After spending a day at Dreamforce it is clear that the SaaS app market, as well as associated salesforce.com AppExchange eco-system, is growing like gang busters. The top sponsorship slot for Dreamforce this year was Platinum for a whopping $250,000. Next year they’ll have two even more expensive slots: Diamond and Titantium. Imagine what those will go for.
Here are a few SaaS app trends I see:
More connectors and off-the-shelf integration between SaaS products (who’s going to win the generic app marketplace e.g. a marketplace that isn’t the Google Apps Marketplace and isn’t the salesforce.com AppExchange marketplace?)
Integration and migration of legacy data continues to be a big challenge (garbage in, garbage out, regardless of industry)
Ease of use continues to be a major focus (design for the novice, customize for the pro)
Pricing and complexity of contracts is starting to decrease, making things better for the customer
All in all, the SaaS market continues to grow fast and I’m very bullish about it. We’re only scratching the surface of SaaS apps changing how businesses operate.
This blog posts comes from 30,000 feet in the air courtesy of free WiFi for the holidays from Google Chrome on Delta. Right now, I’m flying to San Francisco for my third consecutive annual salesforce.com conference known as Dreamforce. As one of our main partners and the leader of the SaaS industry, I pay close attention to salesforce.com. Dreamforce never disappoints.
Here are a few thoughts on salesforce.com:
They are a brilliant sales and marketing machine with reportedly 50% of their employees in sales (which represents thousands of people).
They were the first SaaS company to reach $1 billion in recurring revenue.
They are extremely focused on selling seats of their software, with sales reps and support reps being the majority of their users. Because there’s typically a 10-to-1 relationship between sales reps and marketing people, and they want to sell seats, salesforce.com has stayed out of the marketing automation market.
They have a great product but the real value comes from the AppExchange eco-system of other products that integrate with their API. This creates a network effect resulting in exponentially more value.
They have been promoting “no software” as their mantra for years now, which is brilliant to position SaaS against traditional installed apps. Yes, they sell software.
Every year the salesforce.com CEO gives a keynote presentation announcing their results as well new features or products to much fanfare. Last year they introduced Chatter to allow companies to run an internal Facebook-like community. It’ll be interesting to see what they announce this year. Stay tuned for an update later in the week.
The Wall Street Journal published an article three days ago titled Royalty Financing: An Alternative to Venture Funding, Bank Loans that mentions some of the challenges I talked about in my post on Junk Bonds for Startups a week ago. The general idea is that startups usually don’t have much need in the way of physical assets to take loans out against (e.g. real estate, heavy equipment, etc) and so when it comes to bank loans they really aren’t available unless you have personal collateral to cover the majority of the amount. Royalty financing is generally taking a percentage of the future revenues as a way to finance a loan.
A line of credit is worth considering for revenue-producing startups. Most of the time it’s tied to the current accounts receivables (monies owed) to the business and a bank will provide a line of credit for 75% of those receivables. The challenge for many SaaS businesses is that they are paid monthly on a credit card resulting in little receivables relative to the size of the business.
SaaS businesses should find a bank that understands recurring contract revenue and will set up a line of credit based on the last 90 days monies received from recurring revenue. For example, technology company-focused banks will do lines of credit for 75% of those monies for profitable companies. Thus, if $1 million of recurring revenue was collected in the past 90 days, the business might get a line of credit for $750,000. A bank line of credit or loan, especially with today’s interest rates, is often the cheapest way by far to finance a business. The challenge is getting it.
Pricing is one of the areas that I see first-time entrepreneurs undersell themselves. What I mean is that there’s a tendency to price a product too low. Paul Graham says, “You’ve found market price when buyers complain but still pay.” It’s not that you’re trying to take advantage of customers but rather attempting to determine the optimum price (which often isn’t the highest). Software-as-a-Service (SaaS) is especially interesting due the rental nature of the relationship. The client isn’t buying the software but rather paying a monthly or annual fee for access to the application.
Here are a few things to keep in mind when pricing a SaaS app:
Under $10/month is generally a consumer app that is fully self-service
$20-$100/month is more small business and self-service or limited service to get going
$100-$500/month is no-man’s land where it is too expensive to be self-service and it is too cheap to compensate consultative inside sales reps (the exception is products that replace existing, known quantities like VoIP services replacing phone services)
$500-$1,500/month is the sweet spot for having a quality inside sales team that is well compensated
$1,500+/month enters the territory of an expensive field sales force with significant travel and expense costs
Pricing is one of the more difficult things to do early on and I recommend starting two or three times higher than your initial thinking and always remember that it is easier to lower prices that to raise prices.
What else? What are some other considerations when pricing a SaaS app?
When talking about employee benefits most people think of common things like health, dental, and 401k benefits. Lately, we’ve been talking internally about what other benefits we can provide to our team to make our environment and company that much better. Here are some of the non-standard employee benefits we already have:
Free food and drinks (the regular stuff plus nice coffees, teas, fruit juices, energy drinks, and more)
Catered lunches every Friday
Short term and long term disability with no co-pay
Quarterly off-site celebrations with food and drink
Here are some ideas we’re thinking about:
Company-sponsored personal financial education to help team members interested in things like paying off debt, buying a house, and planning for retirement
Massages and personal wellness clinics
More frequent catered lunches as well as breakfasts
More frequent Friday afternoon happy hours
What else? What are some other non-standard employee benefits that you like?
