David Cummings on Startups

Category: SaaS

  • The Economic Value of Annual Contracts Relative to Month-to-Month for SaaS Startups

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    Most enterprise Software-as-a-Service (SaaS) startups require an annual contract with their service. A minority of SaaS startups offer a month-to-month option either as the norm or for a premium over their annual contract price. What’s the economic value of an annual contract relative to a month-to-month offering for SaaS startups? How much more do vendors charge for the privilege of not having a contract?

    Here are a few data points for prices from popular SaaS vendors (plans prominently highlighted on vendor sites will be used when multiple plans are available):

    • Zendesk – $49/agent/month billed annual vs $59 month-to-month (source)
    • New Relic – $149/server/month with annual contract vs $199 month-to-month (source)
    • Olark – $44/month with annual contract vs $49 month-to-month (source)

    Now, this isn’t a large sample size, but for companies that offer different pricing relative to an annual contract or month-to-month, month-to-month is between 10% and 30% higher. It makes sense that committing to a year of service results in a lower price.

    What else? What are your thoughts on the economic value of annual contracts vs month-to-month for SaaS startups?

  • Assessing Customer Renewal Rates and Churn Trends

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    Customer renewals rates are one of the key tenets for Software-as-a-Service (SaaS) startups. It’s important to track relevant details as to why a customer leaves so that these can be analyzed and addressed.

    Here are some common categories for SaaS companies to track in order to assess customer churn trends:

    • Budget
    • Product functionality
    • Usefulness
    • Personnel change
    • Project needs

    Another general question I like to track is whether or not the item was within our control. The idea is that some things, like budget, are outside our control, but product functionality is within our control. Another area to look at when assessing customer renewal rates is to look at the sales reps that brought in the account to see if certain reps are signing clients that aren’t good fits, and thus have higher churn rates. A third exercise is to do SaaS cohort analysis and look at renewal rates of groups of customers from defined time periods (e.g. how do customers signed in Q1 2011 compare to customers signed in Q4 2010).

    What else? What other ways do you assess customer renewal rates and churn trends?

  • Notes from the ExactTarget S-1 IPO Filing

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    ExactTarget, one of the premier email marketing firms, just filed their S-1 for an IPO. Even as one of the largest SaaS companies in the world, ExactTarget has maintained an exceptional growth rate due in part of the execution of the management team, the continued overall market growth, and the power of the SaaS model. The wave of SaaS IPOs has truly arrived with Eloqua, Yelp, BazaarVoice, and more filing this year.

    Here are some notes from the ExactTarget S-1 IPO filing:

    • Largest marketing SaaS salesforce with 285 reps (pg. 1)
    • 4,600 clients (pg. 1)
    • No client represented more than 5% of revenue (pg. 2) – question: which client pays them more than $7M per year?
    • Pricing is based on volume of contracted utilization, level of functionality, number of interactive marketing channels, number of users and level of customer support (pg. 2)
    • 1,100 employees (pg. 3)
    • $40 million annual R&D investment in 2011 (pg. 3)
    • 500 resellers (pg. 4)
    • Corporate culture cited as one of five competitive strengths (pg. 4)
    • Revenues (pg. 7):
      $72.3M (2008)
      $95.4M (2009)
      $134.2M (2010)
      $148M (2011 first nine months – on pace for 55% growth rate)
    • Profits/Losses (pg. 7):
      $3.6M (2008)
      ($2M) (2009)
      ($12.1M) (2010)
      ($29.2M) (2011 first nine months)
    • Accumulated deficit of $140M (pg. 9)
    • Two third-party data centers in Indianapolis and Las Vegas (pg. 13)
    • Significant portion of revenue is derived from clients in the retail and e-commerce, media and entertainment, travel and hospitality, financial services and insurance, technology, daily-deal and flash-sale industries (pg. 19) – amazing that daily deal sites are one of their named categories
    • Line of credit of $10M and long term debt of $7.5M (pg. 35)
    • Recurring subscription revenue by year (pg. 41):
      $53.8M (2008)
      $75.2M (2009)
      $106.4M (2010)
      $114.9M (2011 first nine months)
    • Recurring subscription revenue excludes revenue above the contracted amount as well as services (pg. 41)
    • Recently more clients have requested quarterly and monthly billing resulting in decreased deferred revenue (pg. 41)
    • Professional services are available for training, implementation, integration, deliverability, campaign services and strategic consulting (pg. 42)
    • Write off of $1.2M due to pulling their 2007 S-1 IPO filing (pg. 53)
    • 43 consecutive quarters of revenue growth (pg. 72)
    • 401 employees in sales and marketing (pg. 88) – since they have 285 sales reps, assume 30 in sales management, leaves approximately 85 people in marketing
    • Beneficial equity ownership (pg. 116):
      Technology Crossover Ventures – 25.8%
      Greenspring Associates – 17.8%
      Battery Ventures – 17.5%
      Scale Venture Partners – 7.1%
      Co-founder and CEO – 3.8%
      COO – 1.2%
    • Acquisitions (pg. F-17):
      Keymail Marketing LTD. acquired for $1.6M
      CoTweet acquired for $15.8M ($14.3M of which was goodwill, which is crazy high relative to purchase price)
      mPath Global Pty Ltd. acquired for $2M
      Frontier Technologia Ltda. acquired for $5.4M

