David Cummings on Startups

Category: SaaS

  • SaaS Founder/CEO Equity at Time of IPO

    As a followup to the Rich or Royal conversation, there’s another example to highlight: SaaS founder equity at time of IPO. Here are the last nine SaaS IPOs profiled on this blog and the founder/CEO equity percentage at time of filing:

    On average, the founder/CEO owned 10.9% of the business at time of IPO. Now, these are some of the most high profile SaaS startups over the past three years and by all measures these founder/CEOs have been tremendously successful. Entrepreneurs would do well to think through the Rich or Royal question and understand the level of dilution that comes from multiple rounds of institutional financing.

    What else? What are some more thoughts on the average SaaS founder/CEO equity at time of IPO?

  • 5 Great Resources for SaaS Entrepreneurs

    SaaS is an amazing business model: fast product iteration cycle, recurring revenue with strong gross margins, and great growth rates industry-wide. In addition, the business model is well understood across the different functions – sales, marketing, customer success, engineering, support, and finance – such that there are a number of excellent blogs for entrepreneurs. Here are five great resources for SaaS entrepreneurs:

    Read and study these blogs, now. Learn what the experts learned, minimize common mistakes, and grow faster.

    What else? What are some other great resources for SaaS entrepreneurs?

  • Terminus Raises a $7.5 Million Series A

    Earlier today Terminus announced their $7.5 million Series A round (disclosure: I’m the founding investor). Terminus started in 2014 in the Atlanta Tech Village and has been spreading the flip my funnel message about account-based marketing to thousands of people.

    From before, here’s how Terminus works:

    • Existing leads and contacts from the CRM or marketing automation system are automatically imported using dynamic rules (e.g. take all the leads/contacts with an active opportunity in the pipeline)
    • Based on job titles, additional contacts are retrieved from the targeted companies through multiple data sources (e.g. NetProspex and others)
    • Similar to retargeting, ads based on rules are shown on mainstream sites to everyone identified in the account (e.g. show specific ads based on where the account is in the sales cycle)
    • Ad click-throughs and impressions are tracked to tie results back to effect on pipeline acceleration in the CRM

    Congrats to Eric and team on closing their Series A. Here’s to building an enduring company.

    Know any B2B marketers? Have them take a look at Terminus.

  • The $1 Million Annual Recurring Revenue Milestone

    Continuing with yesterday’s post on Measuring the # of Startups that Raise Money at $10M+ Valuations, there’s another startup community metric worth measuring: the number of startups that achieve $1 million in annual recurring revenue (ARR). Much like the $10M+ valuation is a great indicator of potential success, $1 million in ARR is also a great indicator of potential success. Here are a few thoughts on the $1 million in ARR milestone:

    • Assuming 70-80% gross margins (revenue minus cost of goods sold), there’s enough cash flowing through the startup to maintain a team of 5-10 people indefinitely to grow the business
    • With $1M in annual recurring revenue and a great growth rate, the company has enough traction to raise a small Series A round or another angel round (see Metrics to Raise a Series A)
    • Ability to join a great entrepreneurial group like Entrepreneurs’ Organization (it has a $1 million minimum revenue threshold)
    • Enough continuous feedback and input from customers (product usage is oxygen) to expand and improve the product indefinitely so as to build the customer base

    All first-time entrepreneurs should make it a major goal to hit $1 million in annual recurring revenue. The $1 million ARR milestone represents the financial core of a sustainable business.

    What else? What are some more thoughts on the $1 million in annual recurring revenue milestone?

  • 7 Elements of a SaaS Platform Company

    Within the B2B SaaS world, one of the common entrepreneurial aspirations is to build a platform company. A platform company, like it sounds, is one that achieves a level of success and market penetration such that a number of other companies build add-ons or integrations to programmatically interact with the platform. Salesforce.com (owner of Pardot) is the most well known SaaS example.

    Here are seven elements of a SaaS platform company:

    • Large, fast growing customer base (thousands of customers)
    • Publicly available API
    • Mature partner program with hundreds of integrations
    • Major annual user conference and regional conferences
    • Continued thought leadership and innovation
    • Category definer
    • Often publicly traded

    For SaaS entrepreneurs, building a platform company means a tremendous level of success. While there’s no single definition of a platform company, these seven elements are often a good indicator.

    What else? What are some more elements of a SaaS platform company?

