David Cummings on Startups

Category: SaaS

  • The Magic of a $5 Million SaaS Run Rate

    After Defining a Successful Business several years ago for a Software-as-a-Service (SaaS) entrepreneur, the logical question is “what’s the next revenue milestone for a SaaS company after initial success has been achieved?” Things really start getting interesting once a startup hits the magic $5 million run rate mark. Here are a few reasons why $5 million is so important:

    • Product critical mass – $5 million often represents enough customers that the business will keep growing for several years to come
    • Team – There’s enough scale with 30-50 employees to have depth in each department, yet still move fast
    • Fundraising – Assuming a good growth rate (> 30%), it’ll be easy to raise money as a number of venture and growth equity funds exist with a minimum requirement of $5 million in revenue
    • Industry presence – There’s enough money for a marketing budget that enables attending all the conferences, being covered in analyst reports, and showing up in the key places online (SEO, PPC, etc)
    • Exit opportunities – Many acquirers aren’t interested in small startups, especially ones that are outside their hometown, so $5 million in revenue represents a minimum level where it’s worthwhile to look at acquiring a business

    While there’s no exact number, entrepreneurs that reach $5 million in recurring revenue with strong gross margins and a high growth rate have a tremendous number of strong options as well as enough scale to start spending more time on the business instead of in it.

    What else? What are your thoughts on a $5 million SaaS run rate being a major milestone for entrepreneurs?

  • SalesLoft and Sales Technologies

    Last week Urvaksh broke the news that Atlanta tech-legend Tom Noonan had invested $800,000 in SalesLoft (Disclosure: I’m an investor in SalesLoft). Tom is best known for being the co-founder and CEO of Internet Security Systems from start through exit to IBM for $1.5 billion a decade ago. Now, Tom is investing more heavily in the Atlanta area with a focus on Software-as-a-Service and internet security companies.

    SalesLoft’s core product, Prospector, is built on the premise that the best way to generate an accurate list of prospects for a sales rep is by scraping data online. While it might seem simple to some, it’s actually very difficult to find a current list of people with most data services having old information. With over 600 customers, SalesLoft has already shown that there’s a real need in the market for the technology.

    SalesLoft’s soon-to-be-launched product (Cadence) is all about automating the sales development process that was popularized by Aaron Ross’ excellent book Predictable Revenue. As sales teams put more emphasis on inside sales and web-based selling, so too does the need grow for sales technologies to help make this next generation of sales people more productive. Look for the product to be released in the near future.

    SalesLoft is well positioned in the fast-growing inside sales technologies world and is poised to be one of the next great success stories in Atlanta.

    What else? What are some other thoughts on SalesLoft and sales technologies?

  • Annual Run Rate and Size of Funding Round

    While it’s rare that Yik Yak was able to raise a large Series A round just seven months after launching (see WSJ article), there is a strong correlation between the startup’s revenue run rate and raising money. Too often startups, especially B2B Software-as-a-Service (SaaS) startups, go out looking to raise a large sum of money and don’t have the requisite revenue run rate, or other metrics, to warrant the target amount of capital and corresponding valuation (entrepreneurs typically sell 20-35% of the company during each round of financing, so to raise a $10 million round, the company must have a huge valuation).

    Here’s a ballpark for revenue run rate and size of funding round:

    • Annual run rate less than $20,000, raise a friends and family round of less than $250,000
    • Annual run rate between $20,000 and $100,000, raise a seed round between $250,000 and $750,000
    • Annual run rate between $100,000 and $1,000,000, raise a large seed round between $750,000 and $2,000,000
    • Annual run rate between $1,000,000 and $3,000,000, raise a Series A round between $2,000,000 and $7,000,000

    Now, the goal is to set expectations, based on recurring revenue, of what a normal-sized round might be for a competitive deal. Of course, investors can offer as much, or as little (none!), as they want. It doesn’t hurt to seek a larger round than what the annual run rate and corresponding valuation might dictate, but it’s important to be in the reasonable range to show you’ve done your homework and understand how the process works.

    What else? What are some more thoughts on annual run rate and size of funding round?

  • Modeling Sales Rep Ramp in SaaS Startups

    Most Software-as-a-Service (SaaS) financial models focus on the standard areas like new customers acquired, customer churn, expenses, cash flow, etc. In the section that models out labor there are the standard categories like sales, marketing, engineering, operations, administrative, etc. Only, the sales rep section is often too simplistic with a model that shows the hiring of two new sales reps every month/quarter (always hire sales reps in pairs) and simply leaves it at that.

