Bessemer 10 Laws Of Being SaaSy Fall 2008

The 10 Laws of Building a Successful SaaS Company Byron Deeter Partner Bessemer Venture Partners Philippe Botteri Senior Associate Bessemer Venture Partners Mark Trang Director, ISV Marketing salesforce.com

Software-as-a-Service (SaaS) is the Next Major Growth Driver of the Software Industry 2008 1960 2000 Market Size $250+ billion The Mainframe Era The Client-Server Era
Mainframe servers and green screens
IBM domination
PCs dominated by Microsoft-Intel
Enterprise software
Emergence of Open Source
Thin client (browser)
Computing power in the cloud
The cloud computing Era: Software-as-a-Service

Bessemer Venture Partners Snapshot
Founded 1911
The longest standing track record in the Venture Capital Industry with 150+ M&A and IPOs
Strong Global Platform with over $2 billion under management and eight offices worldwide
One of the most successful software and SaaS investors in history
Close partnership with Salesforce.com for SaaS investing

Who We Are
Byron Deeter
Seven years in venture capital, with a focus on Software, SaaS, and Internet investing
Current Board member of several SaaS companies, including: Eloqua, Intacct, Cornerstone OnDemand, & Retail Solutions
Founding CEO of Trigo Technologies, an early Bessemer-backed SaaS business acquired by IBM in 2004
Strategy consulting at McKinsey & Co.
Degree with honors from UC Berkeley
Philippe Botteri
Joined Bessemer in 2006 to focus on Software and Internet investing
Actively involved in Bessemer investments in Eloqua, Cornerstone OnDemand, Intego, Wize and Intacct
Close to 10 years with McKinsey & Company (France, US) in the Tech and Software practice – pioneered McKinsey effort on SaaS
Masters from Ecole Polytechnique (Physics) and Ecole des Mines (Engineering)
Venture and SaaS Blog: www.cracking-the-code.blogspot.com

Why did we create (and update) the 10 Laws? The emergence of Software-as-a-Service is the most important trend in the software industry of the decade, and that these tectonic shifts in the global software ecosystem are just beginning. Periods of tremendous transformation create tremendous opportunity, but the next giants of the software industry will need to abandon many of the long-held tenets of software best practices and adhere to a new set of principles .

Bessemer’s Top 10 Laws for Being “SaaS-y”

Bessemer SaaS Law #1
Your key monthly business metrics are: CMRR (Committed Monthly Recurring Revenue), Churn, and Cash flow - “Bookings” is for suckers
From bookings and opacity… EXPENSES BOOKINGS
Difficult to make decisions:
Multi-year bookings
Non-recurring revenues
Impact of churn and renewal?
… to CMRR and transparency!
Full transparency :
Employee assessment
Operational planning
Financing
Valuation
CMRR New Accounts Upsell & Expansion less churn Existing Contracts Renewals EXPENSES Cash burn rate

Bessemer SaaS Law # 2
Customer Acquisition Cost (CAC) and Customer LifeTime Value (CLTV) are the best indicators of long term value creation
CAC ratio: defining your S&M spend CLTV: defining your profitability
CAC < 1/3 (3 years payback or more): Bad! Slam on the breaks and refine your sales model
CAC >1 (payback in less than 1 year): Great! Invest more money immediately and step on the gas…and please call Bessemer immediately
CLTV > 0 = Profit! Example : 1 customer generating $1 of ARR

Tune before you scale: the Sales Learning Curve is even more critical for SaaS and it takes at least $300k MRR to climb it. Stop at three sales reps until at least two of them are making $100K MRR quotas
Target quota 2X fully loaded cost of a Sales Rep. ($100k MRR quota) Fully loaded cost of a Sales Rep. Sales Rep. performance SaaS company MRR run rate <$300k Staff to learn Staff to scale

Separate your “hunters” and “farmers” and pay them all on CMRR growth
CMRR Growth New Sales Upsells & Renewals Hunters! Farmers!
Paid on New CMRR - rule of thumb: $1 of CMRR = $1 of bonus
Min threshold at 50% of target and 2x acceleration above target
Incentives for more favorable cash flows (e.g., multi-year pre-payment)
Typically $100k CMRR quota per year
Paid on Net incremental MRR for customer portfolio (Upsells – Churn)
Lower bonus level for renewal:
Upsell: $1 CMRR = $1 bonus
Renewal: $1 CMRR = $0.3 bonus