  • Moving from General Tools to Prescriptive Solutions

    One of the biggest trends for SaaS over the next five years is new products that offer prescriptive solutions in place of general tools. What I mean is that there are a number of well-defined categories like CRM and ERP that are essentially customizable front-ends to specialized databases (e.g. CRMs are mostly contact management databases). These new products are still going to have the specialized database behind the scenes, but the front-end is more of a business process management system that actually tells the user what to do next.

    Let’s take a look at SalesLoft (disclosure: I’m an investor) as an example of a prescriptive solution:

    • Configure a multi-step cadence that outlines the business process (e.g. flow of emails, phone calls, social outreach, etc. over a period of time)
    • Based on the sales rep’s role, the cadence tells them exactly what to do and feeds up the next activity for them to perform (e.g. call this person now and it has an auto-dialer to dial the phone for them — the software holds their hand)
    • Activities are constantly analyzed in an effort to improve the process and make the sales reps more successful

    Now, compare the prescriptive solution to a standard contact management tool. Contact management tools have the specialized database with contact info, lists of people, etc. but they are merely databases where the user has to figure what to do and how to best interface with it, not business process engines. Look for more prescriptive solutions to emerge that make people much more productive at specific functions.

    What else? What are some more thoughts on moving from general tools to prescriptive solutions?

  • Video of the Week: Godfather of SaaS Jason Lemkin

    In honor of the SaaStr annual conference, our video of the week is Jason Calacanis interviewing the Godfather of SaaS, Jason Lemkin. Enjoy!

    From YouTube: Jason sits down with the “Godfather of Saas,” Jason Lemkin, to discuss everything from the SaaS (software as a service) industry to angel investing criteria, from Lemkin’s current venture Saastr, to what the field has in store. We learn about the history of SaaS, why we owe a huge debt to Salesforce, and why so few enterprise customers “try before they buy.” The two Jasons further discuss Microsoft’s foray into SaaS, why “lockin” is a myth, the successes of — and differences — between Slack and HipChat, Lemkin’s SaaS investments (including Talkdesk, Algolia), why founders don’t make great VCs, Lemkin’s criteria for an investment (hint: the founder has to be better than him) and Lemkin’s advice on lifetime value to budding SaaS startups. Finally, the Jasons posit what would happen if Google or Microsoft came out with a free Slack competitor (protip: do not get arrogant about your engineers), the hurdles in monetizing a free product, why an acquisition might cost nothing for a big tech company, the mistake many companies made in 2008 and 2009, why choosing the celebrity investor isn’t always the best idea, the sheer volume of startups today — and much more.

  • SaaS Success in 84 Slides

    David Skok, serial entrepreneur and venture capitalist at Matrix Partners, has an excellent slide show he put together for the SaaStr conference titled The Key Drivers for SaaS Success.

    Here are the areas of his presentation:

    • An intro to SaaS metrics
    • Unit economics
    • LTV and churn: An in-depth look
    • Variable pricing axes
    • Months to recover CAC
    • The primary unit of growth: Sales
    • Understanding public SaaS companies

    http://www.slideshare.net/DavidSkok/the-key-drivers-for-saas-success

    Every tech entrepreneur would do well to study the The Key Drivers for SaaS Success slide deck and learn the business model.

  • Public SaaS Valuations Hit Hard

    Clearly my post on Thursday titled SaaS Public Company Valuations Q1 2016 was bizarrely timed as less than 24 hours later the companies in the category lost $28 billion in market cap value that day. Here are a few notes from the Re/Code article:

    • Big drops on Friday:
      • LinkedIn fell 43 percent
      • Salesforce.com fell 13 percent
      • Workday fell 16 percent
      • NetSuite fell 14 percent
      • ServiceNow fell 11 percent
    • Valuations of 47 publicly traded cloud software companies have fallen $66 billion since a mid-December peak
    • As a group, these companies are trading at four times forward revenue (meaning, 4x the revenues expected in the next 12 months)

    Long term, I believe we’ll see SaaS companies trade at 4-6x revenue unless they have an exceptional growth rate (see also Quantifying the SaaS Growth Rate Multiplier). While the market likely overcorrected on SaaS valuations, I still see the long-term future of SaaS as incredibly promising.

    What else? What are some more thoughts on public SaaS valuations being hit hard?

