SaaS Marketplaces vs. Middleware, Embedded Finance, and Urban Income Inflection Points thanks to January Capital - E246

In the latest episode of BRAVE, Jeremy Au and Shiyan Koh analyze January Capital's monthly report on Southeast Asia, focusing on the region's marketplaces with low margins. They delve into how these marketplaces are leveraging embedded finance to increase their profit margins, while also considering the role of retention in simplifying their operations. Furthermore, the discussion also touches upon the shifting trends in the SaaS landscape of Southeast Asia.

Download the January Capital report here.

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Jeremy Au: (01:35)

Morning, Shiyan. Another day, another week.

Shiyan Koh: (01:40)

Good morning. It's 7:00 AM, that's pretty awesome. Let's do it. Who's ready to talk about software?

Jeremy Au: (01:47)

Software, software, software. And of course this week the report of the month would be January Capital, with the report on Southeast Asia. We have digested, they have 40 over slides, not 332 pages with dear friends at Asia Partners. But interesting summary and you and I have spent our time reading and rereading it. And I think let's talk about it. I think before we jump into specific favourites or insights and debates what your general feel for the January Capital report was?

Shiyan Koh: (02:16)

I think it was a good summarization. I think they did a nice job with the company details. All you venture capital associates out there, someone has done your job, they've put everything on a landscape, and they've arranged the logos nicely.

And I think it's nice to see a bunch of the players on a single slide. I think it's also great to see some of history and timeline evolution. So they kind of plotted some of that stuff. And it's nice to see the growth of the specific sub-sectors that they highlight. I think there's clear inspiration from some of the Asia Partners’ work, I think particularly on the talent slides.

And I think what's most exciting is for us to kind of just discuss the three kinds of trends that they highlight and riff a little bit on what we think about those. And I think it coincides nicely. One of their trends is around SaaS. SaaS for the world built out of Southeast Asia, SaaS for the region. And you're going to SaaStr today, right? It seems like a good time to talk about all things SaaS.

Jeremy Au: (03:14)

Yeah, and I think for me, I definitely resonate with the fact that Asia Partners has pioneered, I think, the talent mafia analysis approach. And I think definitely see that DNA kind of like ripple into, obviously in our own conversations, but also into the January Capital report. And I think we'll probably see that replicated a lot more as a thesis point in future reports that VCs will do to the LPs and in their AGMs and in their industry reports. One thing I do think about at a high level.

I think January Capital is interesting because they're the sister organization of Venture Capital Insights, right? Which is, I think there's proprietary database of transactions in Southeast Asia. And of course they're pulling from, not only from Crunchbase and PitchBook, but also from the kind of private market financial announcement transactions, right? And so I think what was interesting in my head was that I felt like overall their debt around some of the numbers, at least around funding rounds and especially per country breakdowns, were higher resolution than most VCs would have done with this Crunchbase or PitchBook. So I would probably say that this, I think, probably will end up being one of the gold standards I think for sizing the deal velocity changes quarter by country. I think people are gonna trust this a little bit more than I think some of the other approaches to ballpark those numbers.

Shiyan Koh: (04:32)

Yeah, I do know that some funds manage their own databases. And so obviously there's some stuff that is private that isn't publicly reported and they use that for their own internal analysis. But yeah, I think from what is publicly available and freely shareable, I think this is a really good place to start.

Jeremy Au: (04:48)

Yeah. And on that note, what would you think was your one key inside or your favourite slide of the lot?

Shiyan Koh: (04:53)

My favourite slide? I think probably like the core focus areas, right? So what is slide 17? I think talking about the digitization of commerce, financial services, plumbing, and then the rise of SaaS, I think brings like a nice focus to what they're interested in and also the why.

And I think it helps people also better understand how the ecosystem has evolved over the last 10 years and why these are kind of the things folks are looking at to push to drive that next leg of growth.

Jeremy Au: (05:33)

Yeah. And they spelled them out. I think the three big trends is digitization of commerce. The second one is plumbing of financial services, and the third is the rise of Southeasts Asian SaaS. For those who can see the deck, feel free to go to www.bravesea.com to download the report. Obviously go to January Capital directly.

