David Cummings on Startups

Category: SaaS

  • SaaS Metrics Resources

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    Yesterday I had lunch with the CEO of one of the most successful SaaS startups in Atlanta. They have well over 100 employees and are on a path to IPO in the next 36 months. Towards the end of the lunch we got to talking about Software-as-a-Service (SaaS) metrics and which ones we track in our firm. One of the great parts of SaaS is that the predictability of the business also provides for easy management of metrics and forecasts.

    Here are some of the best SaaS metrics resources:

    These SaaS metrics resources are a powerful way to understand the dynamics of the underlying business and should be studied by management teams of SaaS startups.

    What else? What are some other resources for SaaS metrics that you like?

  • The Power of APIs

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    Applications Programming Interfaces, or APIs, enable applications to talk to other applications in an automated and structured fashion. They are powerful. Extremely powerful. Thinking through the advent of technological development we’re now entering a phase where robust, generally available APIs allow for significant new opportunities. It is much easier to mash up disparate data sources to provide new products that deliver results better, faster, and cheaper.

    In the same way cloud computing has changed the equation for scaling web apps, APIs are changing the speed with which apps can be developed. There are off-the-shelf APIs for a number of things like sending emails, looking up WHOIS info, connecting to Google AdWords, connecting to Amazon Web Services (that’s right – use APIs to scale up or down your cloud computing tools), validating a postal address, processing a credit card, finding your friends on Facebook, and many more. What we’re seeing is a proliferation of specialized services that interact with existing apps or provide niche data and tools.

    Traditionally, a developer would have to build something internally, most often coupled in a monolithic fashion, and then maintain it over time. Now, with APIs, specialists can do what they do best and other apps can focus on adding value as opposed to writing more code for something that is now readily available. APIs are extremely powerful and need to be understood by tech entrepreneurs.

    What else? What are some other powerful aspects of APIs?

  • Migrating Models from Enterprise Sales to Inside Sales

    Software as a Service
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    Yesterday I had lunch with a successful entrepreneur in town to talk about our inside sales model. His business has raised a fair amount of institutional capital, been growing nicely, and realized it has a customer acquisition problem. His SaaS product sells in the mid five figures with a handful of six figure deals and he has an enterprise sales team resulting in a cost of customer acquisition that is twice the first year’s revenue.

    For SaaS companies, a good rule of thumb is that the fully loaded cost of customer acquisition (sales salaries, commissions, marketing salaries, and advertising) should be less than than the first year’s new client revenue of all new clients combined. The thinking was to move to an inside sales model with a lower average deal size and a significantly lower cost of customer acquisition.

    Here are some thoughts on migrating from an enterprise sales model to an inside sales model:

    • The type of sales management for an inside sales team needs to be more activity focused (calls, demo, and pipeline opportunities) and less relationship focused due to the shorter sales cycles
    • Enterprise sales reps are typically $70-90k base while inside sales reps are typically $30-$45k base resulting in the need to hire a new team
    • More focus needs to be on marketing and lead generation to build a steady flow of qualified prospects for the sales team (lead generation drives SaaS)

    Moving from an enterprise sales model to an inside sales model will be a difficult transition but appears to be the right move based on market dynamics and pricing.

    What else? What other thoughts do you have on migrating from enterprise sales to inside sales?

  • Business Idea: SaaS Line of Credit Provider

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    There’s a void in the market for high gross margin recurring revenue businesses to get a line of credit based on the recurring revenue. Banks are designed to lend money when you don’t need it (e.g. very profitable) or when you have assets to put up as collateral (a friend of mine got an SBA-backed bank loan for $1.2M to buy some franchises and had to put up $800k of personal money into a CD that the bank held until the loan was repaid).

    The most common assets for collateral are accounts receivables, real estate, and heavy equipment. Software-as-a-Service (SaaS) companies shouldn’t have any of those. Accounts receivables, especially if the majority of customers pay by credit card, are almost non-existent as the customer payment is made on a regular, timely basis (e.g. monthly). A SaaS startup’s appetite for capital is even more acute due to the fact that the “services” part of SaaS results in effectively leasing the product over the life of customer, as opposed to receiving a lump-sum of money up-front like with enterprise software. This clearly impacts cash flow and is made more difficult due to the cost of sales commissions and providing on-boarding and training services. SaaS companies are doing well if after 12 months of having a client they break even. Typically, it isn’t until years two and three that they start turning a profit.

