David Cummings on Startups

Category: SaaS

  • The Product Manager

    In the tech startup world there’s a consistent theme that software engineers and sales reps are two of the hardest positions to fill as the company scales. Well, there’s an even harder position to fill and that’s the role of the product manager (thankfully, a larger number of them aren’t required for each startup). Here’s a blurb about the product manager’s role from this LinkedIn ad for a VP of Product Management at Pardot:

    As VP of Product Management, you will be one of the most public faces of the Pardot platform and help shape, direct and execute our product vision. You’ll be challenged to blend customer-centric principles with industry-changing innovation. You will work directly with the head of product, as well as the rest of the product and engineering teams, to create experiences that reinforce the Pardot brand by delighting and wowing our customers.

    How many people do you know that are a combination evangelist, visionary, technically adept, and customer-focused? The “technically adept” piece is especially difficult depending on the type and style of product manager desired. Often, the CEO, in conjunction with the head of engineering, act as the defacto product managers in the early years of a startup due limited resources and the difficulty in finding the right person.

    Here are a few thoughts on the product manager role:

    • Software engineers or technical project managers often transition well to product managers
    • Strong opinions on the future of the product are critical as input and feedback will come from all directions
    • True empathy for the customer is a must-have (we’ve all used products that didn’t feel like they had the customer in mind)
    • Extroversion is often found with product managers due to the nature of constant interaction with engineering, sales, marketing, support, customers, prospects, and analysts
    • Attention to detail and planning skills are crucial due to all the moving parts

    The product manager role is one of the toughest positions to fill. A great product manager, while hard to find, is incredibly valuable and important to the long-term success of the company.

    What else? What are some more thoughts on product managers in a startup?

     

  • Power of Growing Recurring Revenue Sooner

    As part of the idea of Always Hiring Sales Reps, it’s important to understand the power of growing recurring revenue sooner. Say there’s a debate between hiring two sales now or six months from now. Assuming the sales reps are hired now, how does that affect recurring revenue over the next four years? Let’s take a look:

    • Assume both reps are successful, 90 days to ramp up, annual quota is $500,000 of new annual recurring revenue, and churn is 10% per year
    • Time between hiring the reps now and six months from now, plus 90 day ramp, makes the first newly generated deals coming in either day 91 or day 271.
    • Annual recurring revenue increase from the six month difference:
      – Year 1: $250,000
      – Year 2: $225,000
      – Year 3: $202,500
      – Year 4: $182,250
      – Total non-recurring revenue: $859,750

    Hiring two more sales reps now, as opposed to six months from now, adds almost a quarter million dollars in new annual recurring revenue in the first year and over $180,000 in annual recurring revenue by the end of the fourth year (it’s the gift that keeps on giving). The moral of the story is to hire as many sales reps as possible assuming the standard SaaS metrics look good.

    What else? What are some other thoughts on the power of growing recurring revenue sooner?

  • Upselling Customers in the Early Years

    One question I’ve received several times is regarding best practices for upselling customers. Interestingly, at Pardot, we didn’t employ any concerted efforts around upselling in the early years. All the focus was on acquiring new customers, and making them successful. In addition, at the time, product pricing was based on email volume and usage of certain features, making upselling difficult as the additional functionality was only compelling to a small percentage of customers.

    Here are a few thoughts on upselling customers:

    • Ensure that the product pricing and corresponding upsell trigger points are enticing
    • Focus most of the energies on acquiring customers and know that as the customer count grows, upselling will become more important
    • Strive for customer upsells to outweigh customer churn such that there’s negative revenue churn
    • Lead with value and focus on customer success such that upselling doesn’t feel pressured or forced

    Customer upselling is an area that I have much to learn. My main lesson learned so far is to have a pricing plan that lends itself to upselling.

    What else? What are some more thoughts on customer upselling in the early years?

  • Notes on the ShopVisible Exit

    Atlanta-based ShopVisible announced yesterday that they are being acquired by Epicor (public filings but privately held) in their press release Epicor to Acquire Industry Leading Cloud Digital Commerce and Order Management Solution Provider – ShopVisible. Epicor has 4,600 employees and is owned by private equity firm Apax Partners. ShopVisible is a specialized ecommerce Software-as-a-Service (SaaS) company led by Sean Cook and Josh Lloyd.

