David Cummings on Startups

Category: SaaS

  • Every Spreadsheet Shared is Another SaaS App

    For software and SaaS entrepreneurs out there, Patrick McKenzie is a must-follow on Twitter. Recently, he tweeted out something that really stuck with me:

    Every spreadsheet shared in a business is an angel announcing another SaaS app still needs to be built.

    Frequently, potential entrepreneurs tell me they want to start a business but can’t come up with a good idea. Well, just look at all the spreadsheets shared in a business and start there when looking for ideas. Now, the inherent scale might not be there with some of them but that’s part of the evaluation process.

    Here are a few more thoughts on every spreadsheet shared is another SaaS app:

    • Spreadsheets have some structure but lack business rules, validation (usually), processes, etc.
    • Spreadsheets are easy to create and well understood whereas most SaaS apps require training and effort to understand
    • Think of the common apps you use on a regular basis and ask which functions you used to do in a spreadsheet (e.g. accounting, project management, customer relationship management, etc.)
    • Most SaaS entrepreneurs flop due to failing at customer acquisition, not due to failing to build a workable product

    The next time a spreadsheet’s shared with you, ask if there’s a SaaS app opportunity.

    What else? What are some more thoughts on the idea that every spreadsheet shared is another SaaS app?

  • 4 Quick Takeaways from Dreamforce 2015

    As the last day of Dreamforce 2015 wraps up it’s a great time to reflect on the event and conversations. My first Dreamforce was way back in 2008 when we had a tiny booth for Pardot in the furthest corner of the exhibit hall. At the time, the show was said to have 20,000+ attendees and today it’s said to have 120,000+ attendees (I think these numbers are routinely inflated by 20%). Needless to say, the show is massive.

    Here are four quick takeaways from Dreamforce 2015:

    • Marketing Automation is No Longer the Center Stage Cage Fight
      Back in 2012, the last time I attended, I walked into the main expo hall only to see a sea of marketing automation vendors. Directly in front, on the left side, was Marketo, Pardot, and Silverpop, in that order. On the right side was Eloqua with Act-On on the next row and HubSpot around the corner. Today, in 2015, Pardot was the only vendor present. Going from an incredibly competitive market with six vendors slugging it out to a single vendor in three years is astounding.
    • Social Not Even Mentioned
      Three years ago you couldn’t turn a corner at Dreamforce without seeing a message about how business is social and the need for engaging customers over social media. Now, social isn’t even on the radar. Terms like analytics, big data, and Internet of Things are the hot topics. Times change quickly.
    • Standing Out from the Crowd is Incredibly Hard
      With so many people, sponsors, and exhibitors, it’s incredibly hard to stand out from the crowd. SalesLoft put on a great guerilla marketing campaign around Benioff 2020 handing out buttons, shirts, flags, and even $2 bills with the message stamped on it. Only the show is so big and noisy that it was hard for a well executed campaign to get much attention.
    • The Cloud is King
      Previously, the cloud was talked about the up-and-comer and a there was a constant reminder of how installed software is dead. Now, no one even talks about installed software. The cloud is mainstream. The cloud won. Salesforce.com owns the most important cloud ecosystem.

    Dreamforce never disappoints and is truly the Super Bowl for SaaS startups and companies. If you’ve never been to a big tech tradeshow, put this one on your list.

  • The Power of Recurring Revenue

    Early in my entrepreneurial career I sat down with one of the most successful entrepreneurs in town and he said something I’ll never forget: figure out how to build a recurring revenue-based business as it’s the best model. Ever since then, I’ve kept that in mind and focused my efforts on Software-as-a-Service (SaaS) and other types of recurring revenue businesses.

    Here are a few benefits of recurring revenue:

    • Cash flow is predictable and timely
    • Critical metrics like cost of customer acquisition, lifetime value of the customer, and renewal rates are well understood
    • Every year starts with a base of recurring revenue making it much easier to grow indefinitely
    • Banks have credit lines specific to recurring revenue businesses that are much more favorable than standard business credit lines
    • Recurring revenue businesses are significantly more valuable than non-recurring revenue businesses, on average, when comparing ones with similar revenue amounts

    The next time you’re analyzing potential business models, consider the power of recurring revenue. While recurring revenue is harder to get started, it’s an amazing business model once running.

    What else? What are some more thoughts on the power of recurring revenue?

  • Comparing SaaS Startup Funding to Revenue

    After last week’s post on 2015 Inc. 500 Software Companies, I wanted to dig in and see how funding for Software-as-a-Service (SaaS) startups compared to revenues. Here’s the data for the five fastest growing SaaS companies on the 2015 Inc. 500 list:

    With this tiny sample size, there doesn’t appear to be much correlation between revenue for small, fast-growing SaaS startups and funding. What is clear is that it requires a tremendous amount of capital to grow quickly, since scaling a SaaS startup is expensive.