And so I thought the 0.1 about digitization of commerce obviously feels it's, I don't think it's late, but it feels we are definitely in full play for that digitization of commerce. I think we've seen some version of digitization for commerce since Tokopedia, right? and it feels like at least five years in the running right now.

Shiyan Koh: (06:09)

Yeah, I think there's another slide on this which kind of digs into it deeper, which is the first leg of digitization is the marketplace leg, right? Which is like, hey, get all the sellers into one place and get all the buyers into one place and they can see stuff they couldn't see before. There's price comparison, there's some logistics embedded, there's payment rails. And then the next leg is really about how those individual stores break out of the marketplace and start to establish their own sort of brand.com. Going from Amazon to Shopify and have their own direct relationship from customers that are not mediated by the marketplace. And so I think that is kind of an interesting question for me because I don't know whether people are ready to take on the work of running all of their own infrastructure, people wanting to sell more verticalized commerce solutions, whether it's the analytics part, it's price optimization, it's loyalty and discount.

You kind of get those for free when you're in a marketplace. You don't have to think about it. I mean, you have to play by their rules. But at some point people sort of like, hey, I'm doing 10 million of GMV or whatever. I don't wanna deal with Shopee or Lazada. I want to start building direct relationships, and increase my margins, but then they need a whole other set of competencies and teammates basically who can handle some of these other SaaS tools. So I think I'm curious to kind of see how that plays out. It is crowded, there are a lot of people saying we are gonna help stores sell more effectively online.

But go-to-market is hard and margins are not great, right? On the stores already, and so that makes them even less willing to spend money on software.

Jeremy Au: (08:01)

Yeah, and I think that's the tricky part, right? Is that on one end you have these marketplaces that have pretty much, I think to some extent, one, the direct-to-consumer visibility, right? The brand, the stickiness in terms of language. And so I think a lot of folks are like, okay, we're going to be the economers and enablers, right?

And the tricky part is they think they're a counterpart to the marketplace, but the answer’s they're not. They're actually middleware to some extent, right? Because the brand is on the real another side of the marketplace. And so I think when you're middleware, I think a lot of folks are like, okay, we are in contrast to the marketplace, but we're like, no, it's really like you are a service provider to the brand, and the brand has the negotiating power because you can always walk away from you, right? And so I think there's this interesting dynamic, obviously between two approaches to that, two successful approaches to it.

I think one of course is, middleware or folks who become effectively brands, right? So they start having private label brands or they acquire brands in order to maintain the margin right for themselves, and so they don't get enough squeezed by the marketplaces or the brand. Well, the second one is you're somewhere in between, but you're actually providing some serious value that nobody's ever, ever gonna try to really replicate. And so a big one, for example, would be logistics, right? Logistics would be like, nobody wants to replicate the whole stack of same day or next day delivery. So, sure, the brand is not gonna do that. But I think for everybody else, oh, I'm trying to help them get better at digital marketing.

I'm just an example as a middleware, I think there's a real tough value proposition that's, it's not that it's not defensible, but I think it's something that brand is gonna be naturally incentivized to improve on their own, and that's gonna be this interesting squeeze, I think of the take rate or the SaaS or the margin that's available there.

Shiyan Koh: (09:42)

I mean, I think there's a bifurcation, right? So it's basically like the big guys will always try to do it themselves. And the little guys might be too cheap to pay. So you're in the middle, right? You know it's going to help you. It's kinda like Open Source, right? Like on the low end, people will use the open source tools for free. On the high end, they won't and in the middle, that's when they're willing to pay for the premium service on top of the open source offering. So that's kind of like where your customers end up sitting. I think it's an interesting point which is like, I think you can build businesses here. It's just you need to not overcapitalize them. And you need to really understand your segment well.

Jeremy Au: (10:21)

Yeah. And I think now we're kind of going to the second point that they raised here, right? This is about the plumbing of financial services, somewhat like a SaaS, but obviously, there's some commerce dynamics because I think one of the biggest drivers of cost is that for e-commerce you need digital finance, right? And lending and all these other things. So I think there's a bit of a parallel synergy between the development of these two sectors. But I think it's an interesting way they're talking about the plumbing of embedded FinTech with a distribution-first approach. They talk about emerging verticalized solutions for B2B slash B2B2C use cases. What do you think about that?

