At Montclair Advisors I work with many different types and sizes of software firms that are jumping into the SaaS business model for the first time.   Here are a few tips that I would tell a new client who is looking to get into the SaaS business in 2012.

Think “Whole Product”

A SaaS offering is more than just software, it is also the services to get the product up and running, training, support, the infrastructure and security.

For most SaaS firms, they really view their platform as synonymous with their company’s overall brand, which includes more than just the technology. This brand promise is a product experience that is smooth and consistent. It also takes into account issues like business continuity and being able to quickly restore systems and data after an outage. This also means that SaaS offerings must understand and how to properly manage security and compliance concerns for large, complex customers.  In some cases this promise needs to do a high level of monitoring and even anticipate and correct problems before they occur.

When considering the professional service component of a SaaS offering, there should be extra focus on efficient provisioning and on-boarding of new customers. It is important to make this initial experience quick and easy in order to improve the customer’s overall time-to-value. By combining many customer-facing functions like support, training and service into a Customer Success team is also another popular way of trying to deliver a positive ‘whole’ product experience.

Focus on Adoption and Consumption

The economics of SaaS requires both a high rate of new customer sales combined with a better than 90% renewal rate for the financial model to work. The trick that the really fast growing SaaS firms have discovered is that up-selling additional capacity and cross-selling new products not only increases top line revenues but also improves overall Customer Acquisition Costs (CAC) and business margins.

The objective in any software company should always be to build a satisfied customer-base, but in the SaaS model you can’t stop there, it is important get customers to actively use and adoption the product. When a product is easy-to-use, intuitive, being used every day, and built on a solid platform, then it can become viral. Viral products like DropBox, Yammer and Salesforce.com’s Chatter can throw off high marginal add-on sales, that can boost a SaaS company’s revenues very quickly. This type of product consumption is important for all SaaS company’s even if the use of their product may never go viral.

It’s All About Growth

Many new SaaS firms spend a lot of time and capital building out their products, which makes sense. Often they underestimate the amount of effort and focus required to build a high growth sales and marketing machine. Because it is hard initially to jump start the recurring revenue model, it is important to develop a highly productive sales methodology, usually based on a ‘land and expand’ approach. For the most successful SaaS companies (SuccessFactors, Salesforce.com, Workday), an aggressive Compound Annual Growth Rate (CAGR) is imperative to building a profitable company.  Many of these firms, even though they are large, are still growing at 30-50% per year.

In order to build this sales and marketing engine, it requires a meaningful investment in lead generation, a sales organization that separates hunters from farmers and has a set of metrics that are tracked at least weekly. For ISV’s that are moving to a SaaS model, don’t co-mingle the SaaS and non-SaaS sales teams. Each sales team should be very focused on selling a single type of product or a single function. For example, having a SaaS team that focuses on selling only new SaaS deals, another is only doing renewals or up-selling.

Because products and markets are different, it is important to constantly be testing lead generation, pricing, packaging and sales processes in order to find the best one that works for your business. If something doesn’t work, stop doing it, and pivot to another idea. The best SaaS companies are always testing and trying to improve their revenue generation processes.

Optimize Cost of Goods Sold

Most SaaS executives are focused on their COGS and how best to optimize them. This is why many early SaaS firms use free open source software and Infrastructure-as-a-Service providers to build out their platforms, or outsource components of their business to partners to save money. The best way to optimize COGS is to reduce the number of people required to on-board, provision and operate your SaaS platform. It is better to automate as many of your processes as possible, which not only saves precious capital, but also can often improve the overall scalability of the business.

One the best examples of this type of automation is with the popular commercial SaaS storage solution DropBox [Check out this video]. They have built a service that is easy to use, self-provisioning and needs no human intervention. This is why they were able to on-board 40 million new customers during the last 12 months with a net increase of only 7 people across their entire company! This is where SaaS companies can become very profitable and grow very quickly.

Another area that can really impact COGS is related to the 30-day trials associated with most SaaS software. Without a scalable platform that has a sufficient level of automation, the launching, management, tear down and re-provisioning of resources will all be done by an ever growing team of professional services or IT professionals. Best practice is to leverage a multi-tenant platform and automate everything possible.