SaaS is a whole new ecosystem where traditional IT channels don’t work – Focus your business development efforts on business services channels, but you will need to sell directly for a long time as these new set of partners are not easy to ramp-up
From IT Channels… … to Business Channels
Limited system integration requirements
No hardware pull through
Different revenue model
Provider of technology enabled, managed or professional services
Same customer segment focus
Understand value of recurring revenue streams

By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful SaaS business
Profile, Track and Segment Analyze, Adapt, Act! Automate PR Drive to Web CRM/SFA

Stay local - Prove your business in North America first. Only after reaching $1M in CMRR should you consider hiring European sales and services execs behind customer demand. Save Asia for post-IPO.
SaaS companies don’t need significant international sales to go public Key challenges of International expansion
Technical: latency, data access and security
Legal: Privacy issues in Europe (need local data center)
Customer maturity: SaaS adoption is 3-year behind in Europe and Asia is slightly behind Europe
Focus: distract management from core US market
<15% 13% <5% International revenues at IPO Percent

Single instance, multi-tenant, single datacenter - Have only one version of the code in production. Really. “Just say no” to on-premise deployments
Incremental support cost
Different operational model
Less attractive for a potential acquirer
No Hybrid model! Keep one data center
Cost effective/low overhead
Latency no more an issue
No need to go abroad initially
Rule of thumb: Need more than $2M+++ MRR for 2 nd datacenter

The most important part of Software-as-a-Service isn’t “Software” it’s “Service”!
Monitor Service = Customer data = key asset! Gather feedback Benchmark
Track key usage metric
Prevent churn
Track upsell opportunities
Track user flow and functionality used
Input into product roadmap
Enhance your offering with industry benchmark
Codify and share best practices

Be prepared to cross the desert - SaaS requires R&D and sales expense up front for a multi-year stream of revenue, so it demands enough investment capital to fund 4+ years of runway. Load up for the long trip and pace your consumption of calories!
Capital raised pre-IPO for selected public SaaS companies USD, million
SaaS companies have historically raised an average of $30-65m before going public
Capital requirements are expected to decline thanks to:
Lower CAC (SaaS becoming mainstream, new channels…)
Lower IT costs (PaaS, LAMP stack…)
It takes time to get the flying wheel spinning, so don’t be too optimistic in your planning!

Bonus Law
You can ignore one or two of these rules, but not more…Great companies innovate, but pick your battles!

Bessemer’s Top 10 Laws for Being “SaaS-y”
Your key monthly business metrics are: CMRR (Committed Monthly Recurring Revenue), Churn, and Cash flow - “Bookings” is for suckers
Customer Acquisition Cost (CAC) and Customer LifeTime Value (CLTV) are the best indicators of long term value creation
Tune before you scale : the Sales Learning Curve is even more critical for SaaS and it takes at least $300k MRR to climb it. Stop at three sales reps until at least two of them are making $100K MRR quotas
Separate your “hunters” and “farmers” and pay them all on CMRR growth
SaaS is a whole new ecosystem where traditional IT channels don’t work – Focus your business development efforts on business services channels , but you will need to sell directly for a long time as these new set of partners are not easy to ramp-up
By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful SaaS business
Stay local - Prove your business in North America first. Only after reaching $1M in CMRR should you consider hiring European sales and services execs behind customer demand. Save Asia for post-IPO
Single instance, multi-tenant, single datacenter - Have only one version of the code in production. Really. “Just say no” to on-premise deployments
The most important part of Software-as-a-Service isn’t “Software” it’s “Service”!
Be prepared to cross the desert - SaaS requires R&D and sales expense up front for a multi-year stream of revenue, so it demands enough investment capital to fund 4+ years of runway. Load up for the long trip and pace your consumption of calories!
BONUS LAW : You can ignore one of these, but not more than two. Great companies innovate, but pick your battles!

Thank You! More Info: www.bvp.com/saas Contacts: Byron Deeter Philippe Botteri [email_address] [email_address] Come meet us at Nov 2-5, 2008 www.dreamforce.com

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Bessemer 10 Laws Of Being SaaSy Fall 2008

by Philippe Botteri

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