3
by Kevin Dobbs
Montclair Advisors, LLC
When advising software clients who are interested in moving to a SaaS business model, one of the areas I really dig into is how are they selling to new customers. Most of us in the SaaS community realize that carefully tracking your Customer Acquisition Costs or CAC, is a critical component in building a successful and profitable company, but I think it is equally important to understand how traditional software sales and marketing models and SaaS models differ.
Traditional Software Sales & Marketing Model
Over the past 25 years there has been a traditional way to market and sell enterprise software which has been based on key principles such as:
- You need a Large direct sales force including a large support team, or as I used to call them, ‘The Cast of Thousands‘
- Front loaded compensation plans that pay out when deals are sold
- High average sales prices, including services, that would almost always be over $500,000
- Long sales cycles, usually 6-12 months, with pursuit costs averaging around $70,000 for every deal the company played in
- Win rates are in the 30-50% range
- Average face-to-face selling time that is around 15%
- Pipeline building using a combination of in-person events (seminars, tradeshows, user group meetings), telemarketing teams (inbound and cold calling) pounding the phones and a lot of paid marketing campaigns
- Lead pipelines that appeared full but always seemed to lack the appropriate level of qualified opportunities
- First generation CRM systems and reports that were produced periodically using Excel
Brings back the good ol’ days doesn’t it. Many software firms are still using this model and they are finding out that it doesn’t work very well in the new world of Software-as-a-Service sales. Some of the reasons it doesn’t work is that software buyer preferences are definitely changing, but one big issue is it is very expensive to operate this type of model, especially when you get your revenues paid out over time.
SaaS Sales & Marketing Model
There are several important differences in the SaaS model that make the traditional software sales and marketing model less than effective;
- SaaS customers pay a subscription based on users or usage of the software service over time, usually over three years. After the recession, this has become the new normal for software sales
- More focused solutions that usually have Average Sales Prices that are typically lower, so reps need to sell more deals to hit the same quota targets
- Key metrics like customer satisfaction, renewals, up-selling and cross selling are even more important for SaaS than they were in the past
- Sales method is more of a “penetrate and radiate” approach
- It takes a long time to build up a recurring revenue stream
Given these differences, then what should your SaaS Sales & Marketing model look like? Here are some ideas to consider when building out your SaaS sales and marketing plans for 2011 that can help you to build out a low-cost but high-efficiency sales and marketing machine;
Marketing
- Hire experienced marketing leadership and professional
- Evolve a good list of key influencers and industry contact and communicate with them frequently
- Develop a clean prospect database
- Mix paid and free social networking programs
- Build a vibrant customer community and market to them with products like Lithium
- Leverage social media like LinkedIn, Facebook and Twitter to generate interest and leads
- Use Web 2.0 marketing tools like Marketo, Eloqua, Pardot and try drip marketing
- Track everything (see the last Smart SaaS post)
Sales
- Hire experienced SaaS sales leadership and reps
- Your SaaS sales team should be more low touch than your traditional sales team
- Experiment with telesales even with high end enterprise products
- See is using an indirect channel makes sense for your business, if managed correctly these distribution partnerships can dramatically lower your sales costs
- Carefully track your lead hand off between marketing and sales, make sure leads are not falling through the cracks
- Track everything
Metrics like Customer Acquisition Costs and the Magic Number can help your sales and marketing teams see how effective their programs are and can provide insight when to invest and when to continue developing your repeatable sales model. I would also encourage you to learn more about Mark Leslie’s Sales Learning Curve, because it offers a more scientific approach to cost-effectively building out your SaaS sales team. Best-in-class firms that have profiled in this blog have adopted many of these techniques to build a scalable but cost-careful sales and marketing organizations.
Stay tuned for Tip #6 Package for Viral Adoption
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
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:
Gary wanted the sales rep to think MRR and the most logical thing to do was to give $1 of commission for $1 of MRR sold. $1 of MRR generates $12 of annual revenue, so $1 commission equals 1/12=8.3% which is very close to the typical 8% paid for sales commissions.