    Here are a few items to model in the sales rep ramp for a SaaS startup:

    • Time to quota attainment (most sales reps take 60 – 120 days before they’re productive)
    • Sales rep churn (often 50% of reps hired won’t work out and some percentage of the successful reps will leave each year)
    • Productivity increases (reps often get 10-20% better each year)
    • Quota increases (often coincides with productivity increases and market dynamics)

    Sales reps, as a percentage of total employees, is almost always higher than most entrepreneurs realize (check out Salesforce.com which is said to have more than 50% of the employees in a sales capacity). Ramping up a large sales team in a SaaS startup is much more complicated than most financial models dictate.

    What else? What are some other thoughts on modeling sales rep ramp in SaaS startups?

  • Recent Zendesk IPO and More Thoughts

    After all the talk of Software-as-a-Service companies losing some luster, Zendesk had a successful IPO last week rising 49%. Now, Zendesk has a market cap of over $1 billion according to Google Finance (NYSE:ZEN). Back in April, when the Zendesk S-1 IPO filing was released and covered here, many of the basics were covered like financial information, capital structure, and more. Zendesk is one of the more interesting public SaaS companies and deserves more coverage.

    Zendesk is interesting for several reasons:

    • Age – Zendesk is the youngest of the publicly traded SaaS companies and represents a new wave of second-generation SaaS companies (newer tech stacks, more customer centric, less of a corporate feel, etc.)
    • Market – Zendesk has a huge opportunity with millions of help desk workers using out-dated software (or no software!), and has shown that there’s an opportunity to build a large, fast-growing standalone business even when competing with Salesforce.com
    • Design – Zendesk is one of the most design, and delight, centric companies at scale (along with Mailchimp) — just compare the interface of Zendesk with Netsuite and you’ll the difference between first-generation and second-generation SaaS companies
    • Customer Acquisition – Zendesk spends a tremendous amount of money on sales and marketing but is still a freemium model where most of their leads try before they buy, and do so in an entirely self-service manner (there are plenty of free trial products out there but many are too difficult to use without help)
    • Platform – Zendesk is well positioned to be the platform company of the help desk space where other companies build add-ons and integrations (see Kevy Connectors), much like the AppExchange eco-system for Salesforce.com

    The big takeaway is the Zendesk will grow and scale in a different way compared to the majority of public SaaS companies (which are more enterprise-focused). Overall, I think Zendesk will do well and be the dominate player in the help desk market.

    What else? What are some more thoughts on Zendesk?

  • SaaS Valuations Driven By More Complicated Metrics

    Andreesen Horowitz has a great new piece up titled Understanding SaaS: Why the Pundits Have It Wrong. The idea is that SaaS valuations are under intense scrutiny due to the recent run up and down in the public markets. In reality, SaaS companies have financial models and metrics that are more difficult to understand when compared to traditional software companies. With a traditional software company, you spend a ton of money, close a deal, and collect the majority of the lifetime value of the customer immediately. With a SaaS company, you spend a ton of money, close a deal, and then collect a small portion of the lifetime value every month for (hopefully) several years. Financial statements for SaaS companies look worse compared to traditional software companies, yet the business model is significantly better.

    Some key points from the Andreesen Horowitz article on SaaS:

    • More growth requires more capital as money is spent to acquire and onboard customers, yet customer payments are spread out over an extended period of time
    • R&D is much more efficient for SaaS companies due to having a single code base as opposed to lots of different versions of a product
    • Metrics like lifetime customer value, cost of customer acquisition, churn, and billings are critical for SaaS companies, yet difficult to discern from financial statements

    SaaS and subscription-revenue entrepreneurs would do well to read Understanding SaaS: Why the Pundits Have It Wrong.

    What else? What are some other takeaways from the article and reasons SaaS companies aren’t as well understood?

  • Enterprise-Focused Public SaaS Companies More Likely to Be Acquired

    Reflecting on the list of publicly traded B2B SaaS companies from yesterday, it’s clear that over the past few years, companies that reached scale and went public were more likely to be acquired if they focused on selling to large companies (enterprises) as opposed to ones selling into the small-to-medium sized business segment. Companies like ExactTarget, Eloqua, and Responsys are all in the email marketing space, which is white hot (and just had another nice exit with IBM buying Silverpop and closing the transaction today). If you go back another year you have SuccessFactors and Taleo both getting acquired, and both targeting the enterprise with HR software.

