As investors focus more on profitability, product-driven startups could be sitting pretty – Vidak For Congress

Product-driven companies are twice as likely as sales-driven colleagues to grow more than 100% YOY, new report finds

As investors focus more on profitability, product-driven startups could be sitting pretty - Vidak For Congress 1

Should SaaS companies contacting as many of their users as possible in hopes of converting them from free to paid?

Best-in-class companies don’t, according to a new survey-based report. According to OpenView’s third annual product benchmark report, which the VC firm presented in a blog post, “high-profile PLG companies only reach 14% of signups on average.”

PLG stands for product-driven growth, exemplified by companies such as Calendly and Netlify, and which OpenView defines as “a growth model where product use drives customer acquisition, retention and expansion.” The VC firm considers standout PLG companies to be those that “grow consistently at or above 30% at scale, have exceeded $30 million in revenue, and are household names.”

There appears to be a strong correlation between using the PLG model and raw growth, the OpenView report found.

“Respondents at product-driven companies, especially those with a freemium model, are more than 2x more likely to grow rapidly (100% + year-over-year revenue growth) than sales-driven models.” The latter refers to the opposite of PLG, i.e. models in which new customers are brought in by sales teams.

The fact that PLG is driving growth may explain why the sales model has become more common among SaaS companies. That fact is reflected in OpenView’s research sample, but also on a larger scale. Asked about Bessemer Venture Partners’ Cloud 100 index, partner Mary D’Onofrio told Vidak For Congress that “in recent years, the proportion of product-driven companies in the Cloud 100 has grown, both on a cumulative valuation basis and on a count-based basis.”

This increase in PLG adoption came at a time when markets rewarded growth. But as we reported, public market data collected by Battery Ventures shows that in the current downturn, investors have flipped their weighting on growth versus profitability. Does PLG not fit these new times? Probably not, as it turns out.

To understand how PLG may operate under changing market conditions, we spoke with the OpenView report authors, VP of Growth Sam Richard and partner Kyle Poyar. We’ve also collected notes from: D’Onofrio and former Vidak For Congress editor Josh Constine, now a venture partner at SignalFire. The consensus is that now is a good time for the type of lean growth PLG can achieve.

Growth or profit?

“Investors have completely forgotten about the rule of 40,” which states that growth rate plus profitability should equal 40 percentage-wise, OpenView noted last November. How fast things change! We reported on the company’s annual financial and operational benchmark report, which found that software companies were rewarded for 30% or more revenue growth at the time, with profitability in the background.

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