Over the past few months SaaS companies have continued to announce very large funding rounds as they are demonstrating the power of their subscription-based business platforms. Many of these firms are deciding to do large private rounds before filing to go public. Here is a quick round-up of some of these firms:

The company has raised an amazing series B round of $250 million. Dropbox is the Cloud storage company that is very popular with mobile phone and iPad users. They have about 70 employees and have secured more than 40 million customers in the past 12 months. This round put the company’s market valuation at close to $4 billion. This is probably the largest B round we have seen and may have been done as an alternative to doing an IPO.  Sounds like a Facebook type of story because like Mark Zuckerberg turned down a significant acquisition offer from Google, and apparently the DropBox founders, Drew Houston and Arash Ferdowsi, turned down a nine-figure offer from Apple in 2009.

Workday or “PeopleSoft 2.0″, has been making consistent progress towards a 2012 IPO and announced at their recent Workday Rising conference in October that they had just closed an $85 million dollar round of funding. Like Dropbox, Workday has now raised about $250 million. With this lastest round, the company is now valued at $2 billion. What was interesting is that unlike most private fundings, which are usually led by venture capital firms, this round was lead almost exclusively by institutional investors like T. Rowe Price, Morgan Stanley, Janus and Fidelity. As co-CEO Aneel Bhusri put it “In some ways, it’s an early debut of an IPO.” Workday claims they are on track to do about $320 bookings during 2011, which is more than 100% CAGR from 2010.

Another major Cloud storage company, Box.net, resisted a $600 million dollar offer from Citrix and just closed an $81 million round with Bessemer Venture Partners, NEA, Salesforce.com and SAP and existing investors Draper Fisher Jurvetson and Andreesen Horowitz. After this round the company’s valuation is $600 million. The company has about 7 million users and is leveraging a very successful ‘freemium’ go-to-market model.

With competitor Eloqua already in IPO registration to raise $100 million for their Revenue Performance Management (RPM) platform business, Marketo isn’t far behind. The company announced last week that they had just raised another $50 million in a round led by Battery Ventures along with Institutional Venture Partners, InterWest, Mayfield Fund and Storm Ventures. Marketo’s estimated size of around $15 million in in 2010, should double in 2011, but they are probably a little small to do an IPO at this point. Obviously the venture community thinks this RPM area around marketing and revenue optimization for SaaS is quite hot right now.

As part of their IPO registration, Jive Software just raised another $40 million prior to their public offering. Sequoia Capital and Kleiner Perkins Caulfield & Byers purchased stock through preferred warrants. Jive is provides an enterprise social business platform. Currently the company is on a $80 million run-rate but still not profitable and has raised close to $100 million overall.

Enterprise subscription commerce and billing provider Zuora also announced a large round of funding last week. The company raised a Series D round of $35 million from Index Ventures, Greylock along with a personal investment from Workday co-CEO Dave Duffield and their existing investors. To date the company has now raised $82 million. Zuora plans to use these funds to aggressively expand their distribution activities internationally, specifically in Europe.

The common thread for all of these companies is that they have businesses that are growing rapidly and have built very scalable platforms. With the IPO window open, but the public markets are still uncertain, we will probably see more of these type of IPO-preview type of funding announcements as SaaS firms continue to gain momentum in the market.

By Kevin Dobbs

Montclair Advisors, LLC

When thinking about your transition to SaaS, there are many questions to consider including target customers, value propositions, packaging, pricing and how best to build customer relationships.

After conducting more than 50 Smart SaaS business profiles of all different types including pure SaaS, Hybrids and Cross-Overs, all of these companies would probably answer many of these types of questions differently depending on their type of customer, functionality, geography, vertical markets and the only way they can get useful answers is to continually test everything.   Best in class SaaS firms are always trying different pricing, packages, messages in order to optimize their businesses, like a recent firm we profiled - Clarizen.

Some resources when thinking about these types of considerations include:

Software Pricing Partners - Jim Geisman

Chaotic Flow - Joel York

SaaS Blogs

Sixteen Ventures - Lincoln Murphy

4 Pillars of SaaS - Phil Wainewright, ZDNet

In addition to testing, it is a good idea to measure everything including website traffic, marketing campaigns, product usage, customer satisfaction and a myriad of other SaaS and business metrics.  Again, the best firms track and monitor all the key business metrics in order to improve their ability to generate revenues, build market share and reduce unnecessary customer churn.  SaaS requires a very tight operational model and has moved business an art to a science and now there are an entire new class to tools to improve revenue performance and reduce costs.  Some of these next generation of tools include:

Sales Automation

EchoSign - Provides electronic signature and contract management.

InsideView - Sales business intelligence and social media platform.

JigSaw - Business information and data services.

NetSuite - CRM and ERP suite.