  • SaaS Public Company Valuations Q1 2016

    Eleven months ago I wrote about the SaaS Public Company Valuations Q1 2015 and times have changed. Before, SaaS companies were trading at higher multiples and now, most, but not all have come down. Let’s look at the public SaaS company valuations and compare them to last year.

    • salesforce.com (NYSE:CRM) – customer relationship management SaaS company.
      • March 9, 2015
        Market cap: $40.74 billion
        Last reported quarter’s revenues: $1,444 million
        Employees: 13,300
      • February 4, 2016
        Market cap: $43.39 billion
        Last reported quarter’s revenues: $1,711 million
        Employees: 16,000
    • NetSuite (NYSE:N) – enterprise resource planning (accounting, inventory, etc) SaaS company.
      • March 9, 2015
        Market cap: $7.26 billion
        Last reported quarter’s revenues: $157.87 million
        Employees:  3,154
      • February 4, 2016
        Market cap: $5.33 billion
        Last reported quarter’s revenues: $206.23 million
        Employees: 4,506
    • LogMeIn (NASDAQ:LOGM) – remote desktop access SaaS company.
      • March 9, 2015
        Market cap: $1.28 billion
        Last reported quarter’s revenues: $59.90 million
        Employees: 804
      • February 4, 2016
        Market cap: $1.27 billion
        Last reported quarter’s revenues: $69.57 million
        Employees: 964
    • LivePerson (NASDAQ:LPSN) – live chat SaaS company.
      • March 9, 2015
        Market cap: $614.14 million
        Last reported quarter’s revenues: $58.23 million
        Employees: 796
      • February 4, 2016
        Market cap: $315.77 million
        Last reported quarter’s revenues: $60.76 million
        Employees: 1,058
    • Demandware (NYSE:DWRE) – ecommerce SaaS company.
      • March 9, 2015
        Market cap: $2.45 billion
        Last reported quarter’s revenues: $52.50 million
        Employees:  383
      • February 4, 2016
        Market cap: $1.63 billion
        Last reported quarter’s revenues: $57.58 million
        Employees: 590
    • Marketo (NASDAQ:MKTO) – marketing automation SaaS company.
      • March 9, 2015
        Market cap: $1.09 billion
        Last reported quarter’s revenues: $42.34 million
        Employees: 519
      • February 4, 2016
        Market cap: $765.56 million
        Last reported quarter’s revenues: $54.92 million
        Employees: 715
    • ServiceNow (NYSE:NOW) – IT asset management SaaS company.
      • March 9, 2015
        Market cap: $11.15 billion
        Last reported quarter’s revenues: $198.00 million
        Employees: 2,826
      • February 4, 2016
        Market cap: $9.43 billion
        Last reported quarter’s revenues: $285.65 million
        Employees: 3,402
    • Workday (NYSE:WDAY) – HR and financial management SaaS company.
      • March 9, 2015
        Market cap: $15.45 billion
        Last reported quarter’s revenues: $226.27 million
        Employees: 3,500
      • February 4, 2016
        Market cap: $12.11 billion
        Last reported quarter’s revenues: $305.27 million
        Employees: 4,900
    • Cvent (NYSE:CVT) – Events management SaaS company.
      • March 9, 2015
        Market cap: $1.20 billion
        Last reported quarter’s revenues: $39.33 million
        Employees: 1,450
      • February 4, 2016
        Market cap: $1.04 billion
        Last reported quarter’s revenues: $48.38 million
        Employees: 1,740
    • HubSpot (NYSE:HUBS) – B2B marketing platform SaaS company.
      • March 9, 2015
        Market cap: $1.22 billion
        Last reported quarter’s revenues: $34.16 million
        Employees: 719
      • February 4, 2016
        Market cap: $1.35 billion
        Last reported quarter’s revenues: $47.71 million
        Employees: 1,091
    • Zendesk (NYSE:ZEN) – Help desk management SaaS company.
      • March 9, 2015
        Market cap: $1.76 billion
        Last reported quarter’s revenues: $38.54 million
        Employees: 806
      • February 4, 2016
        Market cap: $1.90 billion
        Last reported quarter’s revenues: $55.66 million
        Employees: 806

    Fast-growing SaaS companies still trade at solid multiples but for ones where the growth has slowed, the multiples have lowered even more.

    What else? What are some more thoughts on public SaaS company valuations?