Strive for Independence

For ISV’s who are either transitioning to or launching a new SaaS offering, it is important to seriously consider keeping the new SaaS organization separate from the main business. I have seen many ‘shared service’ models where different groups share sales, operations, demand generation, services and even support and they experience a lot of challenges. The SaaS business model in many ways is unique and conflicts with most traditional software business practices.

For example, professional services in most software companies is a revenue-center and they are always looking for ways to generate additional projects and revenue. At a SaaS company, the professional services team is doing the opposite.  A SaaS services team is trying to minimize their level of involvement with the customer, and the less services involved in setting up a SaaS product, the better. This would be a difficult group to manage if you have both a revenue quota and are also trying to minimize revenue associated with SaaS accounts.

The other reason I often recommend creating an independent group for transitioning ISV’s is that the overall rate and pace of SaaS companies is quite different than traditional software firms. SaaS firms develop products more quickly, sales processes are faster, deployments are more rapid and this mismatch in speed creates a lot of stress when traditional ISVs try to adopt this rate and pace.

It is also important to continue the care and feeding of the core business and realize that is also a critical success factor. By allowing this type of co-existence you can move at the right rate and pace, while continuing to build and run your core business.

There are many other tips and tricks to starting your SaaS business.  Feel free to email me at kevin@montclairadvisors.com and I have some other materials that can be helpful for those who are new to the SaaS model.

I was going to write this post earlier in the week but it seemed that everywhere I turned I saw more developments and wanted to include them.  The market is really starting to get frothy and there are many big SaaS/Cloud deals happening and companies going public with very large market caps.  Let’s take a look:

Recent Acquisitions

SuccessFactors (NASDAQ: SFSF) Acquires Plateau Systems for $290M, which was paid in half cash and half in stock.  This is an interesting move since it is the first acquisition that could be considered ‘core’ functionality when compared with other acquisitions like CubeTree (Collaboration), YouCalc (Analytics), Inform (Analytics) and Jambok (eLearning).  Plateau also has a fairly significant product portfolio overlap including compensation, performance management and succession planning, so it should be interesting to see how these offerings are consolidated.

Plateau has a very respectable customer-base with a large number of federal government customers as well as many large enterprise customers.  The company also was profitable and has some interesting Platform-as-a-Service capabilities that should be very useful for a larger SaaS portfolio.

Based on the market basket of publicly traded SaaS firms, this deal will make SuccessFactors the second largest firm in the group based on current revenues.  We estimate that at their current quarterly run-rate of $68M and Plateau’s estimated annual revenues, the combined company now is probably around $340M, which is only second to Salesforce.com.

CenturyLink (NASDAQ: CTL) Buys Savvis (NASDAQ: SVVS) for $2.5B, which is now third largest telecommunications company in the US with $18B in annual revenues.  The company had purchased Qwest earlier in the year and that deal was finalized on April 1st.   Now with the acquisition of Savvis, CenturyLink is moving into the Cloud Computing market with more than 48 data centers globally.

This is the second major deal in the Cloud Computing market of an emerging Infrastructure-as-a-Service provider, when Verizon purchased Terremark for $1.4B in January.  This should stimulate further consolidation of other providers and Rackspace may be the next target.

Salesforce.com (NASDAQ: CRM) Picks Up Radian6 for $326M for the Canadian social media monitoring company.  Radian6 helps their customers monitor ‘hundreds of millions’ of social media conversations. Salesforce believes that the acquisition will enable it to enhance all of its products, including Sales Cloud, Service Cloud, Chatter and Force.com.

Infor and Golden Gate Capital Buys Lawson Software for $2B.  Now this is technically not a SaaS or Cloud related deal but it just is another example of the pressure traditional providers are feeling from the up and coming SaaS and Cloud providers like Netsuite, Workday and even Oracle’s new Fusion offerings.

Recent SaaS IPO’s

Cornerstone OnDemand (NADSAQ: CSOD) went public on March 16th and quickly captured a market cap of $800M, even when the company lost more than $45M.  The company offers a suite of Talent Management solutions similar to what is offered by SuccessFactors and Taleo.