Shiyan Koh: (10:56)

I mean, I like embedded in FinTech a lot, right? Because you already have the distribution and it's just turning on the finance portion. I think on the lending things it gets a little trickier. There are licensing considerations, there's balance sheet, off balance sheet risk, and maybe when you are starting a payroll software company, that's not what you were thinking about and so I think companies have to navigate, build or buy there. And I think you'll see the emergence of people who will offer up platform solutions, right? And say, hey, we have the license, we have the underwriting expertise, and you have the customers. Why don't we collaborate rather than you trying to build all this stuff yourself?

And so I think that can be really interesting, right? So it's sort of like if you think how many people are gonna build Stripe Capital or Shopify Capital? Versus the US equivalent is a company called Jarvis where they basically say, hey you have the customers, why don't we just plug in all the other stuff from the sort of underwriting criteria to the access to capital? And you can run a really profitable, ancillary business on top of your course software business. And so I think that's gonna be pretty interesting to see these guys emerge.

Jeremy Au: (12:12)

I mean, I think the thing about embedded FinTech. Exactly like I said, is that if you already have a very strong sticky relationship with a customer, the customers moving and buying your services regularly, whether you're marketplace or I guess middleware. There's a lot of opportunity to add on that monetization layer of embedded FinTech, right? So lending to obviously both increases top line, but also helps increase the velocity of everything. So I think that's really interesting. That being said, I think there's a bit of a debate always, right? Which is if you start up today and you're like, okay, do I want to go embed a FinTech or do I build a core service?

Then I think everyone's like, well, do you really have to build a giant marketplace in order to get to embed FinTech? Like, why don't you just go straight to the lending part directly without that transactions? I think there's a big, I think, dynamic.

Shiyan Koh: (12:58)

But do you think people are actually consciously making that choice? Or is it that they are, they started out down the marketplace route and then they were like, oh, margins suck. I need to add something. And then they're like, oh, I know I'm adding lending. I mean, I think that's kind of how people end up there more.

Because if you were gonna build embedded FinTech from the beginning, like the rails and everything, the business will look really different than building a marketplace or a software business.

Jeremy Au: (13:30)

A hundred percent. One is definitely lots of marketplaces with low margins that are doing embedded finance to increase their margins. And I think the big question mark, of course, is what percentage would do a take rate and can they do that landing well? And I think it's a good approach. That being said, I think there are a lot of new startups I've seen that are literally saying, I think they've read Anderson Horowitz's FinTech, like, what's your entry wedge? And then they'll have the embedded FinTech, right? And I think you read this thing and you take this very macro report, right? Which is true at the seven-year mark or eight year mark. But then you're like, okay, I'm gonna build this giant business in order to do financing for the very small fashion of customers. And then I'm like, I think the conversation I always have is, okay, is there a way for us to skip to the profitable part first because it sounds like you're gonna burn a lot of capital in order to get there? Which sometimes works, sometimes does not work, but it's always adding a useful taught experiment to at least pressure test that hypothesis.

Shiyan Koh: (14:23)

Yeah. But I mean, I think it's also a function of what capital markets will bear, right? I think if you said this like three years ago, there are a lot of Khatabook copies being financed with that playbook. And I just got back from a trip to Kenya and Nigeria. And what was interesting was that there are many similar models. So people tried to take those playbooks and roll them out in different African markets because they also have the same problem, right? All these like small warungs or corner stores and things that do everything in pen and paper, can we digitize it? Okay, and what's the incentive is like, okay, at some point we're gonna lend the money, control their payment flow sit in the middle of all that.

But I think what's different is that in the African market, there's less and so a lot of these founders actually were forced to find more profitable or less high burn go-to markets sooner. So you don't see as many as what you see in India or Southeast Asia.

Jeremy Au: (15:26)

I think one underrated risk of cost is that, if everybody's doing EBITDA finance, then you know, it's quite possible that many whales that are borrowing a lot from you end up also being whales borrowing from other finance and better finance. And so I think, I don't think we're really there yet in emerging markets yet because it's not enough capital in general.

