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I listened to an interesting panel discussion at the Opsource, SaaS Summit a few days ago and I thought I would share what I heard.
Venture capital panelists were from Intel Capital, Emergence Capital Partners, CrossLink Capital and Hummer Winblad Venture Partners and Merrill Lynch.
New Investments
Seems like there was no agreement from the panel about what stage of investment was the most popular given the downturn. There were several Series A and Seed investments that were mentioned including Crowd Factory and Zuberance. One bright spot for investors was the fact that OpenTable has filed for an IPO, which would be a good step in the right direction given 2008’s anemic IPO performance.
Zombie Venture Capitalists
Most of the panelists had done some investments in the past six months but it is clear that SaaS entrepreneurs need to be on the look out for Zombie VC’s, who are still operating but are no longer making investments. These walking dead have their lights on, they have websites, and cash to support existing investments but no longer have enough cash to add new portfolio companies. In writing this post I even discovered that peHUB publishes a list of these Zombie VC’s. If they haven’t made any new investments during 2008, then I would be careful about wasting any time with these firms.
Flat is the New Up
One phrase that was uttered more than once is that ‘Flat is the New Up’. Although when it comes to Software as a Service… it appears that ‘Up is still Up’. Even in 2008, most publicly traded SaaS companies have bounced back from their lows by an aggregate of 20%, which is much better than the S&P 500. Apparently Wall Street likes SaaS companies and now are valuing them at 3 to 3.5 times their recurring revenues, unfortunately at the beginning of 2008 that number was closer to 8x. Keep in mind that this is better than a lot of public firms that are currently trading at their cash values. Other Wall Street analysts are valuing SaaS firms at 12x their cash flow but it is difficult to understand if there is a consistent valuation metric that firms or investors should be using.
Another interesting development is that Venture firms are now forced to value their private portfolio the same way they would value a portfolio of publicly traded stocks due to new accounting regulations (FASB 157). Based on the discussion this new regulation, it will only create more company valuation compression on top an already tough market for portfolio companies.
What Does a Good Investment Look Like?
So what are the VC’s looking for in an attractive investment in this market? Apparently the same things they were looking for in the past; a game changing idea, the team, the product and a big market. If you are a software company you better be offering a real SaaS solution or be leveraging the Cloud Computing to even be considered.
They are also looking for new portfolio companies to be more conservative about spending their precious cash. There is now an overt trade-off between the rapid growth rates of the last five years and capital efficiency to provide a longer runway for portfolio companies. The panelists indicated that they would like to see their new Series A companies, for example those who might raise $4 million, to survive at least for 18-24 months before going out for their next round! With the difficult market dynamics it is important for SaaS firms to form a strong syndicate when raising capital because your next round will be an insider round.
The panel indicated that they are looking for operating executives who know how to manage cash and scrub expenses. Another observation was that many of the early stage companies that they are seeing now are much more mature and well run than they were just a few years ago.
There also won’t be any more Salary.com (NASDAQ: SLRY) IPO’s of $15 million companies. IPO candidates will need to be $50 to $70 million in revenues and ideally profitable before filing their S-1.
For public SaaS companies you are going to see a slow down in the rapid growth rates we were seeing from companies like Salesforce.com (NYSE: CRM) and SuccessFactors (NASDAQ: SFSF). Public markets want to see profitability first and growth now comes second. Momentum stocks, those with high growth rates were trading at 8-9 times revenues, like Salesforce and SuccessFactors, are giving way to slower growth companies that are profitable and are given a multiple on cash flows.
Customer Acquisition Costs
When building your SaaS business model, it is important to assume that for every dollar of recurring revenue you will probably need to invest $.50 to $1.00 in your Customer Acquisition Costs (CAC). It is important than ever to have an active program of testing various CAC channels and tactics to maximize your investments. Then you need to have a smart statistical framework that you can explain to your investors.
