David Cummings on Startups

Category: SaaS

  • Rise of the Browser Add-on Business

    Now that Google Chrome and Firefox have healthy, active extension / add-on marketplaces, we’re starting to see more companies build businesses that interact with data and services from other web apps with the browser add-on being a critical component. Here are three popular examples:

    • Rapportive – Adds a sidebar in Gmail that shows rich contact profiles and information (e.g. social profiles, LinkedIn data, etc). Rapportive was acquired by LinkedIn.
    • Boomerang for Gmail – Enables scheduling emails for delivery at a date / time in the future as well as generating reminders if an email doesn’t receive a response.
    • SalesLoft – Enables fast and efficient capture of data returned in Google search results for the purpose of building prospect lists as well as integrating the data into a CRM (Disclosure: I’m an investor).

    Over time, I expect more products will emerge as browser add-ons that take advantage of data and interactions with existing web apps to provide substantially more value.

    What else? What are some other examples of browser add-ons that you like?

  • New SalesLoft Prospector Product

    SalesLoft has a new Prospector product designed to make it easy to build high quality lists of prospects based on results from Google searches (Disclosure: I’m an investor in SalesLoft). As background, one of the biggest challenges for sales people is getting targeted lists of potential prospects that fit the ideal customer profile. There are many data sources out there but the information is often out of date.

    The SalesLoft Prospector idea is really straightforward. LinkedIn has the best, most up-to-date information on professionals, and Google caches the public LinkedIn profile pages. So, provide a tool that takes the data from the Google results, puts it in a spreadsheet or CSV for a CRM, and augment it with phone numbers and email addresses via a third-party data sources. The end result is the best semi-automated list building tool on the internet.

    SalesLoft Prospect Interface

    So, the next time you hear a sales rep complain about the quality of their lists, have them give the SalesLoft Prospector a try.

    What else? What are your thoughts on generating lists of potential prospects and the SalesLoft Prospector tool?

  • Cohort Analysis for Analyzing SaaS Churn

    Andrew Chen has a guest post up from Christoph Janz regarding his spreadsheet for churn, MRR, and cohort analysis. Christoph is the author of the awesome SaaS metrics dashboard that I adapted to work with startups that have an inside sales team.

    Cohort analysis is looking at groups of customers over time as opposed to all customers at a given point in time. As an example, on any given month 3% of all customers might churn (they leave and no longer pay for the service). Upon further inspection, after grouping customers based on the month they signed up, one might find that customers within 90 days of signing up are churning at a rate of 10% per month, but once they get past 90 days, they churn at a rate of 2% per month. This cohort analysis would lead to a variety of recommendations.

    Here are a few thoughts on cohort analysis:

    • Consider sample size and timeframe when evaluating usefulness (e.g. a startup with a small number of customers doesn’t need to spend time on it)
    • Break customers into meaningful cohorts based on different factors (e.g. some startups should measure customer cohorts by the week whereas others should do it by the month)
    • Monitor multiple customer data points beyond churn including average revenue per user, engagement, logins, up-sells, etc
    • Look for anomalies that might influence the data including things like weather, seasonality, etc

    Cohort analysis is an important part of the recurring revenue business model and should be incorporated into the standard startup metrics.

    What else? What are your thoughts on Christoph’s spreadsheet for churn, MRR, and cohort analysis?

  • Every SaaS Company Should Have an App Store Strategy

    Salesforce.com set the standard several years ago with the introduction of their AppExchange app store providing a central repository of third-party applications that work with their platform. Apple took the idea and made it mainstream for consumers with their App Store for iPhone and iPad programs. Now, every Software-as-a-Service (SaaS) company should have an app store strategy.

    Here are a few items to keep in mind:

    • Curating the app store is critical; too many SaaS companies claim to have an app store only to have many apps that aren’t functional or are “pretend apps” that are really lead generation to sell custom consulting engagements
    • An app store should be implemented once the startup reaches scale (e.g. 500 – 1,000+ customers) so that there’s sufficient demand from users to warrant the building and maintaining of the store
    • Some vendors charge a tax (e.g. 15% of revenue from apps that connect to the platform), which should be avoided as it’s better to encourage as many integrated products as possible and not alienate potential partners

    While not an app store directly, companies like Kevy will emerge as data synchronization app connectors for hundreds of cloud-based products. Regardless, every SaaS company should have an app store strategy.

    What else? What are your thoughts on SaaS companies needing an app store strategy?

  • SaaS Business Apps with a Paid Mobile Client

    Last week I was searching the App Store for an unrelated item and I came across the listing for the HotSchedules iOS app. Now, I normally wouldn’t pay any attention but HotSchedules, with their office in Austin, TX, is actually owned by Red Book Connect, which is based in Atlanta. More importantly, I saw a price tag of $2.99 to buy the app, which really surprised me. Why the surprise? HotSchedules is a B2B Software-as-a-Service app for scheduling hourly workers (e.g. restaurant employees, retail staff, etc) — I’ve never seen a SaaS business app with a paid mobile client.

