Here is our updated Public Company SaaS interactive spreadsheet.  Enjoy!

After our post on January 26th we got several great comments about the cost of starting a SaaS company.  It definitely takes a commitment to build a true SaaS company, especially when you consider some the following facts about the 15 public companies that I tracked in my high level analysis:

• Average Start-up Capital Required:                                   $44M
• Average Time Required from Start-up till IPO:                 7 years
• Average Capital Required per Year till IPO (Burn):             $6.8M
• Average IPO Proceeds:                                                    $76M
• Additional Capital Raised After the IPO:                           $243M
• Average Total Capital Raised:                                          $363M
• Average Market Capitalization:                                      $1,262M
• Companies Who are Profitable:                                            8

The costs of getting a SaaS start-up off the ground are substantial but only about half of the firms we tracked actually started out as a pure SaaS company.   These other Cross-Over firms started out as either Application Service Providers (ASP’s) or were traditional On-premise ISV’s that move to SaaS through a combination of organic migration or through a series of acquisitions.  Companies like Concur, Kenexa, Taleo and Ultimate Software have all transitioned to SaaS from an on-premise heritage.

Montclair Advisors - SaaS Start Up Costs - Pre IPO

The shortest time to go from start-up phase to an IPO was 4 years and the longest was 13 years.  Most of the firms we tracked were founded between 1997 to 1999, which was prior and during the Internet Bubble.

When these firms went public they raised a range between $30M (LivePerson and Ultimate Software) to over $150M (DealerTrack and NetSuite), but on average they raised about $75M.  All the firms then went on to do additional capital raises from $32M (LivePerson) up to $750M (DealerTrack) but on average each raised $243M!   The total capital raised, when considering both pre IPO, IPO and post IPO capital raised, these firms raised between $100M (LivePerson and Ultimate Software) to close to more than $500M (DealerTrack, Salesforce.com and SuccessFactors).

Montclair Advisors - SaaS Start Up Costs - Post IPO

After going public, this SaaS market basket of companies have done well as a group.  The majority of the firms are profitable, which makes for solid cash flow performance, revenue visibility and overall stability of the company’s stock, for the real SaaS firms.

The most valuable company, based on their Market Cap is Salesforce.com at more than $8B and there are at least 4 other SaaS firms with valuations over $1B (Blackboard, Concur, NetSuite and SuccessFactors).  When comparing the amount of capital raised to the market valuation, the 5 best performing firms are Salesforce.com (.09), Ultimate Software (.13) , Concur (.19), RightNow (.22) and LivePerson (.31).

Montclair Advisors - SaaS Start Up Costs - Market Caps

This year, as the economy improves, promises to launch a few new SaaS IPOs and we will continue to track this core group as well as a larger group of Hybrids and Cross Overs and will periodically report back with our findings.

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:

1. 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.
2. Demonstrate your company knows how to stretch a dollar as far as possible.  Fewer employees is better… think Craigslist.
3. Show traction.  Number of transactions, members, customers, revenues, profits.
4. Shop carefully for your potential investors and don’t waste time with Zombies.

Having lived inside of a sub-$40M, publicly traded, SaaS provider for a number of years, I can tell you how hard it is!

Today, there are a number of firms in this position and with the pressures of this economic slow down, it is hard just to survive.  As an example, take a look at our listing of Publicly Traded SaaS Index firms, and I can imagine all the firms with market caps less than $100M are having a hard time.

This last week, Salary.com filed a Shareholder’s Rights Plan, or as some refer to it, a poison pill.  Companies usually pursue a poison pill strategy when their market valuation falls to the point where the company becomes attractive for an unwanted suitor to come along and buy the company for a very low price.  Keep in mind that Salary.com is building a nice franchise in the emerging compensation software market.  In fact, the company just announced a new suite of products and a top industry award at the recent HR Technology show in October.  This makes for an attractive SaaS acquisition target.  Stay tuned.

I guess if you are a small fish in this market, and you want to survive, you better swim fast!