Everyone loves to try and categorize the most common types of entrepreneurs. I’d like to throw my hat in the ring. Over the past 10 years I’ve found that there are three main types of entrepreneurs:
Sales – spends a good deal of time focused on selling, doing deals, and anything else related to bringing in new business
Product – enjoys the product management, strategy, and vision aspect of the business (I’m personally in this camp)
Operations – loves the organization aspect of growing a business, the metrics, KPIs, and general execution
There’s no right or wrong answer and you can probably think of famous examples for each category (e.g. Mark Benioff, Steve Jobs, and Jack Welch). My recommendation is maximize your talents by focusing on what you’re good at and understand that it is common to excel in one or two areas.
What else? Do you agree with these three categories for entrepreneurs?
With a clean product slate as a startup it’s easy to iterate and add functionality quickly. The key to remember, especially with customer driven development, is that product development should be paced with customer input. It’s too easy to keep adding features without giving adequate time and effort to solicit feedback.
Keep these in mind when considering the pace of development:
Maintain a strong opinion of the product direction independent of prospects, analysts, customers, and competitors
When considering feature requests, always ask if it is applicable to 80% of your desired customers
Don’t be afraid to remove features or unnecessary complexity from the product if they aren’t adding value (this is a delicate area)
Keep a good pace of development and make sure clients know about new features through blog posts, dashboard updates, social media, and newsletters
My recommendation is to pace product development with customer input while maintaining a strong internal product opinion.
What else? What are some other things to keep in mind when considering the pace of development?
One of the co-founders of a startup should take ownership of the product management role. Product management encompasses everything from customer discovery, feature planning, roadmaps, QA, strategy, wireframes, documentation, and more. After building several commercial products personally, as well as helping other startups, I’ve seen a number of mistakes first-time product managers make repeatedly. Here are a few of those mistakes:
Overcomplicating the product (I still have a tendency to do this) knowing that Voltaire’s quote “the perfect is the enemy of good” holds true
Waiting too long to deploy changes out to the production server (startups should do continuous deployment or at least daily deployment otherwise it leaves room for a culture of monolithic development)
Inconsistent capitalization in button and link labeling (e.g. “Edit user” in some places but “Edit Object” in others)
Not appreciating that window dressing and subtle niceties in a UI contribute toward the user experience
Creating complicated interfaces that don’t employ progressive disclosure of advanced functionality
My recommendation is for first-time product managers to pick up a book like Designing Interfaces and really be a student of the art of building a great product.
What else? What are some other common mistakes for first-time product managers?
Testing a thesis and iterating quickly is one of the central tenants of lean startups. One of the ideas that lean startups should also employ is reaching out to many different potential types of customers while they build the product with feedback from a core group. Spraying and praying, based on educated guesses, isn’t employed as much as I would have expected.
The idea is pretty simple. Take the core value proposition of the product, with feedback from the potential prospects who’ve helped guide development, and start reaching out to other groups that might be a good fit. Ideas to try include:
Related industries/verticals
Different job titles within those industries
Factors like revenue size, number of employees, and geography
The idea is to pick out chunks of 25 contacts, pulled from LinkedIn/Jigsaw, in each potential area and start talking to people. Over time, patterns and fruitful opportunities will emerge. Once momentum has been achieved in an area, double down on it and maximize the value.
What else? What are some other ways to find potential customers?
After reading Michael Lewis’ latest book, The Big Short, this weekend it got me thinking more about junk bonds. Michael Lewis referenced his first book, Liar’s Poker, which chronicles the rise of the junk bond industry at Solomon Brothers, several times in the new book. Ted Turner’s autobiography, Call me Ted, talks about how junk bonds were the only way he could finance the growth of his empire without giving up control of his namesake business.
Why don’t we see the equivalent of a junk bond industry for startups?
Financing for startups typically revolves around angel investors (three Fs – friends, family, and fools) and venture capitalists with the occasional bootstrapper thrown in. I don’t see junk bonds working for pre-revenue companies as bonds are predicated on the ability to pay interest as well repay the whole amount at maturity. But for startups that have moved from the seed stage to early or growth stage (e.g. at least $1 million in revenue), knowing the gross margins for software and SaaS companies are typically north of 70%, there should be opportunity for junk bonds (e.g. high interest loans) to finance growth. The bonds would be senior debt such that failure to repay or refinance the bonds would potentially turn ownership of the company over to the bond holders, there’s sufficient collateral in the form of company equity to back the financing.
Here are a few reasons why we don’t see a junk bond market for startups:
Reporting, auditing, and other controls for startups are typically weak giving little transparency to potential financiers
Many technology startups that reach $1 million in revenue already have investors and are on the investor train (e.g. once you raise institutional money, and things are going well, you’re going to likely raise more and more rounds of equity financing)
There are so few startups looking for this type of financing that connecting the buyers and sellers would be prohibitively expensive
We’re not going to see a junk bond market for startups anytime soon but I believe there’s a need in the market for profitable, fast-growing startups to be able raise debt financing without collateral (e.g. real estate or physical assets) backing it up.
What do you think? Is there a market for startups to do debt financing with asset-lite businesses?
