Bessemer 5 Cs of SaaS Finance

Bessemer’s 5Cs of SaaS Finance Winter 2009

Agenda

Overview of Bessemer

Things have changed

Hard Times require better visibility: the 5Cs of SaaS Finance

Tips to Survive in a downturn

NO, NO, I WAS QUOTED OUT OF CONTEXT. WHAT I REALLY SAID WAS “I DON’T BELIEVE IN SAAS-QUATCH!” A Prediction….

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 six offices worldwide

One of the most successful software and SaaS investors in history

Close partnership with Salesforce.com for SaaS investing

BVP Software and SaaS Practice

BVP Software and SaaS Portfolio

Software and SaaS is the largest investment area for Bessemer New SaaS/Software investments 2008 exits

Agenda

Things have changed

2007: Life was fun…

Healthy SaaS Valuation Multiples

EV/2007 Revenue Multiple for SaaS 13 Index* High growth rate Distribution of 07/08 growth rate for the SaaS 13 index * Excluding NetSuite and SuccessFactors, not public at that time

Strong Growth rate

+

High Valuation

Easy access to capital and debt

2.5-3.0 48% Avg.

Lehman Bank employees stage a protest by blockading the entrance to the Bank's Headquarters

Things have changed: SaaS valuation plummeted… The SaaS 13 Index Base 100 = Jan 1st 2008 -60%

Growth and Cash Flows are not enough to support valuation… Revenue Growth USD million LTM Cash Flows from operations: $60m Omniture Inc. (Nasdaq: OMTR) YTD stock performance: -69% (vs. -38% for NASDAQ) Trading at 2.2x EV/2008 Rev. Base 100 = Jan 1st 2008

…and no one has been spared! 60% < Loss 40% < Loss < 59% Loss <39% -51% -71% -69% -40% -35% -61% -60% -35% -56% -78% -54% -47% -80%

Root Causes Over aggressive marketing and securitization of mortgages Foreclosures Home Prices fall Consumer spend falls Bank assets write off and bankruptcy Access to credit vanishes Business spend decreases Lay offs Recession? Depression? Home Equity Lines decrease

How long will it last? Dow Jones evolution since 1929 Linear scale 1929 Crisis: 25 years to recover Dow fell from 350pts in 1929 to 40pts in 1932 (-89%). Recovers 1929 level in 1954 1987 Crisis: 2 years to recover Dow fell from 2,600pts to 1940 pts (-25%). Recovers 1987 level in 1989 2000 Crisis: 6 years to recover Dow fell from 11,500pts to 7,600 pts (-34%). Recovers 2000 level in 2006 2008 Crisis: Plan for multi-year recovery Dow fell from 14,000pts to 8,175 pts (-41%). How bad is it really? 1973 Crisis: 9 years to recover Dow fell from 1,050pts to 580 pts (-45%) in 1974. Recovers 1973 level in 1982

Brace for a tough 2009

SAP Tells Employees: 'Do Not Order Any New IT Equipment at This Time'

SAP's co-CEOs, Henning Kagermann and Leo Apotheker

We believe demand for application software is deteriorating rapidly and "in real time"-and do not anticipate it will "bounce right back“ A 14% 2009 growth rate keeps Omniture solidly as one of the highest growers among the companies in our coverage universe Goldman Sachs Global Investment Research […] the recent slump in raw-material prices and the decline in shipping costs indicate just how far-reaching the consequences of the global financial crisis will be for the real economy […] a recession is occurring, and that many companies could struggle over the next few quarters Wedbush Securities

Agenda

Things have changed

The 5 Cs of SaaS Finance

CMRR: Committed Monthly Recurring Revenue

Churn

Cash

CAC: Customer Acquisition Cost

CLTV: Customer LifeTime Value

CMRR – Committed Monthly Recurring Revenue remains the key metric for growth 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

Cash – Time to get your cost and revenue line crossing Expense Plan MRR Expected breakeven point Actual Expenses Lines are still not crossing! Time to get the lines to cross – even at the expense of growth

Churn – Key lever in a tough economy

Key metrics

MRR churn ( target <12% per annum and < Upsell)

Customer Churn

Effect of 20 % churn on MRR base

Addressing Churn

Root causes

Pricing/ Value

UI and workflow complexity

Downtime

Monitoring

Overall application usage (login frequency and time)

Application usage (most frequent use case, function used…)

Acting

Competitive analysis/sales tools

Usage monitoring (e.g., True Login Percentage, API usage) and follow-up

GUI/ workflow redesign

Platform stability

Increased discount for early payment

Start of year 1 End of Year 1 End of Year 2 End of Year 3 50% MRR loss in 3 years

CAC – Target a 1-year payback on your Customer Acquisition Cost CAC ratio: defining your S&M spend

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 during the good times and tie growth to cash flows in downturn…

CAC benchmark Salesforce.com CAC ratio and refined CAC ratio since IPO (based on public data) Public Benchmark SaaS 13 Index, Q2 2008

Median: 0.57

High: 1.7 (Kenexa)

Low*: 0.2 (NetSuite)

* Excluding ULTI, SUMT, SLRY which had negative ratios (GM loss) during the period

CLTV – Adjust Your G&A and R&D Costs Towards a positive Customer LifeTime Value CLTV: defining your profitability CLTV > 0 = Profit! Example : 1 customer generating $1 of ARR Time for a >0 CLTV: use this analysis to adjust your G&A, account management and R&D costs

Assumptions

Customer lifetime: 5 years

WACC: 15%

Pro. Serv. Rev./COS included in CAC

CLTV example Salesforce.com CLTV estimates (based on public data)

Agenda

Things have changed

Some ideas for Year 2009 Planning (1/2)

Cash is King…and scarce – preserve it : if you are in a funding cycle, raise as soon as possible and as much as possible. If not - plan to cash flow breakeven with what you have left. Preserving cash is your #1 priority

It is time to fix your key SaaS metrics

P&L: MRR = MRE : you control your destiny when your monthly revenue equals your monthly expenses

Sales & Marketing: CAC>1 – You cannot afford to invest in growth. Keep only reps making quota and cut marketing activities with lower ROI

CLTV >0 – Adjust operations, R&D and G&A to make your business model profitable

Be realistic on valuation : the best public SaaS companies lost 55% of their value on average, so it is likely your valuation is down too!

Watch for cheap MRR (M&A, Other structure to avoid buying assets?) : you will soon be able to buy failing competitors. Volatility creates opportunities

Act fast : don’t wait for the slowdown to hit you, it will be too late

Strategic Manage Carefully Your Internal Communication!

Some ideas for Year 2009 Planning (2/2)

Sales& Marketing

Focus on your farmers: account management is critical to keep your churn low and improve “up-selling”. Monitor account activities and be proactive

Trade-off pre-payments for MRR by increasing pre-payment discount and sales bonus

Review sales comp structure: more commission less salary

Keep you voice up in the market: customer need to know you are still alive!

Rethink vertical segmentation: Healthcare? Is Government a good idea?

Review your marketing media allocation: offline media prices will go down and could generate attractive ROI, tradeshows might have less impact due to travel restrictions…