Co-founder of Outseta
Last month I woke up to a Twitter update that Buildium, where I started my career, had been sold for $580M.
Five hundred and eighty million dollars, I mouthed out loud. Holy fuck.
But I have to admit that $580M number hit much closer to home this time given how intimately involved with Buildium I had been. What started as Dimitris (now my Co-founder at Outseta) writing a few lines of code to collect rent payments from tenants he had living in a duplex in Providence, Rhode Island, turned into something worth hundreds of millions of dollars 15 years later. How the hell does that happen?
In this post I’m going to share the most important lessons about growing a SaaS business that I learned at Buildium—collectively, these things had an awful lot to do with the company being valued so highly.
In late 2009 the economy had tanked and I had a newly minted MBA but no real job experience. I was offered a job as Buildium’s first full-time marketing hire, pulling in a cool $38,400 annually.
To be honest, I wasn’t enormously enthusiastic about this—I’m not techy, so working for a software company wasn’t particularly appealing to me. And working in the property management industry? Let’s just say that didn’t have a whole lot of allure.
But Buildium had found product market fit, and although I didn’t know it yet, I was stumbling into a great situation. I was one of the first 10 or so employees at the company, and over the next five years I was given a remarkable amount of freedom to try new growth strategies, to succeed, and to fail.
We mostly succeeded. When I left Buildium five years later we’d grown from a start-up to a business with more than 12,000 customers and $16M in revenue. I was managing a team of 15 and the company had grown to about 140 employees. I’m proud of all that.
More than anything, I’d fallen in love with the challenge of building a business and helping it grow into its potential. The start-up bug caught me, and it has yet to let go. Along the way I got a PhD in SaaS—I’ve told many people over the years that I benefited tremendously by starting my career in a place where I saw a SaaS start-up “done right.”
I learned a million lessons about SaaS, about start-ups, and about life along the way. In light of the sale of Buildium last month I figured now is as good of a time as any to reflect on the most important ones. What I love about this list is so many of these ideas fly in the face of what we often read about “successful” SaaS start-ups in the media. Without further adieu, let’s dig in.
When I arrived at Buildium, we were selling our product only to residential property managers located in the United States. Having just finished business school, my brain was wired in MBA mode—what were our core competencies as a company?
They were clearly property management and software development, and as someone that was hired to accelerate Buildium’s growth I immediately saw countless opportunities to grow the company by moving into new markets. We could branch out into commercial property management. We could move into new geographies. We could translate the software into Spanish. I raised these ideas several times, and they were consistently shot down.
To this day I’m convinced that an unrelenting focus on the residential property management market in the US was one of the primary drivers of Buildium’s success. I was given free reign to try just about any marketing strategy I wanted, so long as we kept our eye on this market. Since then I’ve seen countless entrepreneurs look overseas or to new markets to accelerate growth almost as soon as they achieve any level of success in their initial target market. 90% of the time this has ended up being a distraction that’s hurt them in the market where they’d just started to win some market share.
The lesson here is simple—don’t be distracted by new or adjacent markets until you’re truly winning and dominating in your own.
Following on the heels of the importance of market focus, I’d like to throw shade on the notion that you can only build a big business if you have a huge total addressable market (TAM). Sure, there’s the obvious reality that the bigger your TAM is the more potential buyers there are. But your product will likely be more generalized and in many cases you won’t be able to serve your target customers with the same level of depth.
Buildium is a great example—when we researched our TAM of small residential property management companies in the US we found that there were about 120,000 potential buyers. That’s a fairly small market, and Buildium currently has about 17,000 customers—some back of the envelope math puts Buildium’s market share at about 14%.
So a company with a 14% share of a relatively small market is sold for $580M—evidence enough for me that TAM is overrated. During my time at Buildium we focused primarily on growing our customer base, but in later years Buildium was able to create a hugely valuable business by selling additional products and services to their existing customers. This included selling additional services like credit card payment processing, tenant background checks, 1099 e-filing services, and renter’s insurance. This required no additional addressable market and also helped to drive down Buildium’s churn rate.
This one sounds obvious and non-controversial—it is—but I think a lot can be learned by looking at how Buildium built its early team. Neither of Buildium’s Co-founders—Michael and Dimitris—are celebrity entrepreneurs. Neither had even had a successful SaaS start-up before; this was their first rodeo.