    Here are a few thoughts on why enterprise-focused startups are more likely to be acquired:

    • Companies targeting the enterprise with scale have an easier time maintaining a fast growth rate due to the nature of high dollar sales (if each new deal is $200k/year in annual recurring revenue, it’s easier to put a bunch more feet on the street and pound the pavement to bring in more deals as compared to trying to sign the equivalent number of small businesses)
    • Large acquirers are more prevalent in the enterprise-focused space (think of Oracle, SAP, Salesforce.com, etc vs Intuit, etc), and once a category is declared strategic and an acquisition is made, the big competitors start circling the remaining players
    • CIOs and executive-level technical buyers communicate more with the large acquirers since they purchase so many different products whereas many SMB products are bought via a credit card by line-of-business managers

    Again, this is anecdotal evidence based on a limited number of public market acquisitions. As for building an SMB or enterprise-focused SaaS company, I’d go after whatever market has the most opportunity. Regardless, publicly traded enterprise-focused SaaS companies are more likely to be acquired.

    What else? What are some other reasons why enterprise-focused public SaaS companies are more likely to be acquired?

  • Enterprise Software Public Company SaaS Valuations for Q2 2014

    Once a year I like to inventory the public company SaaS valuations (see 2013, 2012 and 2010). Earlier this year SaaS valuations shot up a good bit, but have subsequently come back down over these past few weeks. We’ve also had several SaaS companies acquired over the past year including ExactTarget, Eloqua, and Responsys as well as new IPOs like Cvent and ChannelAdvisor.

    • salesforce.com (NYSE:CRM) – customer relationship management SaaS company.
      Market cap: $30.86 billion
      Last reported quarter’s revenues: $1,145 million
      Employees: 13,300
    • NetSuite (NYSE:N) – enterprise resource planning (accounting, inventory, etc) SaaS company.
      Market cap: $5.53 billion
      Last reported quarter’s revenues: $122.96 million
      Employees:  2,434
    • Constant Contact (NASDAQ:CTCT) – email marketing for small business SaaS company.
      Market cap: $874.21 million
      Last reported quarter’s revenues: $78.87 million
      Employees: 1,235
    • LogMeIn (NASDAQ:LOGM) – remote machine access SaaS company.
      Market cap: $981.18 million
      Last reported quarter’s revenues: $49.02 million
      Employees: 675
    • LivePerson (NASDAQ:LPSN) – live chat SaaS company.
      Market cap: $506.71 million
      Last reported quarter’s revenues: $47.83 million
      Employees: 796
    • Demandware (NYSE:DWRE) – ecommerce SaaS company.
      Market cap: $1.69 billion
      Last reported quarter’s revenues: $35.54 million
      Employees:  383
    • Marketo (NASDAQ:MKTO) – marketing automation SaaS company.
      Market cap: $950.39 million
      Last reported quarter’s revenues: $32.29 million
      Employees: 519
    • ServiceNow (NYSE:NOW) – IT asset management SaaS company.
      Market cap: $6.66 billion
      Last reported quarter’s revenues: $139.09 million
      Employees: 1,830
    • Workday (NYSE:WDAY) – HR and financial management SaaS company.
      Market cap: $12.48 billion
      Last reported quarter’s revenues: $141.87 million
      Employees: 2,600
    • Cvent (NYSE:CVT) – Events management SaaS company.
      Market cap: $990.58 million
      Last reported quarter’s revenues: $30.70 million
      Employees: 1,450
    • ChannelAdvisor (NYSE:ECOM) – Ecommerce channel management SaaS company.
      Market cap: $542.43 million
      Last reported quarter’s revenues: $19.34 million
      Employees: 216

    Valuation wise, the two biggest movers were Constant Contact and Demandware doubling in value over the past 12 months. SaaS/cloud computing companies continue to command larger valuations relative to other technology companies.

    What else? What are some other observations on public company SaaS valuations?

