David Cummings on Startups

Category: SaaS

  • Notes from salesforce.com, inc. 2003 S-1 IPO Filing

    The largest and most successful SaaS/cloud company, salesforce.com, inc. (yes, that’s the proper spelling of the company), filed their S-1 for an IPO on December 18, 2003. With the annual Dreamforce conference next week, and the fact that their market cap is now $21.5 billion (NASDAQ: CRM), a little trip down memory lane to see how things were nine years ago is on tap.

    Here are notes from the salesforce.com, inc. 2003 S-1 IPO filing:

    • Signed 8,000 paying subscribers from February 2000 to October 2003 and 110,000 seats (pg. 1) – SFDC now has over 110,000 paying subscribers and many millions of seats
    • May 2003 IDC reports project SaaS/cloud-based apps to be $2.6 billion in 2007 (pg. 1) – SFDC alone is going to be larger than $2.6 billion in revenue in 2013
    • Incorporated in Delaware in February 1999 and released first product in February 2000 (pg. 2)
    • Revenues (pg. 4)
      2001 – $5.4 million
      2002 – $22.2 million
      2003 – $50.9 million
      Nine months ended Oct 31, 2003 – $65.9 million
    • Losses (pg. 4)
      2001 – $33.6 million
      2002 – $30.1 million
      2003 – $9.3 million
    • Accumulated deficit – $71 million (pg. 4)
    • Small business customers have shorter contracts and higher rate of attrition (pg. 9)
    • Fiscal 2003 sales to Europe and Asia accounted for 14 and 17 percent of revenue, respectively (pg. 11)
    • Database software comes from Oracle Corporation (pg. 13)
    • Research and development expenses (pg. 23)
      2001  – $3.3 million
      2002 – $5.3 million
      2003 – $4.6 million
    • In December 2001 abandoned excess office space and took a $7.7 million charge (pg. 26)
    • Owned 64% of a Japanese joint venture (pg. 27)
    • Raised $61.1 million from investors in exchange for preferred stock (pg. 38)
    • $3.5 million letter of credit for office rent in 2001 (pg. 39)
    • 2004 office lease expense of $5.4 million (pg. 39)
    • 10,000 free Personal Edition users activated (pg. 47)
    • Application is written in Java and Oracle PL/SQL (pg. 48)
    • A small number of customers have service level agreements (pg. 50)
    • Field sales offices in more than 20 cities (pg. 51)
    • 412 employees as of Oct 31, 2003 (pg. 53)
    • Equity owned before IPO (pg. 72)
      Marc Benioff – 31.6%
      Halsey Minor – 10.2%
      Parker Harris – 2.7%
      Attractor Funds – 6.0%

    Similar to the Workday IPO filing in the summer of 2012, this salesforce.com IPO filing from 2003 is highly unusual in that it’s a SaaS/cloud company that raised an impressive amount of capital and reached IPO-level recurring revenue in a short amount of time. Salesforce.com sets the standard for SaaS/cloud software companies and shows no signs of slowing down.

    What else? What are some other thoughts on the salesforce.com 2003 S-1 IPO filing?

  • SaaS Apps Can Learn from Casual Game Engagement Techniques

    One of the more common techniques to increase engagement and usage of casual games on the iPad is to provide goals or challenges each time the game is played. As an example, the three active goals in a game might be to beat your previous high score, get to level five, and purchase a digital item in the store. Some, like beating your high score, are context-sensitive and straightforward. Others, like purchasing a digital item in the store, are designed to increase the user’s engagement with different parts of the game, and set the foundation for in-app purchases.

    Software-as-a-Service (SaaS) apps should learn from this approach. In SaaS apps, it’s easy to automatically track what features are, and are not, being currently used. With this information, as well as analytics around what’s going on with usage of active features, the software could recommend new features to take advantage of as well as ways to get more value from existing features. Even better, data across multiple customers of the SaaS app can be anonymized and used for benchmarking, so that the recommendations give a context as well (e.g. you’re 5% below the average for this category and here’s what you should do to improve).

    Here are some example goals or challenges that a SaaS app might provide:

    • Create a new page called ‘about’ in WordPress
    • It takes you an average of 40 days to get paid, and for your type of business the average should be 35 days, according the QuickBooks app, so here is a best practices guide to improving payment turnaround
    • Try out our new commenting feature in a cell in one of your Google Spreadsheets

    The next time you’re contemplating ways to increase engagement and reduce customer churn, consider goals and challenges on the main application screen of the SaaS app.

    What else? What are some other things SaaS apps can learn from casual game engagement techniques?

  • Security Ideas for SaaS Apps

    Software-as-a-Service (SaaS) apps have the same security challenges as any other web-based products. The good news is that many SaaS apps are more secure than installed enterprise apps due to more timely roll outs of security enhancements and better economies of scale for vulnerability testing.

    Here are some simple best practice security-related ideas for SaaS apps:

    • Require more complicated passwords for users (e.g. at least eight characters with upper case, lower case, and numbers included)
    • Enforce two-factor authentication for any power users
    • Audit the application quarterly with vulnerability scans, cross site scripting scans, and SQL injection scans
    • Limit server access to as few people as possible and enforce IP address white listing
    • Authorize individual machine access after email confirmation
    • Expire user passwords on a regular basis

    SaaS security best practices are well known at this point and should be implemented early on for apps that contain confidential information.