    What else? What are some more thoughts on startup funding relative to revenue?

  • Early SaaS Loans Before Bank Credit Lines

    Over this past year I’ve talked to several Software-as-a-Service (SaaS) startups that have over $1M in annual recurring revenue (ARR), raised an angel round, but aren’t convinced they want to go the venture capital route. On the financing side, once SaaS startups have about $3M in ARR, banks like Silicon Valley Bank and Square 1 Bank have great credit lines based on recurring revenue (e.g. 3x monthly recurring revenue times (MRR) annual renewal rate), but there are few options for companies in the $1M – $3M ARR range.

    There exists a gap in the market for high interest loans to SaaS companies to help them grow faster without raising outside capital. Here’s how it might work:

    • $750,000 fixed-rate two-year interest-only loan at 20% annual interest rate for a total of $1.08M payable at the end of two years
    • $1M+ ARR startup hits $4M ARR at the end of year two, thereby qualifying for a $1M bank line of credit (assume 3x MRR), and then pays back the high interest loan
    • High interest loan provider makes a good return, the tech-focused bank gets a new customer, and the entrepreneurs create more wealth without giving up more equity

    With this model, that startup has the opportunity to grow faster than it would otherwise and avoids more dilution. The high interest loan provider would need to be very comfortable with the SaaS model and a plan would need to be in place in the event the loan couldn’t be paid back after 24 months.

    Look for more models like this to emerge that provide funding for SaaS startups that have the start of a great business but don’t have the scale to qualify for a bank line of credit.

    What else? What are some more thoughts on early SaaS loans before bank credit lines?

  • Hire Sales Reps Ahead of Plan at Scale

    David Skok has another great post up titled A Common Way Sales Misses Plan. David has some of the best content out there for entrepreneurs, especially Software-as-a-Service entrepreneurs. The general idea is that when a startup has product/market fit and a repeatable sales process, the most common reason for missing a sales goal is not hiring and training sales reps fast enough. As much as entrepreneurs would like a simple self-service sales process, the reality is that almost all super successful tech companies employ hordes of great sales people.

    Here are a few notes from the article:

    • Bookings = Number of productive sales reps times average productivity per rep
    • 2 variables to increase bookings:
      • Number of productive sales reps
      • Sales volume for an average rep per month or quarter
    • 4 sales rep considerations:
      • Need leads to feed sales reps
      • Reps need time for training
      • Many new hires will fail
      • Staffing is needed for bringing on new customers and supporting them
    • Ultimate recommendation: bring on more sales reps earlier than plan

    Now, hiring a ton of sales people without product/market fit or a repeatable sales process isn’t the advice. Only when things are working well does it make sense to hire sales reps faster than planned. At scale, productive sales reps are the main revenue driver.

    What else? What are some more thoughts on hiring sales reps ahead of plan when at scale?

  • Customer Success Managers

    One role in B2B tech startups that is incredibly important, but not talked about as much, is that of the customer success manager. Several years ago at Pardot we called them client advocates, and tasked them with making our customers successful, knowing that a comprehensive software product, no matter how cool the interface, still requires on-going training and help. Whereas the support team is reactive with customer issues, the customer success team is proactively reaching out to customers to make sure everything is going well and helping customers get more value out of the product.

    Here are a few thoughts on customer success managers:

    • A customer “touch” cadence should be used whereby customers are pinged once a month/quarter/year
    • Analytics and engagement tools should be used to track which customers are actively using the critical features in the product and which customers are at risk of leaving due to little/no usage
    • The old adage “It’s cheaper to keep an existing customer than sign a new one” is even more true for SaaS businesses
    • As major new product features are released, the customer success team should help customers incorporate the new product functionality
    • Some of the best customer success managers are sales people that loved helping prospects but didn’t like asking for the sale
    • Upselling and cross selling is usually part of the customer success team, so it’s often a revenue-generating function

    Customer success managers are critical and should employed earlier than expected in B2B tech startups. As a proactive, customer-facing team, they often develop some of the strongest customer relationships and add tremendous value.

    What else? What are some more thoughts on customer success managers?

  • SaaS at 3x Revenue – Xactly Follow-up

    As a follow-up to last week’s post Notes from the Xactly S-1 IPO Filing, it’s useful to see how things played out for a newly public Software-as-a-Service (SaaS) company. With so much media and analysis around SaaS companies trading at large multiples (e.g. 8x or greater revenue), Xactly paints a much more realistic picture of a cloud computing company growing at a modest pace.

