, word-of-mouth drove larger pipelines and faster sales. Eventually they attracted experienced sales and marketing executives who build a legitimate go-to-market engine on top of it this strong foundation. In short: The company that started out with more product DNA was able to develop its sales DNA over time. How come? Because the sellers had an awesome product to sell!

• Whereas Company GTM found its churn and customer satisfaction issues becoming more and more insurmountable with scale. At the same churn rate, a $20m revenue company has to replace 10x as many customers each year as a $2m revenue company, and in this instance the churn rates were actually getting worse over time. A series of externally recruited CTOs were unable to develop a "product culture" in the midst of a company that was more oriented around the boiler room environment of the sales pit. New bookings remained very high, but net new ARR began to drop as churn cut out all the gains from new customers coming in. The company eventually found itself in a place where they had to keep burning cash just to keep revenues from falling.

By year 8, the difference in outcomes was… vast.

The story of these two companies is essentially the fable of the tortoise and the hare. The business with only a terrific go-to-market enjoys the sugar high of quick revenues, but this comes with a ticking time bomb attached…. Build a product good enough to match the story you've been pitching, or perish. Silicon Valley is littered with the tombstones of VC-funded businesses that couldn't deliver on this before the money ran out.

At the end of the day, a business needs both a strong product and GTM to thrive. But if you ask me which one I’d want first, give me product any day of the week.

This post is published in honor of Marty Kacin, the “Product” half of the two-headed monster founding team of KACE Networks, who tragically passed away on January 5th.

1. Numbers were rounded to protect the innocent. Also, these descriptions are composites of a few similar companies.