The second thing he did was to define was the ramp up of the commission rate to make sure the best sales rep would get the most upside. To do that, he applied another simple rule:
-
- 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
Here is our updated Public Company SaaS interactive spreadsheet. Enjoy!
Company: Yammer
Started: 2007
Located: San Francisco, California
Geography: North America
Market: Enterprise Microblogging Platform
Products: Yammer Desktop, Yammer on your Mobile Device, and Yammer Plug-Ins
Key Customers: Deloitte, AMD, AAA of Northern California, Nevada and Utah, SMG, Cargill, Thomson Reuters, Sungard, Hill & Knowlton and SunCorp.
Website: Yammer
Blog: Yammer Blog
Twitter: @Yammer
Recent News:
Yammer is Selected as an MIT Sloan CIO Symposium Innovation Showcase Finalist
Fortune 500 Companies Flock to Yammer
Yammer Secures $10 Million in Series B Funding from Emergence Capital and Previous Investors
I asked David Sacks, Yammer’s Founder, CEO and Chairman of the Board few questions about his business and his view of the SaaS market in 2010.
Did you start out as a Software-as-a-Service company?
Yes, we did start out as a SaaS company. Our company was incubated inside of Geni, which develops family tree software. I was also involved with the consumer Internet with my experience starting PayPal. As both companies scaled, I found it was hard to keep tabs on what everyone was doing, and Yammer was developed to address this challenge. We found that microblogging was a great way to keep current on the status of important projects, individual profiles and information feeds inside of an enterprise.
Then in 2008, we spun out Yammer and that same year won the TechCrunch 50’s Best in Show award.
Initially we were targeting small and medium sized businesses but we are now seeing that Yammer has strong appeal for large enterprises like AAA, AMD, Cargill, Cisco, Deloitte, and Thomson Reuters.
Yammer is very viral because it was very easy for anyone to sign-up, confirm their company’s email address and start using the system. You don’t need to wait for an IT administrator to set up Yammer and you can quickly invite your work colleagues, with the same company email domain, to join in and begin collaborating with you.
When a company wants to claim the network being used by it’s employees, they pay a nominal subscription fee, and then we provide a set of administrative tools that allow them to manage upgrades, security, compliance, deliver premium support, and customize their site.
Part of our initial business model was to base Yammer on the consumer model of software, but make it enterprise-class. We wanted to remove the traditional friction from our software sales process by making our product as easy to use as Facebook.
Why do your customers buy from Yammer?
Our customers never have to pay or upgrade our software unless their employees are using it. This is very attractive, when you compare it to the traditional software selection process where you have to vet vendors, choose one, negotiate the contract, implement the product, pay a lot of money and then no one uses it. Yammer is de-risking the traditional enterprise software value proposition. Employees are valuing it because they use it.
When large companies see thousands of employees using Yammer what do they do? They can do three things - wait and see what happens, shut it down or buy it and we are finding the vast majority of companies are buying Yammer because their employees are being productive and want to collaborate using the software.Our customers also really like our administrative tools for e-discovery, security, directory integration, and network administration.
“If Facebook and Twitter had a baby, it would be Yammer.”
We are like Twitter because we offer a real-time feed of information; you can follow any one, join groups and sort information feeds by hash tags. We are like Facebook because there is no 140-character limit, you can have attachments, threaded replies and we offer a variety of enterprise management tools.
Yammer is a like a virtual office where workers can feel more connected to each other, especially remote workers. We act like the traditional company water cooler for these distributed organizations. As workforces become more mobile, Yammer just make a lot of sense for enterprise collaboration. Today we only offer Yammer in English but we have noticed that there are an increasing number of new customers who are signing up outside of North America. In the near future we will be supporting multiple languages in addition to English.
