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Public SaaS Company Benchmarking:

                              Are you on track for a successful IPO?
The following docu...
1. CAC ratio
For this analysis, we have used a very simple version of the CAC ratio that can be calculated with
any GAAP P...
The most relevant comparable for a private company is probably the 3-year pre IPO
average. While the median growth rate fo...
The Median value came at -$3.2m and the average at -$7.6m. However, it is interesting to note
that there is a negative cor...
Revenue and gross margin benchmark
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Measuring Growth Businesses with Recurring Revenue

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Transcript of "Measuring Growth Businesses with Recurring Revenue"

  1. 1. Public SaaS Company Benchmarking: Are you on track for a successful IPO? The following document presents a benchmarking of the key value drivers for a SaaS company: Sales & Marketing Effectiveness, revenue growth rate and cash burn rate. It is based on a set of 13 SaaS companies listed in the US public markets: Salesforce, NetSuite, SuccessFactors, Concur, Vocus, Ultimate Software, Taleo, Salary, Constant Contact, DemandTec, LivePerson, SumTotal and Kenexa. By Philippe Botteri September 2008 Philippe Botteri is a leader in the SaaS practice of Bessemer Venture Partners, a top-tier international venture capital firm with 8 offices worldwide and over $2B of assets under management. He was closely involved with the firm investments in Intego, Eloqua, Cornerstone OnDemand and Intacct. Before joining Bessemer, Philippe spent close to 10 years with McKinsey & Company in Europe and the US and pioneered the firm's work with "on-demand" software. You can find out more about BVP’s SaaS practice online at www.bvp.com/saas and read Philippe’s Venture and Software blog at www.cracking-the-code.blogspot.com Executive summary • To benchmark the Sales & Marketing effectiveness of these public SaaS companies, we looked at the Customer Acquisition Cost or CAC ratio 1 . The median CAC ratio of the sample of public companies analyzed is coming at 0.54, equivalent to a gross margin payback on S&M costs of slightly less than 2 years • To benchmark the growth rate, we looked at the average growth rate of these companies during the three years preceding their IPO. The analysis shows two distinct groups of companies in the public sample set: companies with an average growth rate of 80%+ and enjoying premium valuation multiples (avg. of 5.8x EV/2008 rev.) and companies with an average growth rate of 50% or less with much lower valuation multiples (avg. of 2.7x EV/2008 rev.) • From a burn rate perspective, we looked at the operating cash flows and the capex of these public companies while they were in their $30-35m revenue year and found out a median of -$3.2m and an average of -$7.6m. However, it is interesting to note that the data shows a negative correlation between the cash burn and the EV/2008 revenue multiple of these public SaaS companies, illustrating that a higher burn at this stage could be justified if it generates additional growth. ************************ 1 For more on the CAC ratio, see http://cracking-the-code.blogspot.com/2008/03/measuring-sales-and- marketing.html Bessemer Venture Partners Confidential 1