ServiceSource International (NASDAQ: SREV) completed their IPO on March 25th and were valued at more than $800M as well.  ServiceSource helps companies manage their revenue streams from renewals, maintenance and subscription agreements, which is especially important for SaaS firms.

Responsys (NASDAQ: MKTG) was able to launch into the public markets on April 21st and got a very respectable market value of $2.4B.  The company offers SaaS-based software and services that help retailers and eCommerce firms build and manage online campaigns.

By Kevin Dobbs

Montclair Advisors, LLC

Dreamforce 2010 was in San Francisco last week and there were a lot of announcements and it is only now that I am starting post my thoughts.   This post is going be around Force.com 2 and how Salesforce has rethought their approach, repackaged their platform and now have relaunced their PaaS.

This table provides a quick summary of how Salesforce has repackaged the Force.com 2 Platform.

What is interesting is that several of these offerings are just new packaging concepts and several are net-new products.  Let me walk you through the suite:

Appforce

This is basically the original Force platform using their proprietary 4GL, point-click-language APEX that has been repackaged as a departmental application platform.  What is interesting is that this environment is not just for departments, large enterprises like Japan Post and Thomson Reuters have done very large Cloud development projects using this platform.  I think that Salesforce realizes that due to its proprietary nature, most organizations will be attracted to Force.com but would prefer a more open and portable development environment.  Applications built with Appforce are also able to be easily integrated with Salesforce’s collaboration capability Chatter

.

Siteforce

This is a development environment specifically designed for building websites without having to write code. There was a great demonstration of how you can build and modify websites, even for mobile devices, using their drag-and-drop interface.  This will be popular with firms that do a lot of campaigns and need to design a lot of landing pages which can be tied back to Salesforce.  Like the Appforce products, Siteforce can be linked to Chatter to add social and mobile features to websites.  This was an existing capability inside of Force.com that has now been exposed as a new offering.  The marketing materials we were given state that there have been more than 20,000 website built using Siteforce.

VMforce

This platform is a result of a partnership with VMware, that opens up the Force.com platform to more than 6 million Java developers.  Using VMforce, developers can now run their Java-based applications on the Force.com platform, similar to what they would do it they were using Amazon EC2.  Developers can also use Java IDE’s like Spring or Eclipse as well as other open standards.  With my clients, this is a popular approach, it provides some leverage with existing Java-based apps as well as professional developers prefer to develop in this type of environment, rather than using a 4GL point-and-click product.   VMforce is currently in beta and will be ready for general availability in 2011.

Heroku

In a really interesting move, Salesforce went out an purchased a leading provider of Ruby-on-Rails for $212M in cash, $27M in stock and another $10M for un-vested employee shares.  Like VMforce, Heroku will offer developers a way to write applications using Ruby and then run them on Force.com.  The rumor was that VMware had made a run at the firm several months ago, but wanted to remain independent.  Marc Benioff in his keynote indicated that Heroku would remain independent from Salesforce, I am assuming in the way VMware has remained independent from EMC.  Several benifits for Heroku as part of Salesforce will be access to their 87,000 customers as well as their technology stack including Chatter.  Today, there are more than 100,000 websites and applications written using their platform including BestBuy and FlightCaster.

ISVforce

In another re-packaging move Salesforce has taken the Force.com platform and created a new program to help larger ISV’s to build their next generation applications on top of their PaaS.  This is a program that contains services and tools to help Independent Software Vendors to move their apps to the Cloud. Salesforce provides development services, trails and provisioning, connections to AppExchange and application monitoring along with their multi-tenant Infrastructure-as-a-Service.  Some early adopter ISV’s include Blackboard (who did a quick little demo), BMC (RemedyForce) and CA (Agile Vision).

AppExchange

Salesforce continues to promote their on-line application marketplace, which is similar to what Apple offers with their App Market, and how has over 1,000 applications available. Some interesting facts provided by Salesforce about the AppExchange include there have been more than 360,000 application test drives through the AppExchange, nearly 700,000 application installs and more than $1B invested in companies who are on the AppExchange.