Customers also like our value-based pricing model. We charge between $3 and $5 per seat per month, depending on the level of support and administrative tools. We also provide volume discounts for our larger customers. This is much more cost attractive than purchasing Chatter from Salesforce.com for $15 per seat, which is quite expensive and most employees don’t want to communicate through the company’s corporate CRM system. Our very fast viral Freemium approach appears to be working, because since we have been live for only the last 18 months we now have over 1 million seats today.
What do you see as the key trend emerging in the SaaS industry?
The first trend is the consumerization of enterprise software; Yammer is a great example of this trend. Real innovation in the technology space over the past 10 years has been on the consumer-side of the software market with products like Facebook and Twitter. At Yammer we want to take these learnings back into the enterprise software world. When I was at PayPal, we were very successful using the Freemium model to promote adoption. This type of approach to software can definitely result in the overall democratization of enterprise software. SaaS is the first step, when the delivery model changed, then there were no upfront costs and the risk is dramatically lower. Using techniques developed by consumer software firms, more and different kinds of buyers can now access enterprise-class software.
The second trend we see is that enterprise software products will be designed more for the end-user than power users or administrators. A good example is how Facebook and Twitter don’t do every possible feature or function and they don’t clutter the user’s screen. This simplified approach to software allow causal users to be more engaged with their products and other users. These types of causal use software products will also appeal to younger employees who have used Facebook and LinkedIn and expect their enterprise software products to be that easy to use.
Social Networking is also a major trend we are seeing. We started thinking about this over the last couple of years, since 2007. Now it seems so obvious, that social networking would grow into an unstoppable trend. The ability to connect workers, to leverage expertise and content all in real-time, which allows everyone to work smarter, just makes a lot of sense. I still think that there is confusion about Enterprise Social Networking, for instance Salesforce sees it as a CRM newsfeed, and we see it as enterprise real-time communication. Eventually we see Enterprise Social Networking replacing corporate email and instant messaging.
What is your outlook for 2010?
In January we raised $10M, led by Emergence, that provided capital to allow us to expand our team. Our investors liked the fact that we have built a very cost effective business, based on our viral distribution model. Our Q1 sales were greater than all of our sales for last year combined.
The software industry is realizing that Enterprise Collaboration is going to be a huge space. Most software companies will want to get into this market because every company will want one of these collaboration platforms to deploy. The only problem is that most enterprise software firms looks at these types of tools backwards, because they already have multiple different product lines, then they will need to stuff it through their sales channel. At Yammer we have already solved this distribution channel problem and we can actually open up our channel to these companies as a Distribution as a Service model.
We continue to sign up a number of large customers, and this type of adoption makes other large companies comfortable using our technology. Things look great and our traction is accelerating.
Started: 2003
Located: Palo Alto, California
Geography: Global
Market: Electronic Signature and Contract Management
Products: EchoSign Web, EchoSign Salesforce, EchoSign for Google Apps, EchoSign for Netsuite, and EchoSign for Oracle CRM OnDemand
Key Customers: British Telecom, Comcast, Delta Airlines, GE Capital, Qualcomm, and Time Warner Cable
Website: EchoSign
Blog: EchoBlog
Twitter: @fromechosign
Recent News:
EchoSign Electronic Signature Reaches 1,000 Customers on Salesforce.com’s AppExchange 2
EchoSign Integrates Its Electronic Signature Software with NetSuite’s Cloud Computing Platform
EchoSign Now Available Through the Google Apps Marketplace
I asked Jason Lemkin, EchoSign’s CEO and co-founder a few questions about his business and his view of the SaaS market in 2010.
Did you start out as a Software-as-a-Service company?
When we started our company in 2006 the market wasn’t that clear on what SaaS really meant. Our vision has always been clear to build a web or Cloud service where companies could execute a contract electronically on the Web.