  • Notes from the Zendesk S-1 IPO Filing

    Zendesk, one of the hottest and fastest growing Software-as-a-Service (SaaS) companies just filed their S-1 to go public. Zendesk makes help desk software for support teams to interface with customers in an efficient manner. Zendesk started at the same time as Pardot back in 2007, so I have a sense of nostalgia watching our respective companies grow up at the same time as a class of second-generation SaaS companies providing broad-based solutions for a specific market.

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

    • Over 40,000 customer accounts (pg. 1)
    • Zendesk approach (pg. 3)
      Beautifully Simple
      Omni-Channel and Contextual
      Affordable
      Natively Mobile
      Cloud-Based Architecture
      Open Platform
      Proactive Engagement
      Strategic Analytics
    • Revenue (pg. 9)
      2011 – $15.6M
      2012 – $38.2M
      2013 – $72M
    • Losses (pg. 9)
      2011 – $7.2M
      2012 – $24.4M
      2013 – $22.6M
    • 473 employees (pg. 13)
    • Has experienced several security breaches including one in February 2013 where three accounts were compromised and personal information was stolen (pg. 15)
    • Owes $23.8M on their line of credit (pg. 34)
    • Three things that successful businesses do well (pg. 42)
      – Have great products
      – Care for your customers
      – Attract a great team
    • Acquired Zopim, a live chat company, for the purchase price of approximately $15.9 million (pg. 69)
    • Equity ownership (pg. 119)
      Co-founder/CEO – 7.1%
      Co-founder/CPO – 7.2%
      Charles River Ventures – 24.5%
      Benchmark Capital – 18.7%
      Matrix Partners – 8.8%

    Zendesk, with over $100 million in annual recurring revenue and an amazing growth rate, will do extremely well in the public markets. Ultimately, I expect Zendesk and HubSpot to merge in the future and take Salesforce.com head-on as the second-generation cloud platform of record for businesses.

    What else? What are some other thoughts on the Zendesk IPO filing?

  • Notes from the Box S-1 IPO Filing

    The much anticipated Box S-1 IPO filing was just released and it’s filled with a ton of interesting data. Box was co-founded by Aaron Levie, purveyor of the some of the most astute 140 character quips Twitter has ever seen (see 10 Awesome Startup Tweets from Box’s Aaron Levie). Another reason the S-1 is so interesting is due to how it lays out how a Software-as-a-Service (SaaS) company can raise $400+ million in capital and already burn through $300+ million of it in pursuit of amazing growth.

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

    • Box provides a cloud-based, Enterprise Content Collaboration platform (pg. 1)
    • 34,000 paying organizations and 225,000 total registered organizations (freemium model, so they have an astounding 15% conversion rate at the organization level to go from a free user to a paid user – pg. 2)
    • Revenue (pg. 2)
      2011 – $21.1 million
      2012 – $58.8 million
      2013 – $124.2 million
    • Losses (pg. 2)
      2011 – $50.3 million (wow!)
      2012 – $112.6 million (wow!!)
      2013 – $168.6 million (wow!!!)
    • Industry trends (pg. 2)
      Shift from On-Premise to Cloud-Based Applications
      Increased Functionality and Proliferation of Mobile Devices
      Explosion of Content and Data
    • Accumulated deficit of $361.2 million (pg. 14)
    • Grew from 369 employees as of January 31, 2012 to 972 employees as of January 31, 2014 (pg. 15)
    • Retention rate calculated as of a period end by starting with the annual contract value (ACV) from customers with contract value of $5,000 or more as of 12 months prior to such period end (Prior Period ACV) and a subscription term of at least 12 months (pg. 48)
    • Non-U.S. customers represented 20% of revenue (pg. 50)
    • Interesting quips from Aaron Levie’s letter (pg. 75)
      So with some free time and online poker winnings, we set out to change how people could access, share and collaborate on information…
      Neither Dylan nor I had storied careers at IBM or Oracle (though I did use Lotus Notes once in an internship)…
      We’ve seen companies that were once wildly successful become shadows of their former selves.
    • Current ownership (pg. 126)
      Named VCs – 63% (VCs own more than this but weren’t explicitly named)
      Co-founder/CEO – 4.1% (5.7% if you count unexercised stock options)
      Co-founder/CFO – 1.8%

    Outside the amazing amounts of money burned and the growth rate, the S-1 filing was pretty vanilla. No patent trolls. No private jets. Nothing. Box is growing incredibly fast in a massive market which will result in a successful IPO.

    What else? What are some other thoughts on the Box S-1 IPO filing?