What they did effectively early on is bring other hugely talented people onto the team before they could afford to pay them their market worth. They did this by paying several of their early employees in sweat equity that they accrued at the same rate as the founders for time spent working on the business. These people—Anil, Bernard, Saro, and others—helped lay a solid foundation for the business and represented talent Buildium could never have afforded outright in the early days. This is a strategy that we’re replicating at Outseta, so far with James our lead designer.
Very few young founders have the lack of ego required to do this; most hold onto every last scrap of equity as if it was their last possession after having been traumatized by the important lessons they learned watching The Social Network. Remember—the equity you hold is not worth anything unless you build something of value.
Only in the past few years have alternative financing structures become popularized in the world of technology start-ups. I remember reading comments about Rand Fishkin’s fundraising round for Sparktoro last year and it was like a light bulb went off for many entrepreneurs—you can pretty much design any sort of ownership structure for your business that you can dream up!
The Silicon Valley approach of issuing stock options to employees that have a strike price and a 4-year vesting period with a one-year cliff is certainly most familiar to potential investors, but it’s far from your only option.
Buildium was truly ahead of its time in this sense. Looking for a way to create employee loyalty and also ensure that employees participated in the financial success of the business, Buildium issued early employees “Incentive Membership Units” that essentially represented an ownership stake in the business if a liquidity event occurred. The business was structured as an LLC. There was no strike price or vesting schedule associated with these units—they were simply granted to employees based on performance or as a recruiting tool.
This structure was both employee friendly and effective—it’s how most early Buildium employees (including myself) were able to participate in the financial success of the business when a majority stake in Buildium was sold to Sumeru Equity Partners in 2016.
Buildium was 100% bootstrapped—no small angel round or anything like that—until the company reached about $6M in revenue. All the while investors were literally beating the door down, but Michael and Dimitris politely said “no thank you.”
Eventually Buildium did raise some money, but they took the smallest amount of money possible that they thought would make a material difference in the business. The decision to finally raise funding came down to a realization that we were leaving a huge amount of growth potential on the table—at one point we had an LTV:CAC ratio of 16:1 (it was costing us a little over $200 to acquire a customer whose lifetime value was around $3,200).
At this point Buildium raised $2M from K1 Capital, investing the money primarily in marketing and hiring. Only once we’d proven that we could deploy that money cost effectively did we raise a $12M series A, then eventually a $65M series B.
In each case these were carefully measured, logical next steps in the growth of the business—fundraising was never viewed as an outcome and the company never raised more than it could deliberately put to use. Buildium has had positive relationships with their investors and generated enormous returns for all of them as a result.
A personal pet peeve of mine is this notion in the world of SaaS that revenue that’s not recurring is essentially useless and doesn’t impact a company’s valuation. I understand the benefits of a recurring revenue stream, but money is money—at the very least non-recurring revenue can still be used to pay salaries or fund marketing campaigns that do generate recurring revenue. If you’re sitting on an opportunity to grow a non-recurring revenue stream, don’t immediately ignore it because an investor (or anyone else) tells you to.
Buildium’s valuation highlights how the idea that all revenue needs to be recurring doesn’t take any sort of nuance into consideration. A huge percentage of Buildium’s revenues come not from subscriptions, but instead from pay-per-use payment processing revenues when tenants pay their rent online. While these revenues are pay-per-use, rent payments are both large and regular. You better believe that the 11x valuation multiple that Buildium was sold at took this revenue into account and valued it essentially as a recurring revenue stream. The devil is in the details.
Michael and Dimitris wrote the company’s mission on the wall of our offices:
““Our mission is to help small businesses succeed while setting the highest standard for how business is done.”
— Buildium Mission Statement
That last bit sounds a lot like corporate mumbo-jumbo, but they went to painstaking lengths to make sure it was upheld. Like any business Buildium had some bumps along the way, but there was never a failure of ethics coming out of these two.
During my time at Buildium I witnessed multiple instances where financial rewards were paid out to employees when there was no legal obligation to do so—it was simply seen as the right thing to do. I’m not talking about a Christmas bonus; I’m talking about significant payouts on unvested equity, in some instances coming directly out of the pockets of the founders.
I’ve learned over the years that this is exceedingly rare in SaaS and many of the well known entrepreneurs that are celebrated in our industry simply don’t act this way behind closed doors. We all need to be more cognizant of who we choose to do business with.