    It got me thinking about why they chose to charge for it. Here are a few ideas:

    • With an extremely large number of end-users forced to use the software, HotSchedules sees it as an additional, meaningful revenue stream (web based access to the product is free)
    • HotSchedule’s end-users, which are hourly workers, change jobs frequently and are likely to only use their app briefly, making support costs higher, and thus this could be a way to offset some of those costs
    • HotSchedules is in a competitive industry with foes like PeopleMatter and SnagAJob.com, providing more pricing pressure on the core product, such that if they can offer the main application at a lower price, they can capture more market share and make up the revenue via end-users

    I don’t believe paid mobile clients for B2B SaaS app will ever be the norm, but it’s interesting to know that there are examples out there and that companies are trying it.

    What else? What are your thoughts on SaaS business apps with a paid mobile client?

  • The Three Stages of Evolution for SaaS Markets

    After watching the email marketing world for over a decade now, I’ve come to identify three stages of market evolution. These stages are applicable to other Software-as-a-Service (SaaS) markets as well but email marketing is uniquely suited since the market grew up with the Internet and didn’t have an installed software background like others (e.g. accounting software).

    Here are the three stages of evolution for SaaS markets:

    1. Broad, enterprise-strength products. Think Responsys where you have a high-end, infinitely flexible product that’s a private Oracle database instance combined with a powerful front-end. The product does its job well and is very complex.
    2. Turn-key, fairly easy to use products. Think Mailchimp where you have an affordable, straightforward product that’s a magnitude less expensive than the incumbents while still meeting the needs of most businesses.
    3. Vertical-specific, specialized products. Think Sailthru where you have a product that is tailored for the publishing industry with a heavy emphasis on personalization and delivering content to users based on their previous engagement.

    This evolution makes sense as the early startups invent the market and thus go to the large companies, which are willing to pay the most money for the technology. After the market is more defined and well understood, new entrants emerge and take advantage of technological enhancements that have gone on in parallel (e.g. open source, processing power, cloud computing, etc) to deliver a similar service with a better experience at a lower price. Finally, with the generic technology mainstream, in this example email marketing, nuances and applications that are vertical specific get applied to add even more value in a more specialized segment of the market.

    SaaS markets for many applications beyond email marketing are maturing and I believe we’ll see more vertical-specific applications as a result.

    What else? What are your thoughts on the three stages of evolution for SaaS markets?

  • Takeaways from the First Kevy Connects Event / Impact of the Cloud

    Tonight we had our first Kevy Connects event at the Atlanta Tech Village with over 250 registered attendees and a panel of Atlanta cloud software leaders including Reggie Bradford of Oracle / Vitrue, Michael Cohn of Cloud Sherpas, Bill Nussey of Silverpop, and Ed Trimble of Kevy. For the event, our goal was to bring together some of the major Software-as-a-Service companies in town to learn from each other and explore how we can continue to expand Atlanta’s strength in the world of cloud-based applications.

    Here are a few takeaways from the first Kevy Connects event:

    • Cloud-based software, while it’s been around for well over a decade, is one of the fastest growing software segments and shows no signs of slowing down
    • Most companies that were originally averse to putting their information in the cloud due to security, availability, etc have come around and are now comfortable with it
    • Integration of cloud apps is a big challenge for the industry and an opportunity for new entrants
    • Atlanta’s extensive history of successful B2B software companies provides a strong foundation for the next generation of cloud-based software.

    Overall, tonight’s event was a big success and we look forward to bringing the local cloud community together on a regular basis.

    What else? What are some of your takeaways from the event and the impact of the cloud?

  • Notes from the RingCentral S-1 IPO Filing

    RingCentral, a provider of cloud-based phone systems and communications tools, just filed their S-1 to go public. This is interesting from a Software-as-a-Service (SaaS) perspective because RingCentral has a heavy telecom component to the business due to phone numbers, long distance minutes, etc in conjunction with the software component. I’m curious to see what the market values the business on the telecom to SaaS valuation continuum.

    Here are notes from the RingCentral S-1 IPO filing:

    • Over 300,000 business customers (pg. 2)
    • Revenues (pg. 2):
      2010 – $50.2 million
      2011 – $78.9 million
      2012 – $114.5 million
      2013 1H – $73.2 million
    • Key benefits (pg. 3):
      Location independence
      Device independence
      Instant activation; easy account management
      Scalability
      Lower cost of ownership
      Seamless integration with other cloud-based applications
    • An original dot com business incorporated in February 1999 in California (pg. 5)
    • Losses (pg. 8):
      2010 – $7.3 million
      2011 – $13.9 million
      2012 – $35.4 million
      2013 1H – $23.9 million
    • Accumulated deficit of $107.5 million (pg. 10)
    • Level 3 Communications and Bandwidth.com provide the IP and phone networks (pg. 12)
    • Some support in the Philippines and some research and development in China (pg. 38)
    • Up to 10% of revenue comes from selling pre-configured phones (pg. 56)
    • Measures “Annualized Exit Monthly Recurring Subscriptions” as a key business metric defined as the monthly recurring revenue times 12 at the end of a given month (pg. 58)
    • Believes gross margins will grow as the business grows due to more pricing leverage with telecom costs (pg. 60)
    • Legal settlement costs of $1.1 million (pg. 67)
    • Overall gross margin is 58% (pg. 69)
    • Several patent lawsuits (pg. 88)
    • 399 full-time employees including 89 in China (pg. 105)
    • 1,050 contractors (pg. 105)
    • Co-founder / CEO owns 19.6% of the business (pg. 132)
    • Sequoia Capital owns 17.2% and Khosla Ventures owns 16.7% (pg. 132)