  2. 2. 1. CAC ratio For this analysis, we have used a very simple version of the CAC ratio that can be calculated with any GAAP P&L (i.e. not using the Monthly Recurring Revenue or Contracted Monthly Recurring Revenue metrics 2 ). For Q208, the CAC ratio formula is the following: [GM(Q208)-GM(Q108)]*4 CAC Ratio (Q208) = Sales & Marketing Costs (Q108) The following exhibit shows the Q208 CAC ratios for the samples of 13 public SaaS companies we have selected: CAC Ratio for Quarter Ending June 2008 1.80 1.60 1.40 1.20 CAC Ratio 1.00 0.80 Median: 0.54 0.60 0.40 Companies with 0.20 Negative Ratio 0.00 Y EO CS SN QR TI SF N XA T CT M AN R M CR UL SF VO LP SL TL CT CN KN SU DM Ticker We observe the median at 0.54 for these public companies, corresponding to a 2-year gross margin payback on the Sales&Marketing costs 2. Growth rate The second element we benchmarked is the GAAP revenue growth rate. We looked at this growth rate for the same set of public companies and calculated the average growth rate both 3-year pre and 3-year post IPO. The results are shown in following exhibits: 3-Year Average Revenue Growth Rate Pre-IPO 3-Year Average Revenue Growth Rate Post-IPO 180% 80% 160% 70% 140% 60% Revenue Growth Rate Revenue Growth Rate 120% 50% 100% Median: 37.4% 40% 80% Median: 51.2% 30% 60% 20% 40% 20% 10% 0% 0% RY RY EO EO CS SN QR QR SN CS I SF N TI N XA SF CT T XA M CT T M AN AN T M M CR CR UL UL SF VO SF LP VO LP SL SL TL TL CN CT CN CT KN KN DM SU DM SU Ticker Ticker 2 More on the MRR and CMRR at http://cracking-the-code.blogspot.com/2007/07/saas-business-metrics- why-do-they-need.html Bessemer Venture Partners Confidential 2
  3. 3. The most relevant comparable for a private company is probably the 3-year pre IPO average. While the median growth rate for this sample is 51.2%, it is interesting to note that the chart shows a clear differentiation between two groups of companies: the ones growing 50% or less valued at an average of 2.7x EV/2008 revenues and the one growing 80% or more valued at 5.8x EV/2008 revenues. In addition, further analysis shows a very strong correlation between the growth rate pre- IPO and the current valuation multiple of the companies. The correlation coefficient is 0.69 and become 0.93 if you take out VOCS and ULTI. EV/08 Multiple vs. pre-IPO growth rate 12 CNQR EV/08 Rev. Multiple (as of 9/8/08) 10 8 VOCS 6 N CRM SFSF CTCT 4 ULTI TLEO KNXA DMAN 2 LPSN SUMT SLRY 0 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Avg. 3-year pre-IPO growht rate 3. Cash Burn The last element we benchmarked is the cash burn rate. To make things comparable, we looked