RightNow - CRM, call center and social platform.

Salesforce.com - Salesforce is not only a solid Customer Relationship Management system but also a great system of record for all types of sales, marketing and service information and applications. Also offers a application marketplace that provides value added extensions.  Salesforce also offers Chatter a collaboration platform to improve internal communications.

SugarCRM - Open source based CRM that provides a robust no cost solution.

Marketing Automation

Eloqua - Marketing automation platform.

Genius.com - Sales and lead automation.

MarketBright - Marketing and lead generation management.

Marketo - Marketing and revenue management.

Pardot - Business to Business lead automation.

SaaS Analytics

Birst - On demand business intelligence product.

Cloud9 Analytics - SaaS performance management.

GoodData - SaaS business intelligence product.

PivotLink - On demand business intelligence product.

Using many of these tools companies can help a SaaS firm track their business, sales and marketing performance.  The question that I often get is ‘what should I be tracking?’  There are an emerging set of SaaS-based business metrics that include Monthly Recurring Revenues (MRR), Churn, Customer Acquisition Costs (CAC), The Magic Number (MN) and others that provide very precise views into how a SaaS business is performing.  Here is a chart that details some of the more common SaaS business metrics by functional area:

Other resources to learn about SaaS metrics;

5 C’s of SaaS Finance - Bessemer Ventures

Chaotic Flow - Joel York

For Entrepreneaurs - David Skok, Matrix Partners

Haut Tech - Michael Dunham at Scio Development

My opinion about the SaaS business model is that there are a lot of new considerations about building a profitable subscription business today.  The buyers are different, there are many robust low-cost tools available, Cloud technology that can radically change your cost model and time to market as well as many other business factors, so the only real way to really tune your business for SaaS is to continually test everything!

I would be interested in your comments and hearing about what you are testing.

Stay tuned for Tip #4 Sales & Marketing on a Budget

By Kevin Dobbs

Montclair Advisors, LLC

Let’s face it, Hunters and Farmers are very different types of sales people.  One is into the thrill of the chase and the high anxiety of selling the next big deal.  The other is into cultivating relationships, building communities and patience.

When it comes to sales people inside of a SaaS company, these same attributes apply to this team as well.   Trying to get your major account or direct sales reps to effectively manage your existing accounts and still hit an aggressive quota, that usually doesn’t work that well.  The same holds true if you are trying to get your account managers to push their customers to close a big deal, and they just don’t want to push too hard because they might ruin their relationship.  Then why are you trying to get them to do the same job?

The other big difference is usually how these sales professionals get compensated.  A typical software sales rep will have a $1.5-$3M annual quota and want to make at least $200K, where as an account manager might have a much smaller quota, $300-$750K and be making $110-150K.  That’s because they have different skill sets but both types of sales are critically important when building your SaaS sales team. Philippe Botteri from BVP discusses what Gary Messiana an EIR told him about how he compensated his reps for delivering MRR:

• • For 0-25% of the quota, $0.25 commision per $1 of MRR
  • For 25%-50% of the quota, $0.5 per $1 of MRR
  • For 50%-75% of the quota, $1.0 per $1 of MRR
  • For 75%+ of the quota, $1.5 per $1 of MRR

I like the simplicity of the concept and it can be applied to all types of sales roles.

Depending on the type of products/services you are selling, you may actually not have high priced outside sales reps and actually focus more on building out a low cost tele-sales capability.  Even if you do this, you should still separate out your new sales team from your account management teams.  Because SaaS is perfect for the ‘penetrate and radiate‘ sales model, you need teams that can sell that first product and then another team that keeps the customer happy and renewing as well as buying more products and services.

Bessemer Venture’s  10 Laws for being SaaSy also recommends separating your hunters from your farmers.  It is important to be able to find new customers but it is also important to be able to renew, upsell and cross-sell customers additional products, which will increase your company’s Monthly Recurring Revenues.  This well defined sales structure works well with many of the leading SaaS firms including RightNow and Salesforce.com.

One of the big objections about this type of approach is that if forces the customer to deal with two different sales teams.  Although this can be a problem, I have found that these types of channel conflicts can be remedied by using team based compensation plans that have everyone getting paid based on shared goals related to existing customers.  This type of approach also encourages development of up-sells/cross-sell opportunities by the account management team, since they often require the new sales team to engage in these deals and close them.  The team compensation approach means everyone wins, including the customer.

I keep coming back to skills and personalities when structuring your SaaS organization.  Keep your teams small and focused.  Make sure you have ways for those promising team members, who might start out in tele-marketing or account management, to have a path to progress up the sales food chain.  Just make sure that your organization structure is well defined, there are clear rules of engagement and that that compensation plans encourage your sales teams to work together and keep your customers satisfied.

Stay tuned for Tip #3 Test Everything