This is my 4th start-up and the second company that I have co-founded. I was a lawyer at the Venture Law Group here in the Bay Area and it was really obvious to me that this was the right way to get contracts done but lawyers tend to be slow to adopt new technologies.
It always seemed logical to be able to execute contracts electronically, because it saves time and headaches but our vision might have been a bit early. Our early customers were an odd mix of web-centric folks who read TechCrunch, use BaseCamp project management products, and other companies that wanted to automate their business contracting processes. Now we are seeing regular businesses are catching up to our early adopters by leveraging the Web for their contracting processes. We believe this might be one of the last open areas for the automating of business processes using the Internet. Like a lot of other paradigm changes contracts will be going from the analog world to digital, and most contracts in the next 5 years will all be executed electronically.
Why do your customers buy from EchoSign?
We have sold to nearly 20,000 customers of all sizes including Proctor & Gamble to Real Hip Hop Records to Dell and more than 80% of our customers use our products for sales oriented tasks. The real advantage for our customers is going from an older fax-based contract process to EchoSign. We can take a process that currently takes days and compress it down to just a few minutes; in fact we have found that the average time to execute a contract with EchoSign is less than 45 minutes.
Aetna likes EchoSign because healthcare professionals can complete contracts faster and more reliably and can reduce the expenses associated with faxing or mailing these agreements. The company has found that by using EchoSign, they can reduce contract-processing time from three weeks to one day on average. Currently about 70% of all of Aetna’s transactions with healthcare providers are electronic and EchoSign helps with these processes and provides visibility throughout the contract lifecycle.
We built EchoSign to be a very easy to use sales tool, not just a product for lawyers. All types of business people are executing contracts today. Business professionals and sales reps just don’t have time to learn how to use new tools; they just want to focus on closing contracts and getting back to their business.
Like Aetna, many of our larger customers also see the benefits of EchoSign for their legal organizations because we provide visibility into their overall contracting process, which helps with compliance by creating electronic audit trails, delivering a secure signing process, which can also help to avoid fraud.
What do you see as the key trend emerging in the SaaS industry?
When we started the company three years ago, customers were just buying SaaS point solutions like Salesforce.com and WebEx. Today companies are running their entire business using Cloud-based software. So the concept of signing and closing contracts can no longer be viewed as just a point solution, but a component of a larger, integrated business process.
For example, a typical integrated sales process for one of our customers might be capturing a new lead from Google Adwords, then demonstrating their product over the Web using WebEx and managing the sales process using Salesforce.com and then executing the new customer contract using EchoSign. Our customers would ideally like all of their SaaS tools and processes to be integrated because it saves them time and money. Applications should just be loosely connected together using API’s, they want these products to work together in a more integrated way.
Another trend we see is the rise of many different partner ecosystems that companies like ours will need to work with over time. EchoSign is a Salesforce AppExchange partner; in fact in 2009 we were the signal highest rated application on the AppExchange. We also work with Google Apps, Oracle, Salesforce, Box.net and others. We have these partnerships because our customers are looking to integrate all of these web products together to run their businesses and we want EchoSign to be a part of these expanding set of business processes.
Even though Salesforce has over 70,000 customers, the Laws of Attach Rates would tell us that we can only assume that 1-2% of their customers will consume our service. We just announced we have signed our 1,000th Salesforce customer, so we are doing well but we need to work with many of these partners who support large eco-systems of customers. Because we are relatively easy to integrate into, we should have a higher attach rate to these solutions and this partner leverage will enable us to grow our business quickly.
What is your outlook for 2010?
Last year, during the recession, we saw elevated churn rates but now our business is back to pre-recession levels. The churn was related to bankruptcies and other similar types of recession fallout.
Our customer’s buying patterns are pretty consistent. Prior to the recession, we had many lower quality customers, but now we are seeing more stable, higher quality customers who are less likely to churn in the future.