Shiyan Koh: (15:45)

But if it's a closed loop you can take the collections first.

Jeremy Au: (15:48)

Yeah if you have the embedded finance.

Shiyan Koh: (15:50)

Yeah so assuming they run through you.

Jeremy Au: (15:52)

Exactly. But I think the scary part, I think I've seen a lot of folks is like they're doing this landing without a very clear lock on this flow, right? For all sorts of reasons. And so they're saying like, oh, we're gonna do a bunch of analysis and modelling of the uncorrelated risk?

And was just, literally sharing with a founder recently, I was just like, it is uncorrelated risk in every market until is a recession. And one thing I noticed on a BRAVE podcast is that so many folks, entrepreneurs, actually have distinct childhood memories of their parents going through the Asian financial crisis and losing control of the small, medium enterprise. And I was just like, yeah, the thing is if you don't have a lock, like you said, under revenues, the flow, or you don't have a lock on asset, right, because you have covenants, then it's very easy to lend money out, but a tricky part actually, and it's also not too bad to get some repayments in, but a tricky part is to get both right. Get a repayments and a principle back equivalent I mean, it's a magic trick, right?

Shiyan Koh: (16:48)

I always tell people lending is not a product market fit problem. It's a risk management problem. And so people get very happy when their loan book grows, and it's like, no, that's not actually a thing you're supposed to be happy about. So yeah, I totally agree.

Jeremy Au: (17:01)

Especially when they have report total revenues as the repayments. And then you're like that's not how a bank works. We have to look at the net interest margin and fancy spanishy terms.

Shiyan Koh: (15:34)

It's true. But you also get an appreciation of how important credit is in an economy and how limiting things can be when there's no ability to time shift. So it is all essential plumbing, but yeah, there's gonna be a lot of blowing up along the way.

Jeremy Au: (16:10)

I think some ways that embedded finance is trying to de-risk that, of course. And then they start saying like, okay, we're gonna do a SaaS as well which is the third approach that they have. And I know I kind of like, cause digitization commerce is, that's so like three years ago. But I would say SaaS, I give it to them. I think that's probably one of the first written reports I think I've definitely seen that in private conversations over the past one year about maybe SaaS finals in play. But I think they're the first to really kind of say that upfront in the report with the approach.

And I think this kind of goes back, the core thesis from my perspective, and I think Peng at Monk’s Hill had a great point of view, which was like, it’s really about the GDP per capita, right? At some level, fundamentally there's a cost of labor to do this internally as a company, and then once cost of labor rises beyond a certain point, then in general, the incentives are much stronger for you to adopt digital tools to either increase efficiency, but effectively reduce the cost of headcount.

And obviously what's interesting is that Southeast Asia's GDP per capita growth has been slow and steady and good actually, in the current macro environment. But I think if you actually break it out into certain metropolitan areas, I think that GDP per capita growth has been much faster and has definitely exceeded, I think, that B2B SaaS inflection point in many areas. And I think that's really driving the underlying adoption of SaaS by local Southeast Asia companies.

Shiyan Koh: (18:53)

Yeah. And also, I mean, there's a generational transition. I mean, so you know, we have a couple companies in the portfolio that sell SMB SaaS and if you ask them who their best customers are there's sort of two axes, right? One is they manage more than one store. So it's complexity. So it's not even about the labour, it's the complexity. And then two is they're like under 35 because you grew up with the internet, you grew up with software, it doesn't scare you. And so even if it is like you don't break even on the software in the first month, you can visualize basically how this is gonna make things easier for you to grow the top line in the future. And so yeah, I think it's both the GDP but also it's generational mindset and people being willing to adopt software to make their lives easier.

Jeremy Au: (19:46)

Yeah, and I think that reminds me as well I think there's much more appreciation of SaaS, right? So I think founders understand what SaaS is and I think there's obviously a lot of great SaaS information knowledge. For example, SaaStr, right? By Jason Lemkin. They came to APAC and they're having this giant party this week with all the SaaS founders from APAC flying in.