Smart firms like EchoSign and YouSendIt are creating leads virally by infecting their customers and they are finding that they are finding 1/3 to 1/2 of all of their leads are generated organically. It is also important to leverage distribution channels, especially companies that have access to large customer bases like Salesforce.com, Google, and Intuit. Take more of a focused approach to your customer acquisition efforts by targeting a vertical market and use the power of your customer referrals because ‘word of mouth’ is the least expensive and most effective lead generation engine. Keep in mind that your sales process needs to be as easy as possible, in other words it needs to be ‘friction-less’. When your prospects sign up for a trial, it only takes a few minutes and weeks and they can do it without any involvement from your company. Give them a free trial, a sandbox a free version.
So I came away from this panel discussion with the following advice for companies looking for funding in this environment:
- You need to still need to have a great idea, product and team but you might need to have reduced risk for your potential investors.
- Demonstrate your company knows how to stretch a dollar as far as possible. Fewer employees is better… think Craigslist.
- Show traction. Number of transactions, members, customers, revenues, profits.
- Shop carefully for your potential investors and don’t waste time with Zombies.
Good Luck!
SMB Financial Productivity Software
There is an increasing number of Software-as-a-Service (or SaaS) firms jumping into the smallest end of the Small and Medium-size Business (SMB) market, and they are offering a variety of office productivity solutions. This is the fastest growing segment of the economy according to the Bureau of Labor Statistics there are up to 21 million self-employed consultants and small firms in the US.
This has traditionally been the sweet spot in the market for companies like Microsoft. Although most customers are somewhat happy with their offerings, Microsoft offerings tend to be cumbersome, packed with way too many features, hard to use and upgrade.
A new set of SaaS providers has emerged with products designed specifically for the small business owner. These packages are all delivered through the Internet as a service, so no more visits to Best Buy were required. Many of these new software services are very low cost and some were even free, and because of this, the adoption of these products has been rapid.
This Sector Report is only covers the incumbent software provider and the promising new SaaS suppliers.
Office Productivity Suite Profiles
Word, Excel, Outlook, PowerPoint and many other productivity products.
Microsoft has owned the SMB office-based software market for at least the last ten years. Their suite is large and includes all the main office productivity software modules.
Microsoft Office has been delivered as shrink-wrapped software. Microsoft is now experimenting with delivering their products through the Cloud along with using their Azure operating system. Most alternative office solutions are SaaS-based.
There are millions of Microsoft Office customers.
Public company (NASDAQ: MSFT)
New Alternatives
On-demand documents, spreadsheets, calendar, presentations, email and more.
Some applications are very similar to the depth of functionality you would find in the Microsoft Office suite of products. Other Google Apps offer very lightweight functionally and don’t appear to be very useful. All Google Apps are delivered through the Cloud as a subscription offering. Google provides for free usage for up to three users and then offer the applications for $50/user per month.
Approximately 10 million users and 1 million customer companies.
Estimated 3,000 companies are signing up for Google Apps per day.
Public company (NASDAQ: GOOG)
Zoho Productivity and Collaboration Free and $
On-demand documents, spreadsheets, calendar, presentations, email and more.
Most of the Zoho applications have similar functionality to Microsoft’s products and provide many other capabilities beyond their Office suite. The Zoho application suite has better functional depth than Google Documents. All products are delivered through a SaaS subscription model.
Estimate 1.2 million users/customers.
Private company based in California and India. 250 employees.
Zimbra Collaboration Suite Free and $
Hosted documents, calendar and email.
Hosted, open source applications that are less functionally rich than Microsoft, Google or Zoho offerings. One concern with using Zimbra is that if Microsoft finally purchases Yahoo! they might shut Zimba down and force their users to use Microsoft Office.
Estimate hundreds of thousands of users/customers.
Public company (NASDAQ: YHOO)
Other players in the SMB Office software market include Sun Microsystems StarOffice, Apple’s iWork, and Corel’s WordPerfect suite. Small businesses have many choices when considering an Office productivity suite and many of the best options are for free.
