“Don’t start a tech-enabled service” 👩‍💻

The service/SaaS tightrope, why PMs made up for a uniquely difficult persona, and the beautiful utility of constraints.

May 09, 2024

Welcome to the 96th 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: Pilot’s co-founder and CEO, Waseem Daher, makes a sharp-edged case against building a particular type of business — “lots of smart people have started…with this exact thesis…Almost all of them have failed” — that they themselves have been crafting successfully for years.

#2: Panobi’s co-founder (previously, Slack’s Head of Growth), Merci Victoria Grace, lifts the potentially dizzying fog of shutting down her startup with an immediate, exacting critique of their original assumptions and concludes what likely went wrong.

#3: Canopy’s (previously, Know Your Team) CEO, Claire Lew, writes evocatively about the practical (and the philosophical) realizations she had after accomplishing an all-encompassing, time-boxed rebrand as a 3-person team.

#1: “Don’t start a tech-enabled service” 👩‍💻

(From: Pilot’s Waseem Daher) (Source: Startup Real Talk)

Here’s what makes it tough:
You’re going to fool yourself with traction
Congratulations: your {law firm, accounting firm, recruiting firm, travel agent, executive assistant, SDR, website design} service just launched.
You work your network to validate the idea, and you’re able to get your first few customers. You delight your customers by unscalably providing the service yourself, by hand, as you write the first few lines of code.
You continue to do this, it goes well, and you grow the team to keep up with demand—and one day you wake up and you’ve hit the holy grail $1M ARR mark.
You’re crushing it, right?
Well, yes and no. Congratulations: you have built yourself a nice accounting practice. The problem is that you’ve validated that you could start a small accounting firm. Unfortunately, it’s well-known that this is possible: there are literally thousands of small accounting firms in the United States.
The hard part isn’t the first $1m. It’s the first $10m, where you really start to feel the pain of scaling beyond where a normal services firm goes. Your initial signals of success actually lead you astray. You think you’re winning, but your early progress has nothing to do with whether or not you can achieve scale.
And the reason that achieving scale is hard is because…
You’re not going to achieve 100% automation
As you start to tackle the problem, you’ll learn that software can do a lot of the heavy lifting. You’ll also learn that it can’t do 100% of it.
That’s a problem, because your customer will not tolerate the problem being only 95% solved. Their alternative is “work with a legacy accountant,” which can, by definition, provide 100% of the service to them.
(Separately, my view on Pilot is: even if the computer could do 100% of the task, you’d still want a talented accountant in the loop, to provide a compelling customer experience for your client.)
So you are necessarily going to have to staff up a fairly large team of accountants.
Which means…
It’s the worst of both worlds
Imagine all the hard parts of running a B2B SaaS software company. Now add in all of the hard parts of running an accounting firm. Congratulations, this is your new life.
…
You’re going to have bad margins
Your margins want to be bad. By default, you’re a services firm, and services firms have bad margins. (They certainly do not have SaaS margins.) Those margins tend to get worse, not better, with scale—because scale requires overhead.
Unless you’re paying very close attention, you will be unhappy with the margin profile of the business. More importantly, your investors will be unhappy with the margin profile of the business.
The single most common reason that investors passed on the Series A, Series B, and Series C was “I just don’t believe that the margin profile will actually be good.”
They happen to be wrong in the case of Pilot specifically, but this is absolutely one of the main causes of death of this shape of business. You’re unprofitable and your margins are bad, but you continue scaling. One day you wake up without access to further capital and unsustainable burn, and you have to shutter the business.
Good luck
I’m very bullish on this sort of company. (If I weren’t, I wouldn’t be running one.) I think a number of iconic, enduring companies are going to be formed using this model—and it’s going to be amazing for customers.
But it’s definitely going to be a slog.
To the founders of the new crop of “Pilot for X”—best of luck!

Related Relay reading:

Basis’ co-founder, Bebe Kim, on failing to build a tech-enabled law firm and how that influenced her next venture (“The experience of co-founding and shutting down my next business, Atrium, came with a lot of lessons, and reframed a lot of the perceptions that usually dictate Silicon Valley bets.”)