It was a big, big party. A lot of folks are here for the first time in Singapore. But also lots of Southeast Asia founders actually building SaaS and really excited to feel like, is there a moment, right? But, so there's a lot of knowledge sharing.

I think that's really happening about how to build SaaS properly. And also I think there's more venture capital. I think also started to sniffer off for SaaS because I remember about two years ago, there was a big mood, I'll say that only 50% of a third of the VCs were interested in SaaS and two-thirds were like, ah, SaaS is too early. I would say about two years ago. And so, whereas now I think I'm going into this room, it's pretty much everyone's interested in SaaS, especially with the bear market today, I guess.

Shiyan Koh: (20:42)

So I think it's everyone's interested in recurring revenue, that's what you're saying.

Jeremy Au: (20:46)

Oh, yeah, yeah, yeah. And/or recurring revenue, not and/or revenue. That's the joke that they have. And so, I think that's a big driver as well.

Shiyan Koh: (20:54)

Yeah, I mean, I think there's that and I mean, I think for Southeast Asia on the SaaS front, like what do you see, right? Which is, I think the Indian entrepreneurs actually have been the pioneers here, which is they say, hey, all the Western SaaS, the pricing doesn't work for us and we don't actually need all those features. We're gonna come in from the bottom and price really competitively, but also with a more limited set of features that works for our markets and kind of grow bottoms up. And there have been multiple examples of that on the Indian continent. And then those businesses have gone global.

And then I think the other one is like a lot of the sort of Western software types of offerings also don't really handle cross-border that well and so separate from pricing, separate from reducing the feature set is also putting in features that this region needs more of. Or handling cash and local payments and things like that. And so I am excited to see more of these, global software businesses emerge out of our part of the world because more of the world looks like us than like the US market. And so that, that'll be cool to track.

Jeremy Au: (22:03)

Yeah, and I think that's on my side, my favourite slide of their report, was breaking out SaaS into two categories, right? Which is SaaS that's built for Southeast Asia. The second one is SaaS built for the world from day one. And I thought that was a really interesting conversation.

And I liked it because I've been thinking about that a lot and I've been saying that in private and it's nice for them to spell it out more explicitly. That being said, I actually have a recommendation for them. And then they can take this for free for the next report, I guess.

But I think like exactly, kind of pulling what you said, Shiyan, it's like, I think there are folks that are building for their country, if that make sense, or their MSME, which is very much more, I can say Southeast Asia-oriented. I think there are folks building for western countries, right? So high GDP per capita countries like the west, like Europe for customers in the US with honestly, obviously high interest in SaaS, high adoption of SaaS, but also high ticket prices for SaaS, right? And so that's a very different approach. And I think the third, as you said, is building for, you could say, other emerging markets that are maybe one bound less rich, I would say Southeast Asia or a different approach.

So I would say maybe there's two categories. Obviously, there's overlap. I'm sure other management consultants would be like, Jeremy's not like mutually exclusive, collectively exhaustive. So I'll put it a nice little Venn diagram maybe just to kind of like dodge that bullet on that slide.

I think we have to bifurcate the world slide into like you said a building for high GDP per capita or a building for low GDP per capita. Right? And that's it.

Shiyan Koh: (23:37)

Yep. Makes a ton of sense.

Jeremy Au: (22:05)

And on that note, have you seen some, changes in SaaS trends in Southeast Asia? I know you had a point of view on marketplaces versus SaaS, right? So I wanted to hear your point of view on that.

Shiyan Koh: (23:40)

Trend. I mean, I think the biggest thing is people are trying. I think three, five years ago, people were not really trying to build SaaS that much. And I think a little bit is that we don't have a history of it. So if you were a SaaS founder, where would you have done it? But now I think with the pandemic, more people coming home from SaaS companies that they had been part of or built in other markets and more people just coming through and saying, hey, I see an opportunity here. I do think people are starting to build more of it. Which is great.

But I think it is still very much who are you gonna sell to? You're gonna sell to other startups, cause they're more open to the idea of buying. Or you're gonna go sell to like SMEs. But you need to make it so drop-dead easy that they don't have to do anything. I think it's still really hard to sell to corporates here that people are not as open to trying startup software despite the government's best efforts to do like, Sandboxes or collaborations.