    The ExactTarget S-1 IPO filing was straightforward and didn’t have any surprises.

    What else? What other thoughts did you have from the ExactTarget filing?

  • Notes from the Yelp! S-1 IPO Filing

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    Yelp! Inc. just filed their form S-1 to go public, likely by mid-2012 if the IPO market stays open. Yelp is the #1 business reviews platform for consumers to talk about what they like, and don’t like, in a public setting. Since launching in September 2004, they’ve amassed over 22 million reviews.

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

    • #1 free listed travel app on the Apple App Store (pg 1)
    • 61 million unique monthly visitors (pg 2)
    • 19,000 active local business accounts paying for their premium service (pg 2)
    • $58.4 million in net revenue for the first nine months of 2011 with a net loss of $7.6 million (pg 2)
    • Shopping and restaurants represent 46% of the reviews (pg 3)
    • Growth strategy: growth in existing markets, expand to new geographic markets, platform expansion, and enhance monetization (pg 5)
    • 43 Yelp markets in the U.S. and 22 Yelp markets internationally (pg 6)
    • Revenues (pg 10)
      $12.14M (2008)
      $25.81M (2009)
      $47.73M (2010)
      $58.38M (first nine months of 2011)
    • Losses (pg 10)
      $6.23M (2008)
      $2.33M (2009)
      $9.51M (2010)
      $7.41M (first nine months of 2011)
    • Accumulated deficit of approximately $32.1 million (pg 15)
    • CEO recently testified before the U.S. Senate Committee on the Judiciary, Subcommittee on Antitrust, Competition related to Google (pg 19)
    • Currently a defendant in seven patent infringement suits (pg 22)
    • In the process of settling a suit that alleges violation of labor laws for up to $1.3M (pg 22)
    • Advertising contracts are typically 3, 6, or 12 months (pg 24)
    • Going to spend approximately $15 million internationally in 2012 (pg 53)
    • Strengths: passionate community, leading brand in local, powerful network effect, proven market development strategy, local-focused sales force, proprietary technology, and attractive business model (pg 80)
    • As of September 30, 2011, Yelp had 852 full-time employees globally (pg 89)
    • CEO 2010 salary was $210,000 (pg 102)
    • COO 2010 salary was $235,000 (pg 102)
    • Venture capitalists own 74.9% of the company (pg 118)
    • The CEO/co-founder owns 11.1% of the company (pg 118)

    The Yelp S-1 was straightforward and didn’t provide any suprises.

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

  • The Waterfall or Cohort Model for Marketing Measurement

    WaterfallAt today’s Pardot User Conference Elevate 2011, Scott Voigt did a great job talking about a number of topics, one of which was marketing measurement. One example that he presented, and I thought was especially valuable, was that of the waterfall model, also known as a cohort or vintage model. The idea is simple but has several parts:

    • Time is a challenge for marketing data as it is hard to attribute marketing-contributed value in an exact manner
    • One of marketing’s most important KPIs is the number of opportunities created from marketing-generated leads
    • Marketing-generated leads often don’t turn into opportunities immediately so it’s important to look at time series analytics
    • A waterfall model takes the number of leads generated in a specific month, then tracks the number of opportunities generated from those leads in that month as well as subsequent months on a monthly basis

    Here’s an example waterfall/cohort model for tracking marketing-generated leads that turn into pipeline opportunities:

    Jan Feb Mar Apr
    Leads 50 52 49 55
    Opportunities
    Jan 2
    Feb 3 2
    Mar 2 2 1
    Apr 1 3 3 3

    In the table above, note how leads generated in one month turn into opportunities over the course of time. Without this type of analysis it’s difficult to understand marketing’s on going effectiveness.

