What HootSuite has taught investors about freemium SaaS

by Rob Lewis

HootSuite has been a Canadian startup darling for awhile but that hasn't always been the case.

In December of 2009 when CEO Ryan Holmes was raising money they had approximately 200,000 users and were in fierce competition with the likes of CoTweet, TweetDeck, PeopleBrowser and even Twitter. 

Potential investors had a lot of questions for the social media dashboard that dreamed of convert a popular free service into a paid premium service. HootSuite board member Scott Wolfgang of Hearst Interactive shared his original concerns about an investment in HootSuite on his blog over the weekend:

  • What is the business model? Would users pay or is it an advertising play?
  • Can HootSuite succeed in Vancouver?
  • Will it be a winner take all market?

It turns out Wolfgang and Hearst were able to come to terms with the risks and have doubled down since. And they're happy - HootSuite recently surpassed 3 Million users and is generating significant revenue. While Wolfgang's complete retrospective is worth a read, here is what HootSuite has taught him about the Freemium SaaS business model:

1) 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.

2) 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.

3) 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. 

4) 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.

5) 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. 

Hootsuite Media, Inc.
Vancouver, British Columbia, Canada

Hootsuite is the world’s most widely used social media relationship platform. More than 10 million users, including 744 of the Fortune 1000 companies, trust Hootsuite to manage their social media programs across multiple social networks from one integrated dashboard. Learn more about how Hootsuite is revolutionizing communication at http://www.hootsuite.com. more

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Rob Lewis

Rob Lewis

Rob is the President of Techvibes Media and Editor-in-Chief of Techvibes.com.  His diverse background includes stints in International Trade Finance, Web Development, and Enterprise Software and he is a graduate of the University of British Columbia, British Columbia Institute of Technology, and Simon Fraser University. When not running Canada's leading technology media property, Rob can be... more

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