Small businesses are actively looking for ways to save money and using any of the SaaS-based office productivity tools will very quickly pay dividends. For example the City of Washington D.C. decided to switch from using Microsoft Office and related software to Google Apps and is now saving nearly $3.5 million annually.
Given the current state of the economy, many individuals are now setting up their own businesses. Using these new subscription-based Office Productivity tools can not only be very affordable for start-up your businesses but also give the consultant or SMB many of the same capabilities they had at their larger firms.
The good news is that there is no shortage of SaaS-based Office products out there to choose from and this is just a top line summary of what is available. Many of these products are available at very attractive price points, including many who are free. Given the experience that the City of Washington D.C., using these solutions not only can save a lot of money but also make SMB’s more competitive in this tough economic environment.
Company: MrTed, Ltd
Started: 1999
Located: Across the globe with 10 offices – Headquarters in London, UK
Geography: Global presence, with strong experience in Europe
Market: Human Capital Management – Talent Acquisition / Recruiting Technology
Products: MrTedTalentLink™ - Enterprise Applicant Tracking System (ATS)
SmartRecruiters™ - Small and Medium Businesses (SMB) ATS
Key Customers: Siemens, Heineken, Levi Strauss & Co, TomTom, Tommy Hilfiger
Website: MrTed Website
SmartRecruiters Website
Blog: SmartRecruiters Blog
Recent News:
Leading European RPO Ochre House selects MrTed to support its European delivery model
MrTed releases latest version of flagship Talent Acquisition Solution
MrTed Taps eQuest to Provide Job Postings on SmartRecruiters
Ready, Set, Recruit! Talent Acquisition Leader MrTed Launches Free Applicant Tracking System
Free Applicant Tracking System Shakes Up Recruiting Software Market
I asked Jerome Ternynck, MrTed’s Chief Executive Officer a few questions about his business and his view of the SaaS market in 2009.
Did you start out as a Software-as-a-Service company?
Yes, we did. The company was started in 1999 to provide an ASP solution, yet our Applicant Tracking Software (ATS) has always been sold on a subscription-based model for our customers. After the launch of MrTed, we faced some interesting market developments and survived. We learned a lot from the dot-com crash in 2001 and we realized that that being a pure subscription business, or what is now being called Software-as-a-Service, is important for our company’s long term stability and growth.
Being a pure SaaS company during a recession provides more visibility into our future revenue streams and eliminates the up’s and downs we see traditional ATS competitors experiencing. We are now more than 20 quarters profitable and have strong recurring revenue; we are able to maintain our investments in our product roadmap.
Why do your customers buy from MrTed?
For the last ten years MrTed has been servicing the talent acquisition needs of large, complex, global organizations. Our customers are one of the largest companies in the world and we also provide the technology infrastructure for some of the largest Recruitment Process Outsourcers (RPO’s), who also service these types of complex, multi-national companies.
At MrTed, we understand global recruiting. With over 9 years experience we are able to capitalize our knowledge into our products and service delivery. Our enterprise product, MrTedTalentLink™, is a proven solution that is functionally rich but can be set up very quickly, which is attractive for our customers. We support the local regulations and languages of all countries in Europe and most of Asia and North America. Because of this, our clients don’t need to work with local software providers in country where they have a presence. All they have to do is work with us and we have them covered, one single solution for one global workforce. As recruiting in Germany is still not the same as recruiting in China, an enterprise needs to be flexible in its requirements. MrTedTalentLink™ is able to fulfill all the local requirements, but meanwhile maintaining the consistency on the highest level of the company. Because of our user-friendly configuration capabilities of MrTedTalentLink™ a company is able to set its own requirements and configure MrTedTalentLink™ on its own.