I just think it isn't in the DNA of a corporate to be like, yeah, let's try this half-baked software that someone else made. Like it's not an incentive set. And so I think the funny thing is that more startups beget more SaaS because there are just more people initially to sell to and try. And that's a big part of getting this off the ground. And we need more companies in the middle, right? You kind of need the 50 to a hundred million revenue companies, and we don't have a ton of those. We have a ton of companies that are like sub 10 million in revenue, and then we have a few like big unicorns in exits, right? But that middle high growth range that's where they're gonna have this software needs where it's, hey, I'm not gonna buy Oracle or NetSuite, right? And my business going really quickly. I'm willing to take a risk and I'm willing to try something that's gonna solve my problem. You need that middle to emerge too, I think, really drive. Otherwise, you're always stuck in this very grassroots, bottoms-up model, which is, okay, what can I sell to an MSME for under 50 bucks a month?

Jeremy Au: (26:06)

Yeah, and I think that's fair, which is the SaaS that you're building is really determined by what the annual price point of your product is right. Are you at a hundred dollars per year? Are you at a thousand dollars per year? Are you $10,000 per year? Are you a hundred thousand dollars per year? Are you a million dollars per year? And those are actually very different types of companies and very different repetitions. And I think the SaaStr has done a really great job actually really kind of explaining why those are different, especially in terms of like your marketing mix, your sales mix. Are you inbound, are you outbound?

And what is the unit economics that is possible in terms of customer acquisition costs, depending? The value of that end customer. So I think they've done a tremendous job and shout out to SaaStr for bringing the party to Southeast Asia.

Shiyan Koh: (26:47)

Are they a sponsor, Jeremy? What's going on here?

Jeremy Au: (26:50)

Not yet, but SaaStr you hear me? I am all in on that sweet SaaStr APAC promo code. Hit me up for next year, baby. Shout out to Black Mangroves with Arnaud Bonzom for actually securing probably the first promo code in Southeast Asia for SaaS to APAC. I saw a lot of folks, probably the best-performing promo code.

Shiyan Koh: (27:09)

We got to get Arnou on the podcast.

Jeremy Au: (27:14)

I know he's been rescheduling me. Too popular with his travel and always speaking engagements. Next time, next time.

I think the good news is I do feel like there are some startups that are slowly cracking it. I think, shout out to Evron doing cybersecurity. I think they're slowly selling to chief information security officers and CTOs because they were and used to be CISOs. And that's really, specialized expertise to sell, but they've been doing it and they've been successful at doing it and they're slowly building up the logos. And SaaS is a long-term player, right? It's like it takes you four years to get all your logos lined up like ducks in a row. And then it kind of picks up after that, right? Because then people are like, okay, you're not a fly-by-night SaaS. You're not gonna go belly up tomorrow. It's okay to buy, right? I think if you're building a SaaS, you just have to be patient, right?

Shiyan Koh: (28:01)

I mean we tell everyone you gotta have the plan to get to a million in revenue because everything kinda looks the same before that. But if you hit a million, then you're like, okay, maybe something's working and people will take you more seriously. But it's gonna be a lean road to get to a million because not a lot of people wanna fund that path.

Jeremy Au: (28:22)

Shout out to Hustle Fund willing to fund folks to get to that $1 million mark.

Shiyan Koh: (28:26)

Yeah, Yes. Send me all your SaaS deals, guys. I wanna see them. I wanna see them.

Jeremy Au: (28:31)

Reach out to Shiyan. There we go. And I think that's interesting, I think transition point, like you, said, right? I think as you said, think million dollars is a very good transition point, and I was talking to another SaaS founder a few days ago, but I think transition points really is obviously your first $1 is obviously life-changing.

And then the next one is adding, I would say, roughly about a $10,000 mark. That's like, okay you started getting the wraps, and then a hundred thousand is like, what am I doing with my life? It's so hard, everything's breaking. I'm still like, I still haven't finished building all the features that my SaaS customers want and I'm still trying to sell. And that's, I think hundred grand is like one of the hardest points because it's really hard. I think millions when things really start to click and feel really nice.