    The business idea is a technology fund that provides lines of credit to SaaS companies. Here are some details:

    • The amount of capital is dependent on several factors including: monies received from recurring revenue in the past 90 days, gross margin, customer renewal rate, customer contract length (if any), and more
    • The fund has a core amount of capital that is then leveraged up with a third-party loan
    • Members of the fund’s management team must have technology experience and be willing to take over a SaaS company that doesn’t meet its obligations (the SaaS companies are using their business as collateral)
    • The idea is riding two waves: lack of sophistication from traditional banks to lend against recurring revenue without hard assets and the proliferation of small SaaS companies that aren’t venture backed

    There’s a clear opportunity in the market for a business like this and I hope entrepreneurs step in and fill the void.

    What else? What do you think of the idea?

  • Lead Generation Drives SaaS Startups

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    Continuing with the sales and lead gen theme from the previous two days (here and here), I came across a blog post today from Bruce Cleveland titled SaaS: Lead Generation – Not Sales Capacity – Drives the Model courtesy of an analyst friend. The general idea is that SaaS companies, compared to traditional enterprise software companies, are driven more by the ability to generate leads than the the number of trained sales reps. SaaS companies, compared to regular software companies, typically have much lower up-front fees and are essentially leasing the software, and thus need to be more capital efficient at acquiring customers.

    Think about it this way: if the market bears you charging $250k for an enterprise software package and you give sales reps $2M annual quotas, they can go beat down doors and deliver eight deals per year. With SaaS, and much lower average customer revenues spread out over several years, that same rep delivering $2M in sales and earning $200k in comp wouldn’t be able to deliver several times more deals to equal the same cash flow for the business. Thus marketing, sales, partners, and customer referrals, all of which contribute to lead generation, drive the growth of the business because the cost of customer acquisition has to be commensurately lower than installed software due to the economics of the SaaS model.

    Lead generation drives SaaS startups. Too many SaaS startups don’t understand this and fail, not because of a bad product, but because of a lack of leads.

    What else? What other ways does lead generation drive SaaS startups?

  • Push Code to Production on Day One

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    More and more startups are instituting a policy to have newly hired software developers push a piece of code (feature or bug fix), albeit small, to the product’s production servers on their first day. The idea is that with web-based apps and software-as-a-service programs the act of making an update should be a simple process unlike the days of shipping a new product release once every year or two on disk hoping that everything was perfect (which never happened). Here are some benefits of having new engineers push code to production on day one:

    • Sets the tone for a fast release process (potentially many times a day with continuous deployment), which often results in greater developer satisfaction due to receiving input from users as fast as possible (developers love to get positive feedback on a regular basis)
    • Reiterates the fact that smaller changes lead to smaller issues and bigger changes lead to bigger issues (bite size chunks are best)
    • Provides a sense of satisfaction to the software developer on their first day that, yes, they will make an impact
    • Makes the process of write coding and seeing it live the product no longer daunting

    My recommendation is to consider having new developers push code to the production servers on their first day on the job.

    What else? What other benefits are there of pushing code to production the first day on the job?

  • Understanding Customer Product Usage

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    As a product manager one of the nice aspects of web-based software is that you can easily understand customer usage. The idea is to track which modules and features customers use in order to make more intelligent decisions. Here are a few notes when thinking about how customers use a product:

    • Consider embedding Google Analytics tracking code in the app (run it in async mode to minimize performance issues)
    • Categorize types of customers based on size and vertical industry in order to segment their usage patterns (e.g. small vs. medium vs. large customers with verticals like governments, IT, healthcare, and higher education)
    • Client advocates should ask customers directly what modules they use most often and record this information in custom fields in the CRM
    • Customer usage information should help in product management to focus development efforts and provide objective information during debates

    Accessible product usage information is a valuable benefit of building web-based software. My recommendation is to incorporate product usage information into your startups processes.

    What else? What other ideas do you have for understanding customer product usage?

