5 Learnings from the Zendesk of HR, AKA Factorial
By: Christoph Janz
Tags: Spain, Hr Software, SaaS, Venture Capital

5 Learnings from the Zendesk of HR, AKA Factorial

How Factorial is building a global SaaS winner from Barcelona, and why you should always listen to your dentist Christoph Janz Follow Sep 7 · 6 min read

Yesterday, P9 Family member Factorial announced an $80 million Series B led by Tiger Global. The additional capital and the support of Tiger Global will help further Factorial’s mission to build the Zendesk of HR, as Reid Christian of CRV (who led the Series A) put it.

In the last few quarters, Tiger Global has emerged as one of the most aggressive venture capital investors. The firm is an investor in no less than 40 companies from this year’s Cloud Top 100 list. It’s not entirely clear to what extent this impressive result is based on an extraordinary ability to pick future winners, help make winners, or invest in companies that are already very successful when Tiger invests in them. In any case, it’s great company for Factorial to be in. :-)

With thousands of customers from over 60 countries, Factorial is a remarkable European success story in the making. Here are a few learnings (and some fun anecdotes) from Factorial’s journey.

1) You can build a global SaaS winner from Europe

Until a few years ago, European SaaS startups with big ambitions had to move to the US. One reason was that there was not enough funding in Europe and that most US VCs didn’t invest in early-stage startups in Europe. How times have changed! According to Dealroom, Europe has been the fastest-growing region for VC investments in the first half of 2021, attracting €49 billion in funding.

The other big reason why e.g. Zendesk couldn’t have been built in Europe was the lack of experienced people. When it comes to people who have taken a SaaS company to $100 million ARR and beyond, there’s still a large gap between the talent pools in the US and Europe, but it’s improved a lot, and companies like Factorial have shown that you can build a world-class team from Europe. This doesn’t mean that you’ll find all your leaders e.g. in Barcelona (where Factorial is founded and HQ’ed) — you’ll probably have to be remote-friendly and/or have multiple offices, in addition to trying to relocate people. The fact that for the last 18 months, every tech company in the world has operated (mostly) remotely has leveled the playing field to some degree.

2) You don’t (always) have to go for the US market from the get-go

At P9, we’ve long thought that most SaaS companies should go for the US market right away. There are several reasons for this line of thought: The US is by far the largest market, it’s relatively homogenous (compared with Europe), and it’s where you’ll find most early adopters of new technology. So the thinking is that whoever wins in the US will be able to get big much faster and can eventually use that scale to conquer Europe.

While we still believe this is true in many (maybe most) sectors, Factorial shows that it’s not a rule without exceptions. One factor (no pun intended) is that HR is so country-specific. There’s a reason why Factorial doesn’t see much competition from US players in most countries. Another aspect is that the SaaS industry has become so much larger than we (and almost everybody else) thought. As companies like Doctolib and P9 Family member Docplanner show, you can build a large tech company outside of the US. (Which is not to say that Factorial won’t go to the US at some point — stay tuned!)

3) Best product (often) wins

I’m not going to go into the age-old “product vs. sales” minefield debate in this post. :-) Let me just say this: Factorial has built the best product hands-down. The quality of Factorial’s product, the user experience, and the excellence of Factorial’s product and engineering team were among the key reasons that made us so excited to invest at the seed stage. Factorial’s strong technical foundation, and the founders’ ability to turn Factorial into a magnet for excellent engineers, have allowed them to launch localized versions in eight countries in less than six months while improving and expanding the product at record speed.

I’m not saying that sales and marketing isn’t important — it, of course, is. But it helps a lot if your product is so delightful that it’s mostly bought, not sold, and if your customers tell all their friends about it. :-)

4) Pricing is key

If you know me a bit, you know that I have a love/hate relationship with the freemium model. Some time ago, I wrote:

In the end, freemium only makes sense if a certain percentage of your free users do one of three things: 1) Eventually convert to paid, 2) refer paying customers, or 3) provide the kind of valuable feedback that will improve your product. A freemium product that fails to achieve any of these effects will merely saddle you with extra costs and distract you from servicing your most important users. Not every company can be a Dropbox, but the good news is that not every SaaS company needs to adopt Dropbox’s freemium model to succeed.

Factorial started with a freemium model. The free plan helped the company get 20,000 users from more than twenty countries and gather huge amounts of valuable feedback. It served Factorial well in the early days, but ultimately, freemium turned out not to be the right model for the company. We just gave away too much value for free, and having a free tier made it harder to focus on the right type of customers — companies that get the most value from the product and are willing to pay for it.

The decision to kill the free plan about two years ago was risky, but transformative. It led to a 3x increase of MRR within a few months and created the foundation for a scalable, profitable customer acquisition engine.

From an internal note after a Factorial board meeting

5) Always listen to your dentist!

“Hi” from the dentist’s chair. I had a dentist appointment today. I kid you not.

I promised some fun anecdotes, so here goes. :-) In the early days, Factorial’s conversion rates were pretty low. As mentioned above, the issue was related to our pricing model, but I thought we also didn’t have enough clarity about our ICP (Ideal Customer Profile). I remember that in one of the first board meetings, I asked if we could look at our user and usage data and see if we could find any commonalities between those trial users who converted faster or at a higher rate than the bulk of our signups. I said something like, “if we find out that we have higher conversion rates in a certain subset of users … let’s say, hm, dentists … then we can use that information to …”. For the rest of that board meeting, “dentist” became a chiffre for our ICP and a bit of a running gag.

Then, lightning struck. After the board meeting, the Factorial team dug into the data and found out that the fastest-converting customer ever had been a …. dentist. :-)