Shiyan Koh: (29:11)

I mean, I think the other thing that I would say is retention, right? It's great to get the first dollar and the first 10,000, but retention is the thing that's gonna make things easier. And so if your turn is really high out of the gate, spend time fixing that because otherwise you're just pouring water in a leaky bucket and that is really demoralizing. And so I think sometimes people get so caught up in the sale that they kind of forget about the customer success retention part.

And it's still early days where when you're really trying to understand, okay, when is my customer being like, okay, I get the value. It's working, it's clicking versus liking, I'm very confused. I've installed and I don't know what's happening here. so I think that's the thing that sometimes people neglect and then you're in this horrible situation where you're bailing water on retention and like sales is going down.

Jeremy Au: (30:01)

Yeah, I mean, Reforge actually does a really good job teaching that, Brian Balfour. And I remember he taught a class and I was there and he was just talking about how like if you don't fix that revenue retention by cohort especially, then what happens that you have a shark fin, right? Each cohort looks like they're growing cause the initial customers buy more, but then you're dropping off and you have a shark fin, right?

And then you're stacking multiple cohorts of shark fins and it becomes a giant shark fin. And then you kind of like scratch your head because you're like, oh my God, you hit your a hundred grand, but then you know, more people exiting at the same rate as you are building. And then I think that's the make-or-break moment for a lot of SaaS founders, right?

Because either they run off cash because they thought they were gonna hit a million real easy cause they assumed the potential was okay versus those who kind of like being able to then start hammering the team to be like, okay we have to ship the features or the UX improvements that our existing customers really want versus let's stop building features that the new customers want.

And I think that's a huge debate. I think that happens at every SaaS team all the time. Because revenue retention is a very non-sexy part about SaaS.

Shiyan Koh: (31:06)

No, retention is super sexy. Do not listen to Jeremy's blasphemy. Retention is the sexiest thing. Net revenue retention. Okay, that should be everyone's favourite thing.

Jeremy Au: (31:18)

Okay, new shirt.

Shiyan Koh: (31:19)

The thing that works when you are asleep, is retention. Okay.

Jeremy Au: (31:23)

Okay. Net revenue retention is sexy. Okay. Right. I would say that's something that I think a lot of SaaS founders really don't, somehow portray properly in their decks. I've seen founders who do a good job on net revenue retention and they totally don't talk about it in their decks.

And so it's very much me looking at numbers and then I have to do all the math for myself to be like, okay, the reason why it's happening is that they're really good at net revenue retention rather than as sales. And then that makes me very interested and I'm also very happy, right? Because that means no other VC did the math, probably, there's an opportunity for me to help out and talk to the founder and you can say, get the deal right. And partner up about how to do that in the future. I think there's something I would love for more SaaS founders to do is yeah, show their retention by cohorts.

Net revenue, retention by cohorts, break it out by attrition versus cross-selling. And those would be three beautiful slides, that will be awesome to see more of.

Shiyan Koh: (32:18)

Cohort charts. I definitely wanna see more cohort charts in decks.

Jeremy Au: (32:22)

Is that a SaaS tool for cohort?

Shiyan Koh: (32:24)

Yeah, for sure. For sure. But you should wanna know that anyway. It shouldn't something that investors have to ask for. Like, you, the founders should wanna see that thing. Yeah.

Jeremy Au: (32:34)

I'll give you an example. I was working with a startup and they were using the cohort metric report from Stripe. Thank you, Stripe. Shout out to Stripe, another potential sponsor, for obviously their cohort tool on retention.

And they were just kind of using it as the thing. And basically, if it came down to was like monthly attrition was like 7%, right? And then, which is high, obviously very and then the conversation then became, what's going on here? And it's like, yeah, because for our product, people like to like use it and then they pause it and then they resume it right down the road.

And Stripe counts it as two or three cancellations, right? During that time period. And they're like, so that's okay. And I'm like, what? That's not okay. That means attrition is way lower. Your lifetime value is way better than what you're putting on this slide. And I think I was like so angry at like three different Zoom calls and just hammering this and he finally like gave in.