    What else? What are some other security ideas for SaaS apps?

  • Notes from the Workday S1 IPO Filing

    Workday, one of the largest and fastest growing Software-as-a-Service (SaaS) companies, just filed their S-1 to go public. Workday was co-founded by the founder of PeopleSoft, David Duffield, who fought the PeopleSoft acquisition by Oracle and lost. Workday’s equity control was set up such that it would not be subject to any hostile takeovers in the future.

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

    • Provides software for human capital management (HCM), payroll, financial management, time tracking, procurement and employee expense management (pg. 1)
    • Deliver a new product update three times per year (pg. 1)
    • 325 customers (pg. 2)
    • 1,450 employees (pg. 2)
    • IDC estimates that the SaaS market will grow at a compound annual growth rate of 24%, from $23 billion in 2011 to $67 billion in 2016 (pg. 2)
    • Native iOS app for iPhone and iPad combined with an HTML5 app for Android and Windows Mobile (pg. 4)
    • Growth strategy (pg. 5)
      Expand customer base
      Strengthen and extend the suite of applications
      Expand internationally
      Deepen relationship with existing customer base (a.k.a. up-sell)
      Develop partner ecosystem
      Leverage corporate culture
    • Incorporated in March 2005 as North Tahoe Power Tools, Inc and in July 2005 changed name to Workday, Inc (pg. 6)
    • Revenues (pg. 9)
      2009 – $25.2M
      2010 – $68M
      2011 – $134.4M
    • Losses (pg. 9)
      2009 – $49.9M
      2010 – $56.2M
      2011 – $79.6M
    • Accumulated deficit of $329.5M (pg. 10)
    • Customer contracts are typically 3-5 years (pg. 14)
    • The co-founders/co-CEOs control a majority of the voting stock (pg. 29)
    • Professional services revenues (pg. 45)
      2009 – $11.5M
      2010 – $31.4M
      2011 – $45.8M
    • Sales and marketing expense (pg. 45)
      2009 – $20.9M
      2010 – $36.5M
      2011 – $70.4M
    • $325M in subscription backlog as of July 31, 2012 (pg. 53)
    • Workday HCM product modules (pg. 72)
      Workday HR Managment
      – Workday Lifecycle Management
      – Workday Organization Management
      – Workday Compensation Management
      – Workday Absence Management
      – Workday Benefits Administration
      – Cloud Connect for Benefits
      Workday Talent Managment
      – Workday Onboarding
      – Workday Goal Management
      – Workday Performance Management
      – Workday Succession Planning
      – Workday Career and Development Planning
    • The relationship with Salesforce.com does not include any revenue sharing arrangements (pg. 81)
    • VC ownership (pg. 105)
      Greylock – 11%
      NEA – 10.1%

    Workday’s S-1 paints a fascinating story of building a multi-billion dollar SaaS company in seven years by burning over $325M in capital, and no signs of slowing down. Workday’s management team is in it for the long-haul and will be extremely successful.

    What else? What are some other thoughts or comments on the Workday S-1 IPO filing?

  • SaaS Cost of Goods Sold for Startups

    Cost of goods sold for Software-as-a-Service (SaaS) startups seems like it should be a straightforward topic but there are a number of different conflicting reports online. According to Wikipedia, cost of goods sold “refers to the inventory costs of the goods a business has sold during a particular period.” Of course, due to the nature of software, there is no inventory but there are costs to deliver the application.

    Here’s what we include in our cost of goods sold calculation:

    • Hosting fees (our highest expense after salaries and benefits)
    • Third-party web fees like content delivery networks, embedded software, etc
    • Support personnel costs
    • Customer on-boarding costs (e.g. client implementation personnel costs)
    • Note: Credit card fees and other billing fees often are not cost of goods sold for SaaS companies and are instead general and administrative fees

    Notice things like software development costs, customer acquisition costs, and more aren’t included since they are not required once the customer has already been signed. SaaS cost of goods sold is an important metric so that gross margin can then be calculated.

    What else? What are some other items that should be considered as part of cost of goods sold for SaaS companies?

  • SaaS Customer Acquisition Costs Relative to Customer Revenue

    One of the core tenants of Software-as-a-Service (SaaS) economics is that the cost of customer acquisition needs to be commensurate with the revenue provided by the customer. As an example, if it costs $50,000 to acquire a customer and the customer only pays $1,000 per month, it’s likely that the business, in it’s current form, won’t work (save for an unusual up-sell situation). When looking at SaaS metrics, the ratio of customer acquisition costs to annual recurring revenue is one of the most important.

