With HootSuite surpassing 3m users and generating significant revenue, I thought that this would be a good time to reflect on the investment we made back in December 2009 and share what I’ve learned since.
For quick background, I reached out to Ryan, the CEO and founder, in spring 2009. It was apparent that this thing called ‘social media’ was going to be big, but from a risk profile and investment size standpoint getting into something like Twitter or Facebook was difficult to say the least. As we looked around at tools companies, HootSuite’s focus on the marketing stack and businesses seemed like a differentiated approach. Ryan also had a keen focus on the product and vision for the future that really stood out amongst everyone we had spoken with in the space.
Around July, we presented to Hearst management and got approval to lead the Series A. We wanted a co-investor at this early stage and it ultimately took another 5 months to find and close with Blumberg Capital. They too had the vision to understand the need for social media tools and recognized the value of Ryan, his team and what they had built to date.
When we closed the deal, HootSuite had approximately 200k accounts and was in fierce competition with the likes of CoTweet, TweetDeck, PeopleBrowser and even Twitter. Our main concerns were:
- What is the business model? Would users pay or is it an advertising play?
- Can HootSuite succeed in Vancouver? Successful startups traditionally are born in NYC, SF or Boston so it was a bit of an odd duck (this made it very hard to find that initial partner as investors in general are uncomfortable deviating from normal patterns).
- Will it be a winner take all market? We agonized over competitive set for quite some time.
As I look back with HootSuite now a clear leader in the space, the following are some of my key learnings:
- Freemium SaaS is an incredible model. The hurdle for someone to join such a service is low since the bar is free and the product thus markets itself. Switching costs become high over time and with the user investing nothing to get onto the platform, stickiness starts to build quickly — even before the user realizes it. With price not a competitive lever, it then becomes quite difficult for new entrants to gain traction.
- With price not a differentiating factor, product is. It’s all that matters so you need to have a visionary who can not only determine what features go into the product, but also what stays out. Over building and complication is a huge risk.
- Rapid iteration is mission critical. Of all the learnings, this is the least understood and appreciated in the investor community. It’s also the single most important factor to a freemium success, in my opinion. As such, when I look at other freemium software models, I always ask the founder, “What differentiated strategy do you have to scale the dev team”? In the case of HootSuite, it turned out that its biggest perceived weakness (located in Vancouver) was its most important asset. Up there, surrounded by quality dev talent with limited competition, HootSuite has been able to attract A+ people at a fraction of the cost of its competitors. This advantage has only grown as HootSuite now is one of the top tech companies to work for in Canada and can pull from across the entire country.
- Don’t over focus on competition. So long a space is big enough, it can support multiple SaaS solutions. Just look at Box.net and Dropbox or MailChimp and ConstantContant. Both are similar offerings in their space, but each has carved out a unique value proposition that serves a certain segment of the market particularly well.
- Be patient. It can take a long time for a freemium software businesses to scale. If and when success comes, it is not immediately obvious either as the difference between linear and exponential growth is hard to discern when looking at short intervals. I equate it to how people do not seem to change when you look at them every day. However put some time in between meetings, and progression seems obvious. In the case of HootSuite, it took more than a year after funding to add a million users. Now that takes just a few months.
Bottom line, if you convince yourself that it’s a big space, you believe in the product chops of the founder and he/she has a differentiated strategy to secure talent, you have the recipe for success. Happy hunting!