    Here are a few details on ShopVisible:

    • Started in 2006 in South Florida and relocated to Atlanta (source)
    • Domain name registered January 26, 2006 (source)
    • 41 employees on LinkedIn (source)
    • Raised $823,000 in equity in 2009 (source)
    • 2013 Venture Atlanta presenting company (source)

    While the purchase price wasn’t disclosed, with 41 employees, I’m sure the deal was lucrative. Congratulations to the whole ShopVisible team on the exit.

    What else? What are some other notes on the ShopVisible exit?

  • Customer Success and Retention Software

    We’ve all heard the old adage that it’s much more cost-effective to keep an existing customer than it is to sign a new customer. Well, there’s a relatively new class of Software-as-a-Service (SaaS) products known as customer success / customer retention software. This class of software is similar to marketing automation software (like Pardot) in that it has tools to track and communicate with users, but it’s much more focused on the unique needs of existing customers as opposed to generating prospects and turning them into customers. Imagine analyzing user behaviour in the application, correlating it with activity data in the CRM, and making recommendations as to customers that are likely to churn (e.g. if the user doesn’t sign into the application regularly, doesn’t use the most popular features, doesn’t interact with the support or customer success teams, etc).

    Here are a few vendors in the space:

    Customer success and retention software is going to be a major category. While not as large as marketing automation, it’s a good market and will have big winners.

    What else? What are some more thoughts on customer success and retention software?

  • Inventory of our Current Business Apps

    Every year I like to take an inventory of the tools and products we use on a regular basis within our startups. Most products stay the same from year to year, but there are always a few new break-out products that catch on quickly.

    Here’s what we use day-to-day:

    This list applications shows the rise of Software-as-a-Service (SaaS). My prediction is that three years from now we’ll be using 50% more applications.

    What else? What are some other business apps you use on a regular basis?

  • What Happens to Small SaaS Companies

    Earlier this week I was talking to a venture capitalist about the Software-as-a-Service (SaaS) market. Halfway through our conversation we got to talking about what’s going to happen to all the successful (greater than $2 million recurring revenue) SaaS companies that are providing a service that isn’t venture backable (hard to see how the business achieves a value of $100+ million). It’s tough for investors to make good money as the market for small acquisitions is tiny outside of Silicon Valley.

    Here are a few thoughts on small SaaS companies:

    • SaaS has such good cash flow, predictability, and gross margins that many of these small businesses can be very profitable, even sub-scale
    • Investors will likely make their returns off of dividends once the business stops spending for growth and instead looks to maximize profitability
    • Rollup companies will emerge that specialize in SaaS businesses (scale might need to be a bit higher e.g. $10+ million in revenue) much like Infor did for maintenance-focused enterprise software companies
    • SaaS companies that are growing fast (greater than 40% year over year) get premium valuations (e.g. 7-10x revenue), and ones with lower growth are going to get smaller valuations (e.g. 2-4x revenue)
    • SaaS as a delivery model for software is only going to grow, and more entrepreneurs are going to find unmet needs (a SaaS trend is to provide one component of a larger SaaS product in a format that’s better, faster, and cheaper)

    Just like any cottage industry, more and more small SaaS companies are going to emerge and carve out their own profitable niche. While most won’t have splashy exits, they’ll be great businesses and provide nice lifestyles for the entrepreneurs.

    What else? What are some other thoughts on what happens to small SaaS companies?

  • Notes from the New Relic S-1 IPO Filing

    Last week New Relic, an application performance company, published their S-1 IPO filing to go public. From a technical perspective, New Relic provides software developers insight into how every part of their web and mobile application performs, which is incredibly valuable. New Relic is part installed software (to gather the data) and part cloud-based software (to review and analyze the data).