at the cash burn rate of public companies the year they reached $30-35m in revenues. The cash burn rate is defined as the cash flows from Operations plus the Capex. The following chart presents the results for the same sample of public companies: Cash burn of Public SaaS Companies during their $30-35m Revenues Year 20.00 10.00 Median: -3.2m 0.00 Cash burn (USD, m) RY EO CS SN QR TI SF N XA T CT M AN M CR UL SF VO LP SL TL CN CT KN DM SU -10.00 -20.00 -30.00 -40.00 -50.00 Bessemer Venture Partners Confidential 3
  4. 4. The Median value came at -$3.2m and the average at -$7.6m. However, it is interesting to note that there is a negative correlation between the current valuation multiple of these public companies and the burn rate at that stage (the correlation coefficient comes at -0.78). Companies like Netsuite, Concur, SuccessFactors or even Salesforce.com had higher than average burn rate and are today enjoying above average multiples for having invested successfully in growth. ******************** Bessemer Venture Partners Confidential 4
  5. 5. Revenue and gross margin benchmark Estimates Revenues (USD, m) Growth rate Company IPO year IPO-3 IPO-2 IPO-1 IPO IPO+1 IPO+2 IPO+3 IPO+4 IPO+5 IPO+6 IPO+7 IPO+8 IPO+9 IPO+10 IPO-2 IPO-1 IPO IPO+1 IPO+2 IPO+3 IPO+4 IPO+5 IPO+6 IPO+7 IPO+8 IPO+9 IPO+10 Salesforce 2004 22.4 51.0 96.0 176.4 309.9 497.1 748.7 1074.9 127.7% 88.2% 83.8% 75.7% 60.4% 50.6% 43.6% NA NA NA NA NA NA Vocus 2005 11.5 15.4 20.4 28.1 40.3 58.1 77.7 33.9% 32.5% 37.7% 43.4% 44.2% 33.7% NA NA NA NA NA NA NA DemandTec 2007 19.5 32.5 43.5 61.3 75.3 66.7% 33.8% 40.9% 22.8% NA NA NA NA NA NA NA NA NA NetSuite 2007 17.7 36.4 67.2 108.5 157.5 105.6% 84.6% 61.5% 45.2% NA NA NA NA NA NA NA NA NA SuccessFactors 2007 10.2 13.0 32.6 63.4 108.0 27.5% 150.8% 94.5% 70.3% NA NA NA NA NA NA NA NA NA Taleo 2005 28.4 43.6 58.7 78.4 97.0 127.9 177.9 53.5% 34.6% 33.6% 23.7% 31.9% 39.1% NA NA NA NA NA NA NA LivePerson 2000 8.2 12.0 17.4 22.3 33.5 52.2 76.6 46.3% 45.0% 28.2% 50.2% 55.8% 46.7% NA NA NA NA NA NA NA Constant Contact 2007 8.1 14.7 27.6 50.5 85.7 81.5% 87.8% 83.0% 69.7% NA NA NA NA NA NA NA NA NA Ultimate Software 1998 3.7 9.3 17.6 43.3 55.8 62.0 59.5 55.1 60.4 72.0 88.6 114.8 151.5 180.6 151.4% 89.2% 146.0% 28.9% 11.1% -4.0% -7.4% 9.6% 19.2% 23.1% 29.6% 32.0% 19.2% SumTotal 1998 18.2 18.5 25.7 33.4 34.7 25.5 31.2 30.5 29.5 55.2 75.0 106.0 121.9 134.3 1.6% 38.9% 30.0% 3.9% -26.5% 22.4% -2.2% -3.3% 87.1% 35.9% 41.3% 15.0% 10.2% Salary.com 2007 10.0 15.3 23.0 34.5 45.6 53.4% 50.6% 49.8% 32.1% NA NA NA NA NA NA NA NA NA Kenexa 2005 32.4 34.0 46.3 65.6 112.1 181.9 226.5 4.9% 36.2% 41.7% 70.9% 62.3% 24.5% NA NA NA NA NA NA NA Concur 1998 2.1 2.0 9.0 20.1 37.0 35.7 41.1 45.1 56.7 56.6 71.8 97.1 129.1 213.8 -4.8% 350.0% 123.3% 84.1% -3.5% 15.1% 9.7% 25.7% -0.2% 26.9% 35.2% 33.0% 65.6% Bessemer Venture Partners Avg. 3-year pre-IPO 69.9% Average 57.6% 86.3% 65.7% 47.8% 29.5% 28.5% 10.9% 10.7% 35.4% 28.6% 35.4% 26.6% 31.7% Median 3-year pre-IPO 51.2% Median 