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

Now that many software companies really feel that the risks associated with a second recession are firmly in the rearview mirror, it now seems like everyone is looking to grow their businesses.

I read a great post yesterday by Bruce Cleveland at InterWest Ventures about the Value of Growth for SaaS Companies, which I thought really accurately captured a challenge that many software firms face when transitioning to a SaaS model.   This is a subject that is near and dear to me given my background as a reformed marketing executive and someone who was responsible lead generation at Oracle years ago during the Tom Siebel and Marc Benioff era.   I think it was Tom Siebel when he was running Oracle’s inside sales team that told me “I want it to rain leads from the sky!” At the time I was actually shocked because he was asking me to literally drown his sales team with qualified opportunities who wanted to buy Oracle’s database products.

As I have come to learn that he knew exactly what he was talking about and his track record demonstrates that productive sales teams deliver amazing revenue growth results.  Bruce’s post highlights that a SaaS company without meaningful growth is not worth very much and probably will fetch the low-end of the valuation curve, which is still pretty good in today’s crazy market (See last week’s post about the SaaS Bubble).   So how are high flying SaaS companies like Salesforce and SuccessFactors achieving CAGR’s in excess of 30% every year?   Check out this chart I put together on some of the leading publicly traded SaaS firms (sans Salesforce because they will skew the chart):

As you can see the companies with the higher growth rates are also the ones that have high market caps (valued more highly by Wall Street).  What is really interesting is that SuccessFactors was able to grow by almost 50% for the past three years, even through one of the worst recessions in the last 100 years.  The value of growth can also been seen by a company that recently went public, Cornerstone OnDemand, they have been rewarded with a market cap that is over $800M even though the company lost more than $40M last year.  Seems crazy right?  But they have a great organic growth story along with a major channel relationship with ADP which could also signal even faster growth in the future.

If you talk to any software sales rep they often complain about their pipeline and the lack of quality leads. Reminds me of those coveted Glengarry leads  from Mitch and Murray downtown.    So at the heart of all of these companies and their rapid growth rates is that they have all developed a core competency to generate high quality leads and build pipelines quickly.

(click on picture to see clip)

Here are some tricks that I have learned along the way that will help you to build out your SaaS lead generation strategies:

• Use a Portfolio Approach - Depending on your product, buyers, and market there may be many ways to generate interest.  Campaign elements of a typical lead generation strategy are a combination of organic and paid web traffic, email campaigns, webinars, customer programs, social media and targeted events.   Don’t put all of your investment in a single demand generation approach, but reward the tactics that generate quality leads at an affordable price.
• Test and Test Again - With the portfolio approach you will need to continually test your messaging, packaging, value propositions, and price points.   The best-in-class SaaS firms are continually testing and refining their lead strategies.  This is important as most SaaS marketing organizations are trying to lower and optimize their Customer Acquisition Costs (CAC).
• Automate Where Possible -  There are a lot of great Sales 2.0 tools available today that can give you a real unfair advantage in the lead generation process.  Companies like Marketo, Pardot, Eloqua, Constant Contact, NetSuite and even Salesforce offer many tools to help you automate and analyze your marketing efforts.  I would definitely recommend implementing a lead nurturing or drip marketing program to continue to work your lower quality leads, this is a great way to build your pipeline over time with little direct human intervention.
• Track Everything - Make sure your sales operations and marketing teams are tracking and analyzing all of your lead activities and conversion rates.  You don’t need to be overly complex, but just tracking some basic things like lead scores, lead acceptance rates, leads converting to opportunities and close rates can help your organization to fuel your high growth SaaS sales engine.

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

Continue reading…

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.

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.

On a recent client engagement I was asked to provide a simple set of definitions for basic terms and concepts around Software-as-a-Service and Cloud Computing (which I often use inter-changeably).   What was interesting is that there is a lot of buzz out there but I can see why people get confused because there isn’t a standard set of definitions.

So my Friday contribution to the SaaS industry I am publishing the Montclair Advisors’ SaaS Glossary of Terms.  I would be interested in your feedback on the definitions and if I miss any key ones.

Company:             BrightIdea

Started:                 1999

Located:                San Francisco, California

Geography:           Global

Market:                  On-Demand Innovation Management

Products:              WebStorm, Switchboard, Pipeline and Platform

Key Customers: Adobe, AMEX,  Bosch, British Telecom, Bristol-Myers Squibb, Cisco, Harley-Davidson, GE, Kraft, UBS , and Nationwide

Website:               Brightidea

Blog:                    Innovation Work

Twitter:               @BrightideaHQ or @Brightidea

Recent News:

The cloud: Where bright ideas come to life

Innovation Management Helps Make Your Idea Reality

Meet The Innovation Agents

Wolters Kluwer Using Brightidea Social Innovation Management Software to Drive Future Business

Ketchum Expands Open Innovation Platform, Mindfire, to Accelerate Flow of Ideas for Clients

I asked, Brightidea’s Vincent Carbone, the company’s co-founder and COO a few questions about his business and his view of the SaaS market during 2010.

Did you start out as a Software-as-a-Service company?

Yes, Brightidea was founded in 1999 and from day one our solution was designed on a multi-tenant database architecture that supports our SaaS application solutions.    The concept of SaaS was still in its infancy, but with the launch of Salesforce.com and their brilliant “No Software” tagline, we believed SaaS was the future. We really believe Brightidea is the Salesforce.com for Innovation.

Why do your customers buy from Brightidea?

Unlike 50 years ago, companies today must continuously innovate at an accelerating pace to stay competitive.   Companies buy from Brightidea because there is a fundamental organizational shift underway in medium and large companies who are moving their core business function from a “how to make” to “what to make” mindset. Most companies currently have no infrastructure or software to help them effectively manage their employee, partner or customer ideas that will lead to the development of future products and services.   Similar to how companies implemented Customer Relationship Management solutions 15 years ago to manage and optimize their sales pipelines, companies are now starting to implement Innovation Management Software to better manage and optimize their Innovation Pipeline.

Our customers choose Brightidea because we have over 10 years of experience implementing innovation systems in large, complex organizations. Unlike more generic SaaS social software, like Jive and Lithium, Brightidea’s Innovation Management Solutions are grounded in a core business need around innovation, which delivers a true return on our customer’s investment. These business returns are measured in how our customers can manage large-scale projects, encourage new ideas that can improve innovation around product development, cost cutting and even safety ideas.

What do you see as the key trend emerging in the SaaS industry?

One of the key trends we see is user-adoption of social networking components inside of SaaS software for collaboration.  It wasn’t until consumers started to get comfortable with sharing information on Facebook, that the workplace began to feel comfortable sharing information in a similar manner.  We believe most SaaS applications will continue to adopt more social and collaborative functionality.

What is your outlook for 2010?

We think the future is bright in 2010 for several reasons.

Acceptance of Cloud Computing is going to grow within most IT organizations, so companies will be looking to adopt more SaaS-based solutions.

As I mentioned, users of SaaS software are going to get more comfortable with social networking and collaboration capabilities and organizations will continue to add internal resources that are focused on driving business value through collaboration. We also believe that innovation is inherently a social activity, which means that all of these trends should be good news for Brightidea.

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.