Characteristics of SMB SaaS success — Weave
What does a successful SaaS business look like? Weave is an example (NYSE: WEAV). We dug through WEAV’s latest quarterly filing and below are some of the structural and business practices that make them valuable.
What they do. Founded in 2011, Weave is a leading all-in-one customer communications and engagement software platform for small and medium-sized businesses
Lots of recurring revenue, even for hardware. 95% of revenue was from recurring subscription fees charged to access our software platform and phone services, including recurring hardware fees. 41% of customers pay annually while the rest pay monthly.
Incentive annual subscriptions with a discount. To incentivize annual payments, we offer pricing concessions that apply ratably over the twelve-month subscription plan.
Installation and onboarding revenue are loss leaders, but core to customer acquisition. We utilize our onboarding services and phone hardware as customer acquisition tools and price them competitively to lower the barriers to entry for new customers adopting our platform. As a result, the variable cost associated with providing phone hardware and onboarding assistance has historically exceeded the related revenue, resulting in negative gross profit for each. The revenue and related costs associated with onboarding new customers are typically non-recurring, and are primarily associated with the initial setup of a customer’s software and phone system. We consider the net costs of onboarding and hardware, in addition to our sales and marketing activities, to be core elements of our customer acquisition approach.
Net dollar retention is driven by the upsell of new products, and not releasing new product frequently can hurt NDR. Our dollar-based net retention rate decreased to 101% at September 30, 2022 from 104% at September 30, 2021, reflecting an anticipated decline as compared to the successful Weave Payments initial product rollout and upsell efforts we experienced continuing into the first half of 2021.
Innovation has to be continuous. We continue to add new products and functionality to our platform, broadening our use cases and applicability for different customers. In short, our ability to add new SMB customers is dependent on the features and functionality we add to our platform for small businesses, particularly in our core specialty healthcare verticals.
How to diversify into new verticals. Entering a new industry vertical includes identifying, evaluating, developing and launching the new offering. We create functionality specific to the new industry vertical and then integrate that functionality with the primary systems of record in that vertical. We started in dental and have since successfully expanded to optometry and veterinary, among other areas. In the near term, while we intend to continue to grow within our core vertical markets, we are focused on additional expansion opportunities. We believe expansion into adjacent markets, such as home services, diversifies our end-market exposure and creates a flywheel effect.
Stick to software. Vertical integration (install services) didn’t work. In the first quarter of 2020, we launched a nationwide installation program (the “Installation Program”), and began encouraging all new customers to use an on-site technician to configure phone hardware, install our platform software and assist with network upgrades recommended to optimize platform performance. While the Installation Program increased our revenue in 2020, it also increased our onboarding costs substantially. This program was phased out during the second half of 2021, resulting in limited impact to revenue and cost of revenue. Following this change, our customers now directly engage with third-party independent contractors to configure hardware, install the software and assist with upgrades, for which we do not derive any revenue.
Financials. Retention is good, with net dollar retention of 101% and gross dollar retention of 94%. Revenue to loss is 3.0x although YOY growth could use improvement at that level (21%). Revenue in Q3 was $36mm and net loss was $11.8mm.
Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com and email directly at sammy@blossomstreetventures.com. We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 100%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.