#2: (Controversial) takes from not finding PMF ♨️

(From: Panobi’s Merci Victoria Grace) (Source: LinkedIn)

1️⃣ I’ll never do my own customer research again. People are too nice to your face. In the future I’ll only have proxies do my interviews for me and remain just doing founder sales myself.
2️⃣ I’ll also reach out to folks at companies that are struggling to see what problems are painful for them. I didn’t grok until too late that my challenges running growth at Slack were champagne problems… and so were the problems of the successful companies that I spent most of my customer development time with like Notion, Figma, and Postman.
3️⃣ Most individual contributors like their silos, they feel safe in them. If your product requires individual PMs to opt into a new system – of which the primary benefits accrue to the larger org and not the person themselves – I think it won’t work.
4️⃣ On one hand, a silo is a prison where people feel trapped and frustrated. This is probably a high performer mindset. But most people are – statistically speaking – average performers.
5️⃣ On the other hand, a silo is more like a private office compared to an open floor plan where your monitor is always in view of your colleagues and your boss. People with this mindset who are working outside of their silo feel exposed and unable to control how they and their work is perceived.
6️⃣ Only executives and high performers care about disrupting silos because they either have or feel they have the agency to create meaning out of a more comprehensive data set.
7️⃣ Most people value the small tuning work that they do to present a story around data. They don’t actually want the data to be shared with anyone at the company without their ability to interpret it for them.
8️⃣ Most people don’t want to be more efficient. They feel like the time they spend moving data around, updating docs, and holding update-based meetings is actually what they get paid to do instead of busywork that steals time from driving outcomes.
9️⃣ It’s also possible that people who become PMs simply... enjoy creating and updating docs?
🤔 🔥

Related Relay reading:

Kairn’s co-founder, Patricia Bernasconi, on how building too close to user love became a problem (“What we mistakenly assumed from the problem validation research was that just because teams (yes, not just people) already pay for project management apps, they’d be willing to pay for a new one.”)

#3: Lessons from a 3-week rebrand 🌳

(From: Canopy’s Claire Lew) (Source: Canopy Newsletter)

As CEO, here are my 4 personal biggest takeaways from doing a 3-week rebrand…
(1) Be willing to walk away.
With each passing day that we worked on the rebrand, I would pause, and ask our team: “Are we happy with where this is at? Does it make sense to continue? We can always turn back. We can always walk away.”
If we didn’t find a new name we liked in 1 week, we wouldn’t continue.
If we didn’t come up with a logo we liked by end of the 2nd week, we’d stop.
We would do the rebrand if and only if, each step of the way, we felt that it was 100% what was best for the business and for our customers. We always gave ourselves the option to walk away.
Sunk cost fallacy is seductive swamp – and avoiding it means being explicit about the other roads through the woods we could take.
After all, we didn’t have to change our company name. Our previous company name (“Know Your Team”) was just fine. It’d worked well enough for the past 10 years. It probably could work pretty well for the next ten.
We didn’t have to change anything. Keeping that perspective, and giving ourselves permission to change our mind, helped stay calm throughout the process.
…
(2) Accept the existential.
…
A rebrand is a much more emotional process than we credit it as. It’s not like choosing a new marketing channel, or deciding you’re going all-in on a different product strategy. Rebranding is an inherently personal, subjective decision. There really isn’t anyone who can tell you what the “right” name is or “right” logo is, no matter how much research you do, how many books you read, or how many podcasts you listen to.
So accept the subjectivity. Know that for the most part, you’re leaning on personal taste. Of course, do root it in what you can find to be objective, as it makes sense (for example, how does this actually support your vision and business goals). But don’t be surprised by the emotional nature of the process.
Acknowledge and accept the existential identity crisis it will undoubtedly trigger.
(3) Keep the decision committee small.
When you rebrand, it’s tempting to crowdsource opinions. However, often the more voices in the room, the harder it is to hear any voice.
As a result, we kept the decision committee exceedingly small. Just 3 people: Myself (CEO), co-founder and CTO Daniel, and our designer James. Then, I would have final say on the decision.
We’re a small company to begin with, so we don't have precedents for 20-person committees, which is helpful. But this intentional move to make sure only 3 people were the ones contributing names, giving feedback on logo kept us moving fast.
…
(4) Prioritize only what people are going to care about.
When you start creating the list of to-dos for a rebrand, you start to realize very quickly that there’s a million things you’d like to change.
Logo appears in X thousand many places. Name is fossilized in X hundreds of podcasts, videos, other assets.
The list starts to become overwhelming long.
So we decided to be ruthless about was only changing what was absolutely necessary – and that’s it.
No one’s really going to care if the logo isn’t updated on an obscure marketing PDF right away.
As long as we covered the basics, we were good.
…
Full caveat, it’s still a lot of work. Whether it’s 3 weeks, 3 months, or a year – whatever time you set aside for your rebrand (or any big project) will feel exhausting.
I needed real time to rest, after we launched the rebrand. And I think I still need more recovery time, more than I’m willing to admit.
The lessons I shared here are by no means a “shortcut” or hack. No, no, no. All meaningful, high-quality projects require effort and time.
Rather, I hope they give insight into how a big meaty project can be done on a shorter timescale with a smaller team, than we originally think.