The behavior I witnessed didn’t just pertain to how financial rewards were delivered, but also to how people were treated when they were let go, how difficult customers were handled, and even how the company talked about its competitors. It’s very easy to put on the public facade of a good and decent business person; it’s a totally different thing to act this way when no one else is looking.
Buildium sells a relatively low price point product to a market of non-technical buyers—as a result the company had to make significant investments in customer service and generally had to support a large customer base with a relatively small number of employees. To operate profitably, particularly in the early days, Buildium simply could not afford to offer top of the market salaries—this was a reality of the company’s business model.
As a result, Buildium took many chances on up and coming talent—myself included. Buildium took many, many employees with literally no job experience in a particular area and dramatically accelerated their careers.
Taking a shot on up-and-comers is not unique, but in my experience most companies do this when they either undervalue what a more experienced hire can bring to the table or when they are simply trying to put a butt in a chair. What made Buildium so successful with this strategy is the company invested heavily in the professional development of their up-and-comers.
For me, Peter Cohen—a SaaS marketer with 20+ years of experience—was initially hired to provide mentorship. Later on, Nancie Frietas—the CMO who took Constant Contact from $15M in revenue to $250M in revenue over 5 years—was hired to further develop my skills. It felt like Michael Jordan had been hired to teach me to shoot free throws. I certainly wouldn’t have been as successful without the support I was given.
I mentioned Buildium had a low price point product and needed to invest heavily in customer service—in the early days that meant that we couldn’t add much headcount in other areas of the business. As a result, Buildium grew to $15M in revenue with a sales team that was most often just two sales reps. You read that right—two! Some months 75% of the sales that we made would close without ever talking to a salesperson. That’s a massive competitive advantage.
“Buildium grew to $15M in revenue with a sales team that was most often just two sales reps. You read that right—two!
This meant that we spent a lot of time optimizing our free trial experience, working to enable what’s now commonly called product led growth. It was never perfect, but it was far cheaper than hiring a large sales team—this is a perfect example of financial constraints actually benefiting a business. Buildium would build out a bigger sales team in later years when funding rounds allowed them to do so, focusing the team primarily on selling larger accounts and add-on services to the existing customer base. But the company’s early growth wasn’t fueled by a heavy investment in sales.
It’s worth noting that this kind of advantage can be realized in other areas of your business, too. For example, Qualified is a SaaS business that sells to a very technically savvy buyer that needs little hand holding when it comes to using their product. As a result, the company doesn’t need to make the investments in customer service that Buildium did—it makes much more sense for them to invest in the growth of their sales team. In any SaaS business there’s almost always a function where it’s just not mission critical to build out a team with a lot of employees. Use that as an opportunity and a competitive advantage.
There’s so much written about how the role of the modern CMO has evolved and how important technical and analytical skills have become. Sure, digital marketing spits off a wake of data and you’re likely going to be working with a bunch of software tools. But I passionately believe that developing a solid grasp and understanding of user experience is a much more important skill for marketers to develop.
In the early days at Buildium I remember feeling frustrated that I couldn’t easily make edits to our website without involving a developer—as a resource constrained team, I felt like I was being held up. I asked Nancie, my mentor, if I should take a course to learn HTML and CSS—her answer surprised me:
Her point was the role of head of marketing is big enough—there were plenty of other skills that I needed to develop that I was much more naturally inclined towards. In retrospect this is some of the best career advice I’ve received to date.
On the flip side, Coryndon Luxmoore started as VP of User Experience at Buildium shortly after I started. Over the next 5 years, pretty much every marketing campaign that I brought to Coryndon he tore to shreds. This was Coryndon’s unique style of tough love, but it was always backed up with very specific advice on how to better consider the user experience in my marketing campaigns. This went way beyond simple landing page optimizations, and whenever we seemed to hit a growth plateau it was usually an experiment with a dramatically different user experience that helped us break through.
Improve the user experience of your website, your product, or your onboarding sequences and the performance of all of your marketing campaigns improves in parallel.
Paid advertising has gotten a bad rap lately in the world of SaaS, and for the most part with good reason—the costs associated with advertising on sites like Google, Facebook, and Linkedin have risen dramatically while the results most marketers have realized from these channels have deteriorated.
While that’s the case, paid advertising was always a key—and highly effective—component of Buildium’s customer acquisition strategy. Dimitris was the first person to manage paid advertising spending at Buildium and initially he thought he’d tapped out on the opportunity that Google Adwords represented at about $2,000 per month in spending. Fast forward five years, and we’d be spending over $100,000 per month while generating a fantastic ROI.