    Public markets love growth and this is a strong growth story. RingCentral won’t receive the same multiple as a SaaS business due to lower gross margins but it’ll trade at a healthy premium regardless.

    What else? What are your thoughts on the RingCentral S-1 IPO filing?

  • Quantifying the SaaS Valuation Growth Rate Multiplier

    We know that Software-as-a-Service (SaaS) companies with a higher growth rate are much more valuable than other SaaS companies with a lower growth rate, all things equal, based on research of publicly traded companies. When looking at the value of a business internally for the purpose of raising money or selling the business, it’s an interesting exercise to quantify just how valuable growth is to the overall valuation of the business.

    Now, making the assumption that gross margins are in the 70% – 80% range, renewal rates are in the 80% – 90% range, and that there’s nothing else abnormal about the business from a SaaS perspective, here’s the proposed formula:

    Valuation = (2*ARR) + (ARR*(1+(GRM*GR)))

    ARR = Annual Recurring Revenue
    GRM = Growth Rate Multiplier = 2.5
    GR = Growth Rate

    So, if growth rate is 0 (e.g. the company isn’t growing), the company is worth two times revenue, which makes sense. Assume a business with 75% gross margins can have profit margins of 33% if it doesn’t invest heavily in sales in marketing. Take the 33% profit margins and multiple by six to roughly approximate the six times EBITDA valuation assigned to an arbitrary business (the common value of a private company is usually 4x – 6x profits). With .33 (for 33%) times six, you get a business value of two times revenue (e.g. .33 * 6 = 2).

    Here are some more examples with growth rates:

    • $300,000 annual recurring revenue
      100% growth rate
      Valuation = (2 * 300,000) + (300,000 * (1 + (2.5 * 1) = 600,000 + 1,050,000 = $1.65 million
    • $1,000,000 annual recurring revenue
      50% growth rate
      Valuation = (2 * 1) + (1 * (1 + (2.5 * .5) = 2 + 2.5 = $4.5 million
    • $1,000,000 annual recurring revenue
      200% growth rate
      Valuation = (2 * 1) + (1 * (1 + (2.5 * 2) = 2 + 8 = $8 million
    • $5,000,000 annual recurring revenue
      100% growth rate
      Valuation = (2 * 5) + (5 * (1 + (2.5 * 1) = 2 + 8 = $27.5 million

    Of course, these are the theoretical valuations for a strategic buyer or an investor with preferred shares. For a shareholder with common shares, there would be a 50% discount for lack of liquidity and other issues related to not having control. In the end, growth rates drive SaaS valuations and (2*ARR) + (ARR*(1+(GRM*GR))) is an example to think through a valuation.

    What else? What are your thoughts on quantifying the SaaS valuation growth rate multiplier into a simplistic formula?

  • Growth Drives Value for SaaS Companies

    Software-as-a-Service (SaaS) is hot. White hot. In fact, it’s been hot for several years now. Marketo, which IPO’d recently, now has a market capitalization of $1.23 billion (NASDAQ:MKTO), even after Salesforce.com bought ExactTarget / Pardot. With Marketo’s most recent quarterly revenue results of $22.5 million (extrapolated to $90 million annually), the stock is now trading at north of 13x revenue (not counting assets and liabilities). The big driver of SaaS value is growth and with a 62% growth rate, the market loves Marketo. Is the stock overvalued in the short-term? Absolutely. Long-term? No, as long as it can keep its growth rate up for several more years and withstand Salesforce.com’s entrance into the market.

    Now, let’s look at NetSuite. NetSuite is at its all-time high with a market capitalization of $7.35 billion (NYSE:N). Based on last quarter’s revenue of $101 million, extrapolated to $404 million annually, the stock is trading at north of 18x revenue (not counting assets and liabilities). Take out a few turns of the multiple for the Oracle premium on NetSuite, and you still have a massive multiple. What gives? NetSuite grew 35% year-over-year and shows no signs of slowing down. The markets love growth.

    As long as the leading SaaS companies continue to post impressive growth rates, look for a market premium unlike many other industries. SaaS entrepreneurs take note: growth rates drive valuation.

    What else? How long do you think the leading SaaS companies will continue to get a large premium for growth?