    Here are a few notes from the outcome of the Xactly IPO (NYSE:XTLY):

    • Market cap: $241M
    • Last quarter’s revenue annualized: $71M (last quarter’s revenue times four)
    • $241M / $71M = 3.3x (ignoring cash on hand, liabilities, etc)
    • Q1 2014 to Q1 2015 quarterly revenue growth: 16%

    So, for a SaaS company growing less than 20% per year, the revenue multiple here is roughly in the 3x range. This is a big difference from the huge premiums much faster growing companies earn (see Quantifying the SaaS Growth Rate Multiplier). For Xactly, it’ll be interesting to see if they can use the new cash on their balance sheet to increase their growth rate and command a much higher premium.

    What else? What are some more thoughts on SaaS at 3x revenue?

  • Notes from the Xactly S-1 IPO Filing

    Xactly, a sales performance and incentive management SaaS company, just filed their S-1 to go public. Over the years, I’ve seen Xactly’s booth many times at the Salesforce.com Dreamforce show but didn’t know too much about the company. After reading the S-1, it’s clear that there’s a big growth opportunity using software to manage commissions for sales reps and other incentive programs.

    Here are a few notes from the Xactly S-1 IPO filing:

    • Company offering: solutions that help executives design, manage and analyze incentive programs and provide visibility into employee and incentive program performance. Employees use the solutions to monitor, estimate and track their own and their team’s performance in real-time, and modify their behaviors to maximize their payout consistent with company goals. (pg. 1)
    • 725 customers (pg. 2)
    • Revenues (pg. 2)
      2013 – $36.3 million
      2014 – $47.2 million
      2015 – $61.1 million (average of $84,275/year/customer)
    • Losses (pg. 2)
      2013 – $9.4 million
      2014 – $14.5 million
      2015 – $18.5 million
    • Replaces spreadsheets and integrates with customer relationship management (CRM), configure price quote (CPQ), human capital management (HCM), supply chain management (SCM) and enterprise resource planning (ERP) applications. (pg. 2)
    • According to IDC, the worldwide SaaS and cloud software market reached $39.3 billion in revenue in 2013, a 22.6% year-over-year growth rate, and will grow to $102.9 billion by 2018, at a compound annual growth rate of 21.3%, compared to an expected compound annual growth rate of 6.3% for the broader software market for the same time period. (pg. 2)
    • Only 12.7% of companies using a commercial incentive compensation management system as their primary method in 2014. (pg. 3)
    • 14 million people in sales and related occupations in the United States (pg. 3)
    • Average revenue per user of $280/year (pg. 3)
    • 28% of subscribers are outside of the United States (pg. 5)
    • Founded in March of 2005 (pg. 6)
    • Professional services revenue (pg. 9)
      2013 – $8.8 million
      2014 – $11.3 million
      2015 – $13.8 million
    • Accumulated deficit of $115.8 million. (pg. 12)
    • As of January 31, 2015, had approximately $198.7 million and $67.5 million of federal and state net operating loss carryforwards. (pg. 28)
    • Define enterprise customers as those customers with a minimum of 4,000 employees and mid-market customers as those customers with at least 350 and less than 4,000 employees. (pg. 49)
    • 104% revenue retention rate in the last 12 months (pg. 50)
    • As of January 31, 2015, had 333 employees, with 93 in research and development, 125 in sales and marketing, 86 in operations, customer support and professional services, and 29 in general and administrative. (pg. 88)
    • VCs own 67.4% of the company (pg. 113)
    • Founder/CEO owns 6.6% (pg. 113)

    Xactly is a good representation of the major growth opportunity for SaaS: taking old-line business functions and building them from scratch in the cloud. By providing a better experience and delivery model, SaaS actually grows the size of the market. Look for Xactly to do well in their IPO and beyond, especially if they can keep their top-line growth above 30%.

    What else? What are some more thoughts on the Xactly S-1 IPO filing?

  • Well, There’s Nothing Left to Build

    During the first summer of Pardot we embarked on a crazy adventure with 11 full-time summer interns. While I wouldn’t recommend that to anyone, we learned a ton and built the foundation of an amazing product. Near the end of the summer, most of the interns had finished and one excellent one stayed around to continue working part-time during the school year. One day, when all the immediate summer engineering projects were done, he walked in and said with a straight face:

    Well, there’s nothing left to build. We finished everything and the product is completely done.

    Of course, the product is never done. Here are a few reasons why:

    • Markets are constantly iterating and evolving (features that are hot one quarter won’t be hot the next)
    • Customer demands and needs continually change (as customer usage matures, more requests come in for edge cases)
    • Competitors introduce valuable new functionality (there’s always an arms-race between the major players in an industry)
    • New technologies emerge (e.g. supporting different screen resolutions, devices, and formats)

    Products with fast-growing customer bases are continually improving and never done. If anyone suggests otherwise, take them through any major product they use on a regular basis and point out how it’s evolved.

    What else? What are some other thoughts on the idea that there’s always room to improve?