These stronger companies are buying our solutions now, which is fueling the growth of our business and we are not seeing those lower quality customers out in the market. I guess it was easier to build a company when equity and debt were available to start a business. Today, strong companies are succeeding and accelerating out of the recession and EchoSign can help these companies optimize their sales processes.
A good sign for our business is that we are starting to see our customers asking to pre-pay for multi-year deals as a way to lock in future pricing.
The broader SaaS market (I would include PaaS and Cloud Computing) have been really interesting this year and here are some of the notable news items that have caught my attention over the past couple of months:
Mergers & Acqusitions
SuccessFactors buys CubeTree for $50M… Interesting move into the collaboration space
IBM buys CastIron … Nice compliment to their Cloud Infrastructure offerings. Is Boomi next?
… then IBM buys CoreMetrics.
Salesforce.com buys JigSaw for $142M! … Surprised that they would pay up for a content company.
CA buys Nimsoft for $350M … gets into the SaaS infrastructure management market. Good company.
SAP buys Sybase for $5.8B … not sure about this one? A diversion to deflect attention away from BBD?
RedPrairie buys SmartTurn … traditional SCM provider begins their move to SaaS.
VMWare looking at EngineYard … interesting since Amazon funded this Ruby-on-Rails PaaS startup.
Fundings & IPO’s
Marketing Automation: Marketo raises $10M Series D, led by Mayfield.
Enterprise Collaboration: Yammer raises $10M Series B, led by Emergence Capital.
Financial Analytics: Host Analytics raises $15M Series C, led by Next World Capital.
Cloud Business Intelligence: Cloud9 Analytics raises $8M Series C, led by Mayfield.
Recent SaaS/Cloud IPO’s include Convio, SPS Commerce and Financial Engines.
New Products and Launches
Broadvision launches Clearvale … Ning for the enterprise.
Plateau launches PaaS platform for Talent Management
Mercer partners with PeopleClick Authoria, first combination of HR consulting content with Talent Management technology platform
VMware and Force.com partner, launch VMForce.
Lawson launches ERP Cloud offering on Amazon AWS … too little, too late?
Recently Profiled SaaS Companies by Montclair Advisors
Birst, CentralDesktop, Cloud9 Analytics, GoodData, Marketo, Netsuite and WOLF Frameworks.
There are definitely a lot going on in the SaaS and Cloud Computing markets and we will continue to cover newsworthy events and profile leading players throughout 2010.
Since everyone is interested in SaaS funding and valuations I thought it would be helpful to tell you about an interesting Cloud Computing investor panel I attended at the recent All About the Cloud conference in SF. The session was moderated by Jason Green from Emergence Capital Partners and was joined by Gary Hromadko from Crosslink Capital, Mark McNay from William Blair and Evangelos Simoudis from Trident Capital.
So what did they have to say?
The market has finally changed for the better
2009 was all about survival and the venture community did less than half the investments than in a typical year.
This year is now about growing again and current investments are more focused on companies that have weathered the economic downturn. Their investments are focused on changing the slope of these types of company’s growth curves, by concentrating more on sales and marketing.
SaaS and Cloud companies are leading the way
Consumers have been driving the adoption of easier to use Cloud-based solutions like eBay, iTunes, Facebook, Twitter and LinkedIn. They are viral and can reach critical mass very quickly because there are low barriers to adoption.
With SaaS, the recession has really pushed the advantages of a subscription business model and moving from CapEx to OpEx software investments. It’s like leasing your car rather than buying it.
Lean start-ups are definitely in. Almost all early stage software investments in 2009-10 are Cloud-based because it takes a fair amount of capital to fund SaaS firms and it takes a long time for them to reach profitability. One interesting comment was that later stage on-premise companies are now being asked about what their SaaS/Cloud strategy is for the future, because without it, they may find funding might be difficult.
What the VC’s are looking for
SaaS 1.0 focused on a company’s income statement, expenses and cash flows than GAAP reported financials. One important measurement is a company’s incremental contribution margins (gross margins), which is critical for SaaS. Companies needed to balance capital efficiency with building a business that can scale.