Obviously, he kind of knew that was important, so he just did it as well. But cause it's really important, right? Really key to know is that your speedometer is wrong, right? And it just turns out like, hey Jeremy, turns out our restriction rate is like 1%. And I was like, is that good? I'm like, yeah, that's like seven times better, right? I think that's my value add, right? Is being a naggy person about what the best metrics to have, right? On that note any advice you would give to founders? I think that's

mine. Mine was understood your caught retention and attrition real well. How about you? Any last words of wisdom?

Shiyan Koh: (33:55)

Think it's related to what I said earlier, right? Retention comes when you really understand your customer's journey through your product and where they're getting value, and it may not be what you originally thought, so they might have bought for a reason, but they might retain it for a different reason. And so I think spending time to really understand that full customer journey loop and where in that month that they're paying you, are they getting the value? How do you know, right? Because then you know, you can orient your product roadmap more towards that. You can line up your customer success to focus on getting people to that point where they feel that value.

And all those things will stack up into retention. So yeah, I think it's really spent the time early on with customers. I think sometimes people get, as I said, really caught up in sales and then they don't spend the time on the back end, and that's actually super valuable learning.

Jeremy Au: (34:50)

I love to double click on that real quick, which, how do folks focus on that back end? Because it's not, like you said, not hot, not fortunately, it will be hot thanks to you. But I think how does that debate happen?

Shiyan Koh: (35:00)

It's simple. Call them like, hey Jeremy, I saw you've been using my product for like in the first 30 days. I'm the founder. I would love to get some feedback. Like, you can just respond to this email. Like, what's going well? What pisses you off? Or I'm happy to jump on a call, whatever's easiest.

And just try to get as much feedback as possible. And then also understand who your best and who your worst customers are, right? So if someone turned like right away, you need to know why. If someone is like three standard deviations, the highest engaged user like, oh man, they log into the product like every day and they're doing something.

You also need to understand why, because you know your best user, maybe there's some use case you didn't think of, or there's some value you didn't realize, and then you can go focus on that kind of customer. Finding more people like that and then the guy who just like turned right away. It's like there might be something really stupid in the flow that you didn't realize was stupid and it's like an easy fix, right?

You just have to ask and sometimes you can't tell from the data, right? You need to actually talk to a human who used your product to understand what's actually going on as they're using it. The data helps, right? Obviously, you should have all the standard analytics and instrumentation set up, but I think it's really hard to beat some of the qualitative stuff early on because you just have no idea. You're still figuring out how people are using your stuff.

Jeremy Au: (36:22)

Yeah. Hundred percent agree. And I think last night I was very frustrated with well-known startup very frustrated with the UX, but thankfully a former employee jumped in with the GM to basically hear my side of the story. And then he prevented a tweetstorm from me about UX problems. I was like, okay, I promise not to like do a tweet star about the UX here.

Shiyan Koh: (36:44)

Most people won't tweet about it. They'll just churn. So you won't know.

Jeremy Au: (36:48)

Just churn, yeah. But I thought it was funny, just the UX, cause it's like comedy of errors, right? But it was okay, it was my fault at some level, but it was just like the UX has.

Shiyan Koh: (36:56)

User error.

Jeremy Au: (36:59)

Hey, now you're like, this is all me. I wanna say that my user error is called being late, changing my credit card. Okay. So that was my one error. Okay. So it was not, that was my error. Okay. On that note thank you so much and, oh wait, Shiyan, I think you wanna do a shout-out to Projjal, right? For his feedback.

Shiyan Koh: (37:14)

Oh, well, I guess we're starting to get people right in and Projjal was sad that I mentioned OnLoop but did not say his name.

Projjal I'm listening. Projjal is great. He's a SaaS founder using AI in Southeast Asia and helping people capture feedback achieve company goals and automatically write reviews, which for anyone who's been through a review cycle, knows is incredibly painful. And so imagine if you could do that automatically. Check out OnLoop.

Jeremy Au: (37:44)

Automatically my favourite phrase as well. And also you can check out the Projjal episode as well. He did a prior one-on-one personal interview on bravesea.com and check out his profile. On that note. Thank you so much, see you.

(37:57) Shiyan Koh:

Take it easy. Bye.