53.4% 50.6% 49.8% 45.2% 38.0% 29.1% 3.7% 9.6% 19.2% 26.9% 35.2% 32.0% 19.2% Min -4.8% 32.5% 28.2% 3.9% -26.5% -4.0% -7.4% -3.3% -0.2% 23.1% 29.6% 15.0% 10.2% Avg. 3-year post IPO 35.2% Max 151.4% 350.0% 146.0% 84.1% 62.3% 50.6% 43.6% 25.7% 87.1% 35.9% 41.3% 33.0% 65.6% Median 3-year post IPO 37.4% Delta Average -34.6% Median -13.8% Gross Margin (USD, m) Gross Margin (%) Company IPO year IPO-3 IPO-2 IPO-1 IPO IPO+1 IPO+2 IPO+3 IPO+4 IPO+5 IPO+6 IPO+7 IPO+8 IPO+9 IPO+10 IPO-3 IPO-2 IPO-1 IPO IPO+1 IPO+2 IPO+3 IPO+4 IPO+5 IPO+6 IPO+7 IPO+8 IPO+9 IPO+10 Salesforce 2004 16.4 40.6 78.8 142.9 240.7 378.2 577.1 845.0 73.2% 79.6% 82.1% 81.0% 77.7% 76.1% 77.1% 78.6% NA NA NA NA NA NA Vocus 2005 8.8 12.2 16.0 21.5 32.0 47.2 63.3 76.5% 79.2% 78.4% 76.5% 79.4% 81.2% 81.4% NA NA NA NA NA NA NA DemandTec 2007 10.7 20.0 29.3 40.8 50.5 54.9% 61.5% 67.4% 66.6% 67.0% NA NA NA NA NA NA NA NA NA NetSuite 2007 9.5 20.7 44.2 74.8 109.5 53.7% 56.9% 65.8% 68.9% 69.5% NA NA NA NA NA NA NA NA NA SuccessFactors 2007 5.9 5.4 18.2 37.0 68.2 57.8% 41.5% 55.8% 58.4% 63.1% NA NA NA NA NA NA NA NA NA Taleo 2005 17.9 29.5 35.7 50.9 64.9 87.9 122.4 63.0% 67.7% 60.8% 64.9% 66.9% 68.7% 68.8% NA NA NA NA NA NA NA LivePerson 2000 6.6 10.0 14.5 18.0 25.9 38.7 55.8 80.5% 83.3% 83.3% 80.7% 77.3% 74.1% 72.8% NA NA NA NA NA NA NA Constant Contact 2007 5.9 10.9 19.8 37.5 63.6 72.8% 74.1% 71.7% 74.3% 74.2% 0.0% NA NA NA NA NA NA NA NA Ultimate Software 1998 1.9 3.5 8.0 24.5 34.8 34.7 32.2 27.6 32.8 40.6 52.7 65.3 86.7 103.8 51.4% 37.6% 45.5% 56.6% 62.4% 56.0% 54.1% 50.1% 54.3% 56.4% 59.5% 56.9% 57.2% 57.5% SumTotal 1998 13.6 12.8 18.3 18.9 18.7 17.9 23.1 21.4 19.0 36.3 50.8 68.1 77.2 84.1 74.7% 69.2% 71.2% 56.6% 53.9% 70.2% 74.0% 70.2% 64.4% 65.8% 67.7% 64.2% 63.3% 62.6% Salary.com 2007 8.1 12.2 17.7 26.3 34.7 81.6% 79.7% 76.8% 76.2% 76.2% NA NA NA NA NA NA NA NA NA Kenexa 2005 24.0 25.2 34.1 46.9 80.4 131.0 161.5 74.1% 74.1% 73.7% 71.5% 71.7% 72.0% 71.3% NA NA NA NA NA NA NA Appendix: Public SaaS Companies Benchmarking Concur 1998 0.7 0.7 5.9 11.5 19.2 7.9 16.1 23.1 33.5 33.3 43.4 59.3 85.4 145.0 33.3% 35.0% 65.6% 57.2% 51.9% 22.1% 39.2% 51.2% 59.1% 58.8% 60.4% 61.1% 66.2% 67.8% Confidential Avg. 3-year pre-IPO 67.4% Average 65.2% 64.6% 69.1% 68.4% 68.6% 57.8% 67.3% 62.5% 59.3% 60.3% 62.6% 60.7% 62.2% 62.6% Median 3-year pre-IPO 69.8% Median 72.8% 69.2% 71.2% 68.9% 69.5% 70.2% 72.1% 60.7% 59.1% 58.8% 60.4% 61.1% 63.3% 62.6% Min 33.3% 35.0% 45.5% 56.6% 51.9% 0.0% 39.2% 50.1% 54.3% 56.4% 59.5% 56.9% 57.2% 57.5% Avg. 3-year post IPO 64.6% Max 81.6% 83.3% 83.3% 81.0% 79.4% 81.2% 81.4% 78.6% 64.4% 65.8% 67.7% 64.2% 66.2% 67.8% Median 3-year post IPO 70.6% Delta Average -2.8% Median 0.8% than $7m in revenues and we have considered for this analysis that the “IPO year” was 2005 with $22.3m in revenues Note: the results for LivePerson have been adjusted to reflect more realistic IPO criteria: the company went public in 2000 with less 5

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