Our latest offering, SmartRecruiters – which is still in beta – is designed specifically for small business recruiters and hiring managers who, until now, have been forced to use expensive enterprise systems that are complicated and difficult to implement. By contrast, SmartRecruiters is easy to use, deploys in just a few minutes, and is 100% free. Integrated with the SmartRecruiters ATS is a set of pay-per-use services and vibrant and supported by a growing user community. After only 90 days, we have over 350 SMB clients who have signed up for SmartRecruiters! This Open SaaS product was designed to be free and easy to use, which is what SMB’s are looking for. We started our mission with the believe that SmartRecruiters can change the Recruiting Software industry and that SmartRecruiters has become the fastest-growing ATS in only three months is testament to the great need in the market for something new. We will continue to improve the application through input from the community and the addition of new services, and we are optimistic that SmartRecruiters will be the number one ATS in the industry by the end of the year.”
What do you see as the key trends emerging in the SaaS industry?
The urgency for enterprises to have one global platform and be able to adopt the local requirements, while maintaining the global consistency. If you don’t provide a single hosted and one code base solution to your customers, this will be difficult times for you.
With the launch of our SmartRecruiters Open SaaS offering for SMB’s we believe that free software is the wave of the future, especially when it comes to the SMB market. For many mature software categories, sales penetration into smaller organizations is costly and difficult. By adopting some of the business approaches of firms like Google, Yahoo!, Linkedin and Skype, if you can aggregate a large user community, there are many ways of monetizing the customer base without having to sell software.
Our approach to the ATS market is to use an Open SaaS approach, which is a mash-up of both Open Source and SaaS principals. Offer the software for free, its hosted and maintained but provide pay-per-use services and wrap it with a strong user community. We think that this trend has the potential to change the SaaS industry.
What is your outlook for 2009?
We continue to grow and see opportunities in the market on both enterprises as well for the SMB businesses.
In the enterprise market, it’s time to take control and grow from one global platform and get rid of the numerous local solutions. Customers want to consolidate on numerous local solutions into a single global solution, covering and managing their global workforce. We are ideally positioned for this 2nd buyers market. A couple of years ago this buyers group were the early adaptors of the first ATS wave, but now they understand the urgency of the current market to improve their processes, create a global workforce and be ready for the new phase of growth after the recession.
Introducing ATS technology for free to the SMB market turns the SmartRecruiters proposition into a gateway to the estimated $40 Billion staffing services spend by SMB’s in the US alone. Free ATS technology levels the playing field in the War for Talent and ensures that corporate recruiters and hiring managers in smaller businesses can be more competitive.
Although we will need to manage our business very carefully during this recessionary period, we also have new products and markets that we are now attacking, so we see continued growth potential. Unfortunately, we don’t control the current state of market or economy, but for our SmartRecruiters Open SaaS offering – which is Free & Easy – our timing couldn’t be better to launch a free recruiting tool and turn an industry upside down.
Thank you to Jerome Ternynck, Matthijs van Etten and Ralph Brasker for contributing to this profile.
Company: Zuora
Started: 2006
Located: Redwood Shores, California USA
Geography: North America
Market: Subscription Billing
Products: Z-billing: Complete billing solution for subscription businesses
Z-payments: Payment solution for subscription businesses
Z-Force: Billing and payment system fully integrated with salesforce.com
Z-Commerce Platform: Commerce platform for cloud developers
Key Customers: Boomi, Clickability and Marketo
Website: www.zuora.com
Blog: Z-blog
Recent News:
Zuora Introduces the Business Cloud With Launch of the Z-Commerce Platform
Zuora Enables Growth, Reduces Time to Invoice and Increases Productivity at Marketsync
I asked Gary Hagmueller, Zuora’s Chief Financial Officer a few questions about his business and his view of the SaaS market in 2009.
Why did you start your company?
Thanks to the power of the Internet and cloud computing, many products are moving to subscription services delivered online—everything from music and DVDs to software and infrastructure to groceries and cars.
However, companies that deliver these new services need a way to run their subscription business AND support their unique billing needs. For example, they need pricing flexibility to address different customer groups, operational scalability for growth, and key metrics like churn and monthly recurring revenue (MRR) to assess the health of the business.