    Scott did a great job with his presentation and I enjoyed hearing his theories on marketing.

    What else? What are your thoughts on the waterfall method for marketing measurement?

  • Multi-Tenant SaaS and Virtualization are Two Different Things

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    Recently I talked to two companies that said they were Software-as-a-Service (SaaS). After asking more questions and drilling into details for a bit I came to the realization that what they were referring to as SaaS was independent virtualized instances of their product in the cloud. SaaS, to me, is very different.

    Here’s how I define multi-tenant SaaS:

    • Application servers that support multiple clients
    • Databases that support multiple clients in the same tables
    • Infrastructure (load balancers, fail-overs, etc) to support many customers

    Virtualization of the application delivered via the cloud is essentially a more manageable version of the late 1990s Application Service Provider (ASP) model, and not SaaS. A major benefit of SaaS is the engineering efficiencies and scalability of multi-tenant application services and multi-tenant database instances. Multi-tenant SaaS and virtualization are two different things.

    What else? What do you think of people calling their business model SaaS when it isn’t multi-tenant?

  • Notes from the Guidewire Software S1 IPO Filing

    Guidewire Software, Inc just released their S-1 IPO filing to raise a proposed $100M. Guidewire provides software for property and casualty insurance companies to run their back-office including underwriting, policy administration, claims management, and billing. Basically, behind-the-scenes software necessary for insurance companies to operate. Now it isn’t as sexy as marketing automation software, but it is a critical component of business.

    Here are some notes from the Guidewire Software S-1 IPO filing:

    • Average initial client contract length is five years (pg 1)
    • Factors driving the industry: (pg 3)
      Aging IT infrastructure and increasing scarcity of experienced workforce
      Increased business risk due to continued reliance on inefficient processes
      Financial loss due to fraud and error in the claims process
      Changing insurance customer expectations
      Continued pressure on underwriting margins
    • Growth strategy: (pg 3)
      Continue to innovate and extend our technology leadership
      Expand our customer base
      Upsell our existing customer base
      Deepen and expand strategic relationships with our system integration partners
      Increase market awareness of our brand and solutions
    • Revenues: (pg 6)
      2008 – $70.6M (losses of $16.8M)
      2009 – $84.7M (losses of  $10.9M)
      2010 – $144.6M (profits of $15.5M)
      2011 first nine months – $121.4M (profits of $33.4M — $24.4 related to a tax issue, so really $9M in profits)
    • Q2 and Q4 are best quarters due to fiscal year end with sales rep incentives and calendar year end due to buying patterns (pg 10)
    • Some customers get to buy a perpetual license at the end of the contract term (pg 10) — they aren’t a SaaS business
    • Top 10 customers accounted for 38% of revenue (pg 10)
    • Services revenues were 48% of revenues for this year (pg 11) — that’s extraordinarily high
    • Accenture is suing Guidewire over patents (pg 12)
    • Product implementation takes 6 – 24 months (pg 15)
    • Products are typically deployed in a customer’s environment (pg 25)
    • As of April 30, 2011, they had 610 employees, including 93 in sales and marketing, 270 in services and support, 190 in research and development and 57 in a general and administrative capacity (pg 92)
    • Co-founders own between 3.9% and 5.1% of the fully diluted equity (pg 127)

    This S-1 IPO filing for Guidewire Software represents a fast growing traditional enterprise software company that is doing great. It’s especially impressive to see a company grow revenues so fast while barely increasing sales and marketing expense.

    What else? What did you think of the Guidewire Software S-1 IPO filing?

  • Notes from Dreamforce 2012

    Note: If you’re going to Dreamforce 2012, please stop by the Pardot booth.