    Here are a few thoughts on SaaS customer acquisition costs relative to customer revenue:

    • A general rule of thumb is that the cost to acquire a customer should be less than the annual recurring revenue from the customer (e.g. if it costs $1,000 to acquire a customer, the customer should pay at least $1,000 per year in recurring revenue)
    • Length of contract and average lifetime of a customer are also important considerations, especially with products that have high switching costs (e.g. a content management system has much higher switching costs than an email marketing system)
    • Gross margin is another critical piece of the puzzle as SaaS companies with higher gross margins can afford to spend more to acquire a customer, everything else being equal
    • Cost of capital is another consideration when looking at customers that are expensive to acquire but will likely stay for many years

    As a SaaS entrepreneur, SaaS customer acquisition costs relative to customer revenue is one of the most crucial metrics for building a viable, high growth business. Many venture-backed companies burn significant amounts of cash to reach profitability, and many of the most successful ones don’t reach profitability until well after they’ve gone public. Regardless, the economics of customer acquisition need to make sense.

    What else? What are some other thoughts on SaaS customer acquisition costs relative to customer revenue?

  • SaaS Valuations and NTM Multiples

    Software-as-a-Service (SaaS) valuations continue to do well in the public markets even after other technology companies like Facebook and Zynga struggle. One valuation metric for SaaS startups that isn’t talked about as frequently as it should is a multiple of the next twelve months (NTM) revenue. One of the reasons a forward looking revenue multiple is so important is that there’s a large premium for high growth SaaS companies vs medium growth SaaS companies.

    Indy Guha has a great post on Quora titled Keeping it SaaS-y: Valuations for SaaS Companies. In article, the author shows examples for two buckets of SaaS company valuations:

    • Companies with at least 30% growth and 65% gross margins trade at seven times NTM sales
    • Companies with less than those percentages trade at 4-5 NTM sales

    As an entrepreneur, it’s instructive to think through rough company valuations based on factors like a multiple of the next twelve months sales as a function of growth rate and gross margins.

    What else? What are your thoughts on SaaS valuations and NTM multiples?

  • Bottom-Up SaaS Revenue Forecast for Startups

    Bottom-up revenue forecasts are the only way to go for startups, especially for Software-as-a-Service (SaaS) startups. Too often, entrepreneurs will take a big number, like all the people in China, and say are going to get 1% of them to buy something, and thus have a big business. Alternatively, an entrepreneur will start with a small number, like their current revenue, and forecast that it will grow at some growth rate indefinitely (if only things were like the wise man who asked the king for one piece of rice and to have that piece doubled for every spot on a chess board). Unfortunately, top-down revenue forecasts should not be used for startups.

    Here’s an example bottom-up SaaS revenue forecast approach:

    • Take the number of sales reps expected to make quota (e.g. 2)
    • Multiply by the monthly quota per rep (e.g. $25,000 in new annual contract value (ACV) per month or $75k ACV per quarter or $300k ACV per year)
    • Multiply by the monthly renewal rate (e.g. between 97% and 99.5%)
    • Add in any consulting or one-off revenue
    • Arrive at the total monthly revenue

    Bottom-up forecasts are the only way to go for SaaS startups and should be used from idea stage all the way through growth stage.

    What else? What are some other thoughts on bottom-up SaaS revenue forecasts for startups?

  • The #1 Enemy of SaaS: Churn

    Software-as-a-Service (SaaS) continues to be one of the most popular tech-based business models as evidenced by the multiples for publicly-traded SaaS companies. It’s easy to get excited about the model due to the recurring revenue, high gross margins, and general growth of the space. One area that doesn’t get the attention it deserves is the #1 enemy of SaaS: churn. Churn is when a customer leaves and is a normal part of business, but with SaaS, it takes on more importance.

    Here are some thoughts on churn:

    • A leaky bucket can quickly form if the number of new customers equals the number of customers that churn (assuming no upsells and everything else is equal)
    • A killer amount of churn is often thought of as 3% or more per month, due to the huge number of new customers required to continue growing
    • Keep detailed records around churn reasons and analyze them on a regular basis
    • Monitor customer cohorts on a monthly/quarterly/annual basis to understand how churn rates are improving/declining over time

    Churn is the #1 enemy of SaaS and deserves more publicity. The next time you think about SaaS metrics, churn rate should be near the top of the list.

    What else? What are some other reasons churn is the #1 enemy of SaaS?

  • Churn Cohorts in SaaS Startups

    Churn is the silent killer for Software-as-a-Service startups. SaaS is such a great business model that people focus on the cash flow predictability of recurring revenue, high gross margins, and overall growth prospects. Churn, or losing customers, isn’t talked about as frequently and is just as important to understanding the model as more popular items like cost of customer acquisition and cost of goods sold.

    Churn, globally, is a valuable metric that should be tracked closely. Even more important than generic churn is looking at churn on a quarterly or monthly basis, to get a better understanding of each cohort of customers for trend analysis. Here are some other churn cohorts, like monthly cohort analysis, to consider:

    • By customer company size (e.g. revenue, number of employees, etc)
    • By customer annual contract value size (e.g. track the five most common dollar amount ranges paid for the service)
    • By customer acquisition source (e.g. channel sale, Google AdWords, cold call, etc)

    As you can tell, there’s no shortage of potential churn cohorts to analyze. The key is making it easy to track and run churn cohort reports against a variety of factors.

    What else? What are some other churn cohorts to consider for SaaS startups?