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

    • Mission is to empower organizations to build the best modern software possible and to improve their business intelligence using the data flowing through and about that software (pg. 1)
    • Revenues for fiscal years ending in March (pg. 2):
      2012 – $11.7 million
      2013 – $29.7 million
      2014 – $63.2 million
    • Losses for fiscal years ending in March (pg. 2):
      2012 – $7.5 million
      2013 – $22.5 million
      2014 – $40.2 million
    • Gartner says the IT Operations Management market is $19.1 billion in 2013 and growing to $27.9 billion in 2017 (pg. 5)
    • Business started in September 2007 (pg. 6)
    • Accumulated deficit of $100.8 million (pg. 11)
    • Employee headcount grown from 315 employees as of September 30, 2013 to 534 as of September 30, 2014 (pg. 12)
    • In the fiscal year ended March 31, 2014, sales and marketing expenses represented 92% of revenue (pg. 14)
    • 83% gross margin in 2014 (pg. 46)
    • Product line (pg. 67):
      New Relic APM: Application performance management
      New Relic Mobile: Mobile application performance management
      New Relic Servers: Server monitoring for cloud and data centers
      New Relic Browser: End-user experience monitoring and performance monitoring
      New Relic Synthetics: Software testing through simulated usage
      New Relic Platform: Platform that extends our functionality into other applications
      New Relic Insights: Real-time big data analytics for business managers
    • As of September 30, 2014, had over 250,000 users and had 10,590 paid business accounts worldwide (pg. 75)
    • Three core values (pg. 77):
      Customer Trust and Success
      Growth—“Excelsior!”
      Team—“Be Bold, You’re Not Alone”
    • Ownership percentages (pg. 100):
      CEO/Founder – 27.3% (this is an impressive amount for a company at this scale)
      Benchmark Capital – 22%
      Trinity Ventures – 13.6%
      Insight Venture Partners – 5.6%
      Tenaya Capital – 4.9%

    New Relic is one of the leading infrastructure apps for the cloud-generation of companies. With its scale and growth rate, the public markets will be very receptive to the IPO.

    What else? What are some other thoughts on theNew Relic S-1 IPO filing?

  • Atlanta’s Contact At Once selling for $65 Million

    Urvaksh broke the news last week that Atlanta’s Contact At Once is going to be bought for $65 million by LivePerson. Contact At Once (CAO) makes web-based chat software and tailors it to industries like car dealerships and apartment complexes. Online chat programs, like LivePerson, have been around for decades. CAO took a standard idea and built a business from the ground-up to service specific verticals, which continues the trend of vertical-specific Software-as-a-Service applications as the next wave.

    Here are a few interesting notes about Contact At Once:

    • Started in 2005
    • 2009 revenue of $2.2 million and 34 employees (per the Inc. 500 page)
    • 2012 revenue of $12.3 million and 86 employees in 2012 (per the Inc. 500 page)
    • Raised $3 million from Fulcrum Equity Partners in 2012 (went seven years without raising money and got to a $10 million+ run rate)
    • 127 employees on LinkedIn today (November 2014)
    • Using the 2012 revenue and employee count, CAO is likely in the ~$20 million revenue range based on having 50% more employees now

    Contact At Once is a great success story that shows you can take a straightforward idea, build a great business, and do it with limited capital. Congratulations to the team!

    What else? What are some more thoughts on Contact At Once?

  • 5 Financial Best Practice Metrics for SaaS Masters

    One of the great things about Software-as-a-Service (SaaS) is the level of predictability it provides, especially on the financial side. Over the past 10+ years, as SaaS has hit the mainstream, a number of financial best practices emerged. Here are five financial metrics every SaaS entrepreneur should know:

    1. SaaS Magic Number – The ratio of last quarter’s new recurring revenue relative to the previous quarter’s sales and marketing expense should be less than one (if < 1, then spend more on sales and marketing, otherwise if > 1, then figure out how to make sales and marketing more efficient)
    2. 3x Recurring Revenue to Sales Compensation Rule – The fully burdened cost of an inside sales rep should be 1/3rd, or lower, of the new annual revenue required by quota, and field reps should be even lower (e.g. if a rep makes $50,000 all in per year, they should bring in over $150,000 in new annual recurring revenue, with some models going up to 8x recurring revenue to sales compensation)
    3. 3x MRR Lines of Credit – Banks that understand the SaaS model will often lend money at a rate of 3x the monthly recurring revenue (e.g. $500,000 per month in recurring revenue results in a line of credit of $1.5 million)
    4. 2.5x Growth Rate Valuation Multiplier – The growth rate of a SaaS company drives the valuation at approximately 2.5x the growth rate on top of a base valuation that’s double revenue (this is highly subject to the whims of the market and timing).
    5. 3%+ of Monthly Churn is Deadly – The hidden killer for SaaS startups is churn, and churn above 3% on a monthly basis is considered deadly (assuming the startup has some modest scale and accounts for the early exit customers)

    Over time, more financial best practice metrics will emerge as the industry matures. Regardless, these five metrics are a great place to start.

    What else? What are some other financial best practice metrics for SaaS masters?