These sort of results can still be achieved with paid ads, but very few companies in SaaS have the stomach or discipline to do it. With the help of Working Planet Marketing Group, we reached what I consider the promised land of paid advertising for SaaS companies. We got to the point where we evaluated our monthly spending against the cohort of customers that it generated, but we also followed each cohort of customers over time and modeled in both expansion and churned revenue to truly understand the lifetime value of each cohort versus our advertising costs.
“We got to the point where we evaluated our monthly spending against the cohort of customers that it generated, but we also followed each cohort of customers over time and modeled in both expansion and churned revenue to truly understand the lifetime value of each cohort versus our advertising costs.
90% of companies I’ve come across understand conceptually that they should be working towards this but come up short of actually realizing it. There’s two reasons for this:
Soren Ryherd from Working Planet articulates the benefit of paid advertising over other channels very directly saying, “It’s easier and faster to execute with paid advertising, and to optimize to a financial outcome, than it is to with say content marketing, or SEO, or PR.”
This continues to be true and is most often neglected.
I left Buildium after five years, but it wasn’t because I thought there were greener pastures elsewhere—frankly, I sort of knew in my heart of hearts that there weren’t. Pulling myself away from a company I’d grown to love, that had done so much for me, was one of the hardest professional decisions I’ve had to make. There was a frog in my throat as I told the team I was leaving.
I left because Buildium was the first job I’d ever really had. I’d worked hard at it for five years and had learned a ton, but I felt that I had to diversify my experience and prove that I could make a similar impact elsewhere in order to keep growing. In retrospect whether or not I made the right decision is sort of a toss up for me, but my reasoning and motivations were sound.
After I left, Buildium continued to grow up. I kept in contact with many of my old co-workers, and soon became something of a confidant for many of them. “Buildium isn’t the same as it used to be,” they’d tell me. “It’s more hectic, less family like, it just doesn’t have quite the same feel,” they’d say.
Well no shit, I’d think to myself. That’s part of what comes with growing from 10 to 140 employees in a few years. That’s part of what comes with success—these are good problems! Let’s not ignore the other things that came along with that growth—promotions, raises, and payouts on equity, for example.
Buildium experienced some growing pains as any rapidly scaling company does—but they were always very, very minor and Buildium was always a fantastic place to work. Some people lost sight of that and left—many of them eventually returned or very quickly realized how good they had it after landing elsewhere.
It bothers me that this is so common in great companies, that this is so deeply ingrained in human nature. One lesson I walked away with is when you land in a truly great company, be smart enough to recognize it, cherish it, and ride it for as long as you’re learning and your work is being appreciated. Don’t expect it to be perfect.
“One lesson I walked away with is when you land in a truly great company, be smart enough to recognize it, cherish it, and ride it for as long as you’re learning and your work is being appreciated. Don’t expect it to be perfect.
The importance of culture is talked about a lot—rightfully so. Patrick Lencioni’s book The Advantage was arguably the biggest influence on Buildium’s growth throughout my time there. The point of the book is very straightforward—organizational health is the single biggest competitive advantage a business can have. If you have a high-functioning and aligned team that can respectfully disagree with each other yet still make decisions and execute, you can overcome just about any challenge in business. On the flip side you can have every market advantage in the world, but if your organization isn’t healthy it’s only a matter of time until you reach your demise. I believe this to be true.
Plenty of people disagreed with me at Buildium and I disagreed with many people too, but I never questioned that it was done with any objective in mind except the betterment of the business. Everything from the money spent on company events and retreats to hiring executive coaches and mentors was designed to create a healthy, high functioning team. I think we did pretty damn well in that regard—this probably had more to do with Buildium selling for $580M than anything else.
Thanks for taking the time to read these thoughts—they represent a lot of learnings that were packed into five short years. I consider myself exceedingly lucky to be able to say that Buildium was a big part of my professional journey.
Congratulations to all of the Buildians, old and new!
Outseta was spun out of our experience at Buildium as we reflected on the technology decisions we made while bootstrapping the business to $6M in revenue—it’s the technology stack we wish existed at the time. If you’re bootstrapping an early stage SaaS start-up, we’d love it if you’d give Outseta a try. Create your free account.
(Originally published here)