Investors are looking for unique business processes that can only be built or automated through SaaS or the Cloud. Emergence latest investments are pure Cloud-based companies that have viral qualities like YouSendit, the files sharing company and Yammer and the enterprise micro-blogging firm, both of these companies are viral enterprise solutions. Yammer has more than 70,000 customers with at least 1 user and is signing up between 7-10,000 users a month and 10% are turning into paying customers. Crosslink invested in Carbonite, a backup and recovery company, has high margins and is the only other independent player in the category with Mozy, who is owned by EMC. They felt that scarcity of competitors and their ability to manage Customer Acquisition Costs were important in establishing the company’s value.
The panelists also said they are looking for companies that have a rigorous focus on metrics like Customer Lifetime Value and Customer Acquisition Costs. In fact CAC appears to drive business value because it has a lot to do with capital efficiency and the company’s ability to grow their business.
Exits, IPO’s and Valuations
Economy has recovered and CEO’s are ready to start taking on more risk, and it’s a real change in psychology because we are at the beginning of a macro trend that will last more than 10 years.
This is evident by more than 100 M&A transactions last quarter including high profile deals like IBM buying CastIron, Salesforce buying Jigsaw for $142M, Successfactors buying CubeTree for $50M. The current environment is right for deals, especially as SaaS is gaining enterprise momentum with recent deals like SuccessFactors’ mega deal with Walmart for 1.6M users. Transactions like Jigsaw, CubeTree, and CA’s purchase of 3Tera and Nimsoft for $350M all indicate a return to a healthy M&A atmosphere, that will probably last for the next 12-18 months.
Oracle and SAP won’t be aggressive on the M&A front until they come to the realization that they can’t build Cloud solutions internally. Because many SaaS companies have now crossed the $25-30M in recurring revenues threshold, these firms may become quite attractive to these larger ISV’s looking to make the move to the SaaS business model.
But these acquirers don’t want to take on the burn associated with many start-ups so it will be important to stay close to breakeven and you may have to sacrifice growth for profitability. Since the access to capital is still tight, start-ups will have to try and collect cash upfront and continue to tune their business models to improve cash flows.
Companies that seem to own a category have perceived scarcity value which will result in a premium on any transaction, especially if they are perceived to own a segment franchise. VC’s and acquirers are looking for a minimum of 40% CAGR to get a premium valuation.
On the other side of the liquidity front, the IPO window for SaaS companies is beginning to open up and firms like SolarWinds and LogMeIn have now been joined by SPS Commerce and Convio. At least before the recent stock market downturn, these companies had traded up by 15% since their IPOs.
The panel seemed to believe that the market is definitely getting better and that is good news for SaaS and Cloud Computing companies looking for funding or an exit!
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.
Company: Cornerstone OnDemand
Started: 1999
Located: Santa Monica, California
Geography: Global
Market: Integrated Talent Management
Products: Onboarding, Learning Management, Social Networking, Compliance, Performance Management, Compensation, Succession Planning and Extended Enterprise
Key Customers: Barclays, Barnes & Noble, Kelly Services, MasterCard, Turner Broadcasting, Starwood Hotels & Resorts, Flextronics, Ticketmaster, Sanford Health, Save the Children
Website: Cornerstone OnDemand
Blog: Talent Management Blog
Twitter: @Cornerstoneinc
Recent News:
Cornerstone OnDemand EMEA General Manager to Give Keynote Presentations at iLearning Forum 2010
NRF Foundation Chooses Cornerstone OnDemand’s Industry-Leading LMS for Global Training Initiatives
I asked Adam Miller, Cornerstone OnDemand’s President and CEO a few questions about his business and his view of the SaaS market as we move into 2010.
Did you start out as a Software-as-a-Service company?