Database.com

Another interesting announcement is that Salesforce has gone into the database business.  When I first heard this, I thought it wasn’t necessarily a good idea, but then I read that they were just repackaging a gigantic Cloud-based version of Oracle and selling the database by-the-slice.  Apparently Oracle thinks this is not a secure approach to selling databases, but let’s see how this all works out.  Amazon has something similar with their RDS offering.

The result is that Salesforce now has a suite of offerings that are designed to meet the needs to enterprise customers, software companies, professional and casual developers.  The strategic benefit of all of these offerings is to open up several new revenue streams for the company and continue their leadership momentum in the Cloud.

Last week’s Oracle OpenWorld show was quite an event with many different story lines including the tie-in to the Iron Man 2 movie.  In fact, in the main area outside the keynote hall there were three Iron Man suites along side their Exadata and Exalogic cousins.  So here is what we learned:

Cloud in a Box according to Marc Benioff and Larry Ellison.  There was quite a number of heated, yet humorous references to Marc Benioff’s (CEO at Salesforce) comments related to Oracle’s view of Cloud Computing that it has to reside in an Exadata box.  In fact in one session I attended, he even said that the Internet was not made of Cloud boxes that were even taller than Marc, and he is tall.  In the Sunday afternoon session, Larry was very dismissive of both Marc’s vision of the Internet and his book Behind the Cloud. If you have some time check out Marc Benioff’s OpenWorld keynote, very funny.

What is really interesting is that in many ways they are both right.  Larry is very famous about a his rant on Cloud Computing and that it is nothing more than a network, servers and software.  This is true, even the most Cloudy providers in the market like Amazon and Salesforce.com are dependent on a real infrastructure that can scale and is reliable and many of these firms are Oracle customers.

On the other hand, Marc is right that the Cloud is less about buying, building and maintaining this scalable architecture and more about leveraging a firm that provides their Infrastructure-as-a-Service.  This has been one of the main catalysts for the software industry’s move to a subscription business model or SaaS, just like Salesforce.com.

In some ways both companies are right, it just depends on your viewpoint.   I think that Oracle is thinking more like IBM and HP and Salesforce is more aligned to Facebook and Zynga. Even though Larry and Marc were both exchanging jabs last week, they are both customers of each other, and in the end that is good for all of their customers.

Mark Hurd looks like he fits in well with Oracle.  The keynote sessions where Mark presented, he was relaxed and really knew the material.   Given Oracle’s absorption of Sun, it is really helpful to have someone with Mark Hurd’s background helping Larry run the company.  The hardware business is quite different than running a software firm and Oracle was able to secure one of the best hardware executives in the industry from HP.

Oracle is really embracing the hardware world.  It was interesting to see the focus on the new Exadata and Exalogic products.  The company’s messaging revolved around performance, availability, security and management and not very much around applications or Cloud Computing.  A lot of discussion around hardware and software being engineered together to create these incredibly powerful database and middleware server platforms.  But does this approach raise concerns around ‘vendor lock-in‘?   This hardware-centric strategy makes sense because Oracle really views IBM as their biggest competitor and they need to monetize the Sun acquisition as well.

Fusion applications are coming at the end of the year, but not sure if anyone at Oracle cares. Larry told the crowd that the writing of the new Oracle Fusion applications for Financial Management, Procurement and Sourcing, Project and Portfolio Management, Human Capital Management, Customer Relationship Management, Supply Chain Management, and Governance Risk and Compliance.  These are the products that were promised last year at OpenWorld but they appear to be real at this point.  Although I didn’t attend the deep dive sessions for Fusion, others who did told me that they have done a good job.  At the Wednesday afternoon keynote, the demos of the products looked good and the user interface looks quite modern.

According to Larry the writing of the new Fusion applications was the biggest development project in Oracle’s history, it was interesting to see that there was little for no fanfare surrounding this major milestone.  As long as the Fusion applications sell more database and infrastructure software and more Exadata servers, I guess that’s what is important.   The successful roll out of the Fusion applications later in the year is going to be important for the overall software market but I doubt it will really impact the leading SaaS providers like Salesforce.com, Taleo, SuccessFactors or Workday.  It will be interesting to see how Oracle evolves its thinking about the applications market and it’s approach to the Cloud, because that is where all the growth will come over the next 5 years.

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

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.