As investors focus more on profitability, product-led startups may be sitting pretty

Should SaaS companies contact as many of their users as they can in hopes of converting them from free to paid?

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

PLG stands for product-led growth, which has been exemplified by companies like Calendly and Netlify, and which OpenView defines as “a growth model where product usage drives customer acquisition, retention, and expansion.” The VC firm views standout PLG companies as those that “consistently grow at or above 30% at scale, have surpassed $30 million in revenue, and are household names.”

There seems to be a strong correlation between the use of the PLG model and raw growth, OpenView’s report found.

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

That PLG drives growth can explain why the sales model became increasingly common among SaaS companies. That fact is reflected in OpenView’s survey sample, but also more widely. Asked about Bessemer Venture Partners’ Cloud 100 index, partner Mary D’Onofrio told TechCrunch that “over the past few years, the proportion of product-led companies has increased in the Cloud 100, on both a cumulative valuation basis and count basis.”

This increase in PLG adoption happened at a time when the markets rewarded growth. But as we reported, public market data compiled by Battery Ventures shows that in the current downturn, investors have flipped their weighting of growth versus profitability. Is PLG a bad fit for these new times? Likely not, it turns out.

To understand how PLG can work out under changed market conditions, we talked to OpenView’s report authors, VP of growth Sam Richard and partner Kyle Poyar. We also collected notes from D’Onofrio and former TechCrunch editor Josh Constine, now a venture partner at SignalFire. The consensus is that now is a good time for the type of lean growth that PLG can achieve.

Growth or profit?

“Investors have forgotten all about the Rule of 40,” which states that growth rate plus profitability in percentage terms should equal 40, OpenView observed last November. How fast things change! We were reporting on the firm’s annual financial and operating benchmarks report, which showed that at the time, software companies were getting rewarded for 30% or greater top-line growth, with profitability taking a back seat.