We started the company in 1999 as CyberU, which was an on-demand Internet content company, focused on e-Learning. We were on-demand before there was Software-as-a-Service.
The original idea for the company was to provide access to education on-line for individuals and small businesses, which was more of a consumer business model than what we are doing today. CyberU was a distributor of on-line training content as opposed to delivering the courses through a traditional classroom.
What we started to realize is that large companies were interested in educating their employees, so we then begin selling to large Fortune 100 type companies. Many of these companies had a strong resistance to using any type of on-line business solutions, because they felt that it should be inside their own data center behind a secure firewall. There were a lot of concerns around security, scalability and control of business applications. This was about the same time that Amazon.com was launching their on-line retail operations and consumers had similar issues putting their credit card information on-line. From about 2000 through 2006 we were just a small software company that sold training and content over the Internet.
We held to our belief in on-line solutions and even as recently as 2004 we lost many of our deals because we wouldn’t deliver our product as an on-premise offering, but we knew if we did that for even one client we would undo our economic model.
Then over time we were still managing training on-line but our customers wanted to tie the courses back to leadership and succession plans and then led us to rollout an integrated Talent Management suite of solutions. Well, as it turns out the SaaS model has caught on and has grown form less than 300,000 to now over 3.3 million eLearning and Talent Management users, who are happy we decided to deliver our products over the Internet.
Why do your customers buy from Cornerstone OnDemand?
Our customers buy from us because our solutions are better, faster and cheaper than traditional Talent Management solutions.
We are better because we offer a fully integrated talent management platform that covers all of the different aspects of managing people all the way from ‘hire-to-retire’.
Cornerstone OnDemand is faster because our entire system is configurable with 11 discrete modules and over 9,000 individual features, that all can be personalized to address our customer’s business requirements. Our customers can also start with a single model and then turn on incremental modules over time as they are ready for more functionality. Our system can scale to serve the needs of the largest organizations and down to very small companies. In fact, our largest customer is Kelly Services with over 750,000 users and we have eight customers who have more than 150,000 users each. Our average customer has about 14,000 users.
The reason we are cheaper is because we are a pure-play SaaS provider. Our customers have found that it is cheaper to only have to buy from a single supplier, not have to buy hardware and have a lot of staff having to manage multiple systems and relationships.
Our customers also like that we only build products based on their enhancement requests because we don’t build software they don’t want. We currently offer five integrated products including Learning, Performance, Succession, Connect or what some are calling Social Networking and Extended Enterprise which services the needs of non-employees using both our Learning and Connect products. Cornerstone offers global capabilities and has users in 141 countries and supports 16 languages. We think we are doing a good job because we have 95% customer retention rates and that is very important to us.
What do you see as the key trend emerging in the SaaS industry?
The biggest trends we see are Cloud Computing and Mashups. Mashups can be Platform-as-a-Service (PaaS) methods to combine application functionality and even integrations between different company’s systems. It is like delivering third party content to customer and they don’t know where it comes from but it is valuable. We anticipate that customers in the near future will be able to do basic integrations between content and systems themselves without needed the assistance of any third party or system integrators and that will be very popular.
We are also starting to see more, large-scale deployments as SaaS becomes more mainstream. As I mentioned earlier we have eight customers with over 150,000 users including some very large banks, insurance and two of the largest healthcare companies who are now deploying Cornerstone OnDemand solutions, which is exciting.
What is your outlook for 2010?
2009 was the best year we have ever had and broke all of our records. We think that 2010 is even going to be better and we are very bullish.
Last year we were able to gain some significant marketshare and we will continue our expansion this year. For instance our partnership with ADP is just getting off the ground and this year we will anticipate more deals from a growing partner pipeline. ADP is proving to be a great partner and has brought a lot of resources to the table and we are optimistic about 2010.
But we are still not out of the woods with the broader economy and there are still has some weak spots, so we will continue to monitor things carefully.
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