    This morning I had the opportunity to listen to the keynote presentation at salesforce.com’s Dreamforce 2011 right near the front as part of the Executive Summit. Dreamforce has turned into a massive software and cloud computing event taking over the entire Moscone Center and surrounding hotels in downtown San Francisco. Each year gets larger and larger with this year being a considerable increase over last year.

    Some notes for the Dreamforce conference:

    • 45,000 sign ups — largest software/cloud conference in the world
    • Social contacts native in the app with links to social networks, social profile pictures, etc (Pardot has had this for a long time but it’s good to see it as part of the native CRM functionality)
    • Jigsaw is now data.com with added data from D&B
    • HTML5 at touch.salesforce.com for a better mobile/table experience with all core production functionality
    • More social media and collaboration tools to connect with employees, partners, and customers

    The cloud expo show floor has been especially packed, showing signs of strong growth and spending in the cloud computing category of technology.

    Dreamforce has been a big success so far and I’m very impressed.

    What else? What are your thoughts on the show and announcements?

  • Growing SaaS Companies with Declining Bookings

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    With all the recent S-1 IPO filings by SaaS companies it’s great to the see the growth and market awareness expanding for the business model. One area that isn’t talked about frequently is how a growing SaaS company can actually be in bad shape due to declining bookings. That’s right, the business can have its top-line revenue increasing year-over-year while the business is actually eroding.

    Here’s how to analyze a growing SaaS company that might have declining bookings:

    • Look at each year’s new customers as individual cohorts (e.g. the 2007 cohort, the 2008 cohort, the 2009 cohort, etc)
    • Analyze the renewal rates and up-sell/ARPU growth of each cohort
    • Look at incremental bookings growth of each year’s cohort (bookings are monies to be received based on customer contracts)
    • Understand if once the individual cohort renewal rates are teased out from the overall renewal rate there are trends not seen before (e.g. legacy customers might be sticking around but customers signed in the last couple years are leaving at a significantly greater rate indicating a serious problem not seen by looking at the generic renewal rate)
    • The end result, in a bad case, is that the business shows revenue growth due to the layering of new revenue each year, but the underlying business is eroding faster due to customer churn, so declining revenue is on the horizon

    The SaaS business model is great due to recurring revenue, strong gross margins, and predictable cash flow. It’s important to understand the lifecycle of more specific customer cohorts and distinguish positive or negative trends that could result in growing SaaS companies with declining bookings.

    What else? What other aspects of SaaS companies do you look at to see if there are declining bookings?

  • Notes from the Eloqua S1 IPO Filing

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    Eloqua, one of our main competitors, filed their S1 today to go public and raise a proposed $100 million. Being in the industry, I’m very interested to dive in and learn everything I can. Here are some quick notes from the document:

    • Revenues (pg  8 )
      2008 – $32.9 million
      2009 – $41.0 million
      2010 – $50.8 million ($3.6 million from services)
      2011 – $60 million+ run rate currently
    • Accumulated deficit of $148.6 million (pg 11)
    • Sales seasonality with Q4 being the best (pg 14)
    • Single data center in Toronto serving all customers (pg 18)
    • Pardot LLC is mentioned as a competitive lead management software vendor (pg 21)
    • Two patents pending (pg 25)
    • Customer count (pg 67)
      712 on December 31, 2009
      896 on December 31, 2010
    • Annual user conference cost $600,000 (pg 72)
    • Substantial portion of cash provided by operating activities is deferred revenue (pg 74)
    • IDC predicts that the marketing automation market will grow from $3.2 billion in 2010 to $4.8 billion in 2015 (pg 81)
    • Each client gets their own database with a common schema (pg 96)
    • Executive salaries are between $215,000 and $310,000 (pg 112)
    • Executive target bonuses were focused around net monthly recurring revenue, cash balance, customer satisfaction, sales qualified opportunities, and product development (pg 113)
    • Equity ownership percentage for the remaining co-founder is 5.5% and investors is ~81% (pg 132)

    Overall, there’s nothing too surprising in the filing other than one item: I’m surprised salesforce.com entering the marketing automation market wasn’t listed as a threat.

    Reading S1 filings is always interesting, and this one doesn’t disappoint.

    What else? What do you think of the above information?