  • Key Tenets of SaaS for Startups

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    Earlier today I was emailing with an entrepreneur seeking advice. After a few emails back and forth about pricing he asked if he could charge more to customers who got to use the latest version of the software. Wow, I was taken aback as we’re talking about a Software-as-a-Service (SaaS) application where all customers should use the same version. That got me thinking about some of the most important aspects of a SaaS startup. Here are a few key tenets of SaaS:

    • The application should have a multi-tenant architecture where all customers use the same version of the product on one or more shared databases
    • Product enhancements and fixes should be pushed on a frequent basis
    • The most important word in software-as-a-service is “service” and not “software”
    • Customer acquisition costs and on-boarding costs should be appropriate for the monthly/annual fee
    • Churn should be studied as closely as sales and marketing

    SaaS is a phenomenal business model once it is up-and-running but presents its own unique set of challenges. Entrepreneurs should understand these key tenets of SaaS and work to incorporate them into their startup.

    What else? What are some other key tenets of SaaS?

  • SaaS Startup Growth Metrics

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    Software-as-a-Service (SaaS) continues to be a hot area for startups. The Responsys IPO filing shed more light on the numbers behind a larger scale SaaS business, including ratios of license to service revenue as well as growth over many years. As a SaaS company, whereby clients essentially rent the software, and thus are financed compared to paying a large up-front license fee, it is critical to understand if you’ll be making money over a long-term horizon as there’s a great chance you’ll lose money in the short-term due to the nature of the business.

    Here are some SaaS growth metrics we track:

    • Churn rate in terms of number of clients as well as in dollars
    • Monthly, quarterly, and annual recurring revenue growth
    • Client acquisition costs as well as how many months/years it takes for a client to be profitable
    • Omniture Magic Number – ratio of sales and marketing costs two quarters ago to new annual recurring revenue from last quarter
    • Average revenue per customer/user
    • Lifetime value of the customer as well as the lifetime value discounted against the cost of capital
    • Cost of goods sold (typically hosting and customer service fees) per client

    Managing and tracking these SaaS metrics help us better understand our company as well as benchmark us against data from publicly traded SaaS companies. My recommendation is to prepare a monthly analysis of this type of information.

    What else? What other SaaS startup growth metrics do you track?

  • Publicly Traded SaaS Companies

    Software as a Service
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    Software-as-a-Service (SaaS) continues to be a hot area in the technology world. Partly because it has only really started to flourish in the past five years and partly because it is more geared towards SMB companies with a lower ticket price therefore requiring to sign many thousands of clients to reach scale, there aren’t very many publicly traded SaaS companies. SaaS companies are characterized by great recurring revenue, gross margins, predictability, and growth. Here are a few publicly traded SaaS companies and information about them as of December 12, 2010:

    • salesforce.com (NYSE:CRM) – customer relationship management SaaS and cloud computing company. They are the largest SaaS company and the first to reach $1 billion in recurring revenue.
      Market cap: $19.53 billion
      Last reported quarter’s revenues: $429.09 million
      Employees: 4,758
    • NetSuite (NYSE:N) – enterprise resource planning (accounting, inventory, etc) SaaS company.
      Market cap: $1.66 billion
      Last reported quarter’s revenues: $49.74 million
      Employees:  1,022
    • Constant Contact (NASDAQ:CTCT) – email marketing for small business SaaS company.
      Market cap: $872.21 million
      Last reported quarter’s revenues: $44.83 million
      Employees: 625
    • SuccessFactors (NASDAQ:SFSF) – human resources SaaS company.
      Market cap: $2.36 billion
      Last reported quarter’s revenues: $51.54 million
      Employees: 967
    • Taleo (NASDAQ:TLEO) – human resources SaaS company.
      Market cap: $1.29 billion
      Last reported quarter’s revenues: $58.74 million
      Employees: 916
    • LogMeIn (NASDAQ:LOGM) – remote machine access SaaS company.
      Market cap: $1.11 billion
      Last reported quarter’s revenues: $25.35 million
      Employees: 387
    • LivePerson (NASDAQ:LPSN) – live chat SaaS company.
      Market cap: $524.75 million
      Last reported quarter’s revenues: $28.22 million
      Employees: 349

    Personally, I’m a big proponent of SaaS and am very optimistic about the future. It should be an interesting market to watch.

    What else? What other publicly traded SaaS companies would you add to the list?