That’s where Zuora comes in. Just as Amazon makes it easy to become an online retailer, Google makes it easy for anyone to advertise online, and PayPal makes it easy to accept online payments, Zuora’s vision is to make it easy for any company to build, manage and grow a subscription business.
Did Zuora start out as a Software-as-a-Service company?
Yes- Zuora was built from the ground up by SaaS industry visionaries and veterans from Salesforce.com, WebEx, Postini (now Google), and Oracle. The Zuora team grew up in the subscription services world and started Zuora with the mission in mind to help other SaaS companies build and grow. Moreover, Zuora runs its business completely in the cloud, using such applications as WebEx, eFax and Google.
Why do customers buy from Zuora?
Zuora is the fastest-growing on-demand subscription billing and payment service designed specifically for subscription companies. Its innovative products are able to meet a wide range of customer problems. Whether a company is having trouble processing recurring payments or spending too much time and resources of manual billing, Zuora’s team can understand and assess the issue. The Zuora platform changes the way subscription businesses manage and sell to customers and allows them to bring new products to market in less time, with less hassle.
What do you see as the key trend emerging in the SaaS industry?
In the current economic climate, an increasing number of companies will begin offering their products as subscription services. The success of the SaaS movement has even prompted other industries outside of software like cars and movies (i.e Zipcar and Netflix) to adopt this lucrative model of recurring revenue. The problem is…running a subscription business like salesforce.com or WebEx is hard no matter how the economy is doing, and mastering the metrics of a subscription business is even harder.
A key trend emerging is the Business Cloud, any easy way to add commerce capabilities such as subscription billing and recurring payments to the services that developers are building. More and more companies will be looking for a set of cloud-based services dedicated to giving them the tools they need to monetize the services that they are building on cloud platforms.
What is your outlook for 2009?
Our outlook for 2009 is extremely bright. The demand for our subscription billing and payment services are expected to grow, particularly in this economic environment, when businesses get lean and mean, regain focus on building differentiation in their core business, and divest non-core activities or outsource them to best of breed vendors like Zuora.
Thank you to Gary Hagmueller, Annette Giambroni and K.V. Rao for contributing to this profile.
Crazy like a fox.
With the economy in such tough shape, with customers on the sidelines with no budget to buy software, maybe now is the perfect time to embrace a Freemium software strategy. This concept was originally proposed by a venture captialist named Fred Wilson, the founder of Union Square Ventures.
This became really clear to me over the past 6 months that this trend towards free software might be the future. Initially I read a great article entitled Free! is the Future in Wired magazine (make sure you watch the Chris Anderson video), which I thought presented a very clear argument for free.
Think of all of the free software and services business models that went bust during the Internet Boom. But then again there have been many businesses that were built using a free business model including Google, Yahoo!, Skype, eBay, and Craigslist just to name a few. Some of the new kids on the freemium block include Facebook, LinkedIn, SimplyHired, Kijiji, 37signals and many of the open source software players.
My second realization of the power of free was using 37signals BaseCamp project management product. It was a great example of providing a free product that you liked so much that you had to buy into their paid version. If you need a project management tool, this one is worth a subscription and you may end up pulling out your credit card like me.
Then my third reason why I thought freemium could really be the future of software is based on working with a great company, MrTed, who makes Applicant Tracking or ATS software for large companies. MrTed just recently launched their new Small and Medium business freemium offering, SmartRecruiters, which is an Open SaaS product, which is a mashup of Open Source and SaaS business concepts. This Open SaaS model was developed by Jerome Ternynck MrTed’s CEO and founder. SmartRecruiters like many other freemium offerings is based on the development of a strong and passionate user community, who ultimately become the revenue engine for these companies. SmartRecruiters will monetize their business model by offering a collection of value-added services that are bundled with their free software.
As companies look at their 2009 business strategies, they need to balance gaining marketshare while keeping customer acquisition costs (CAC) as low as possible. By deploying a freemium software strategy now you might be considered crazy in 2009 but be laughing all the way in the not too distant future.
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