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Cloudonomics 101 - Creating a Financial Plan for your SaaS or Cloud Computing Business
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Cloudonomics 101 - Creating a Financial Plan for your SaaS or Cloud Computing Business

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Looking to build a business plan for your cloud company, but don’t know how to create the right financial model? This session features best practices and actionable tips from cloud finance experts ...

Looking to build a business plan for your cloud company, but don’t know how to create the right financial model? This session features best practices and actionable tips from cloud finance experts and investors on what financial metrics matter—and how they affect your business plan, ability to raise capital, and long-term profitability.

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Cloudonomics 101 - Creating a Financial Plan for your SaaS or Cloud Computing Business Cloudonomics 101 - Creating a Financial Plan for your SaaS or Cloud Computing Business Presentation Transcript

  • Cloudonomics 101: Creating a Financial Plan for Your Force.com Startup
    Tour de Force: Cloud Entrepreneurs
    Byron Deeter, Bessemer Venture Partners
    Philippe Botteri, Bessemer Venture Partners
  • Byron Deeter
    Partner
    Philippe Botteri
    Vice President
    VENTURE CAPITAL
  • Content of today’s discussion
    Who we are
    Get Instrument Rated: the Bessemer’s “6Cs” of Cloud Finance
    Preparing your 2010 flight plan
  • 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 Cloud investors in history
    • Close partnership with Salesforce.com for Cloud investing
  • Who We Are
    Byron Deeter
    • Ten years of SaaS investing and Entrepreneurship
    • 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
    • Focus on Software and SaaS
    • Actively involved in Bessemer investments in Eloqua, Cornerstone OnDemand, Intego, and Intacct
    • Close to 10 years with McKinsey & Company (Europe, US) in the Tech and Software practice – pioneered McKinsey efforts on SaaS
    • Masters from EcolePolytechnique (Physics) and Ecole des Mines (Engineering)
    • Venture and SaaSBlog: www.cracking-the-code.blogspot.com
    • Twitter/CrackingZCode
  • Bessemer’s Top 10 Laws for Cloud Computing
    Less is more! Leverage the cloud everywhere you practically can
    Get Instrument rated, and trust the 6C’s of Cloud Finance
    Study the Sales Learning Curve and Only Invest behind Success
    Forget everything you learned about software channels
    Build EmployeeSoftware and focus on ease of use
    By definition, your sales prospects are online - Savvy online marketing is a core competence
    The most important part of Software-as-a-Service isn’t “Software” it’s “Service”! Support, support, support!
    Leverage and monetize the data asset
    Mind the GAAP! Cloud accounting is all about matching revenue and costs to consumption…well, except for professional services!
    Cloudonomics requires that you plan your fuel stops very carefully
    Bonus Law: You can ignore one or two of these rules, but not more - Great companies innovate, but pick your battles!
  • Content of today’s discussion
    Who we are
    Get Instrument Rated: the Bessemer’s “6Cs” of Cloud Finance
    Preparing your 2010 flight plan
  • Don’t fly blind – trust your gauges…
  • …or be ready to face the consequences!
  • The Bessemer’s “6Cs” of Cloud Finance
    CMRR: Committed Monthly Recurring Revenue
    Cash
    Churn
    CAC: Customer Acquisition Cost
    CLTV: Customer LifeTime Value
    CPipe: CMRR Sales Pipeline
  • CMRR (Committed Monthly Recurring Revenue) is the key metric for growth
    New Customers
    • Bookings: Difficult to make decisions
    • Multi-year bookings
    • Non-recurring revenues
    • Impact of churn and renewal?
    Churn
    • CMRR: Full transparency
    • Employee assessment
    • Operational planning
    • Financing
    • Valuation
    Upsell
    CMRR Q1
    CMRR Q2
  • Cash is King!
    Heavy upfront financing…
    … requiring tight expense management
    Lines are still not crossing!
    Complex ERP sales
    Monthly recurring expenses
    Freemium model
    Expected breakeven point
    Monthly Recurring Revenue
    Key drivers of cash consumption: Customer Acquisition Costs, Churn, Renewal rate
  • Cash: Give the right incentives to your sales force to get longer upfront payment
    Payment terms mix impact on Cash Flow
    Company starting with $1m CMRR and growing at 60% CAGR
    Semi-Annual
    5-year cash impact*
    Quarterly
    Annual
    • Changes in payment mix can have a drastic impact on cash flows
    • Sales incentive needs to be heavily biased towards annual upfront cash payment in the high growth phase
    Additional $38m burn
    Additional $52m burn
  • Churn defines the viability of your business…
    • 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
    • GUI/ workflow redesign
    • Platform stability
    • Increased discount for early payment
    • 5-year cash impact: $12m
    • 12% vs. 20% churn
    Benchmark = 3% per quarter
    Gross Churn
    Net Churn (incl. upsells)
    Benchmark = 0% per quarter
    Actual
    Forecast
  • The CAC (Customer Acquisition Cost) ratio measures your S&M effectiveness
    • 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…
    New CMRR (Q4 09) x 12 x % GM
    CAC Ratio =
    Sales & Marketing Costs (Q4 09)
    excluding account management costs
    Public Benchmark
    SaaS 13 Index, Q2/Q3 2009
    • Median: 0.39
    • High: 0.68
    • Low: 0.00
  • CAC ratio: very difficult to scale with less than 1-year payback
    CAC impact on Cash Flow
    SaaS company starting with $1.6m in revenues
    GAAP revenues
    • Very hard to scale if you CAC ratio is not close to 1.0
    • Productivity is unlikely to improve with scale, so don’t invest and burn your cash if the model is not tuned
    Cash Flow for CAC = 1.0
    Cash Flow for CAC = 0.5
    Additional $66m burn
  • The Customer LifeTime Value tells you if your business model is profitable
    CLTV: defining your profitability
    CLTV example
    Salesforce.com CLTV estimates (public data)
    Example : 1 customer generating $1 of ARR
    Assumptions
    • Customer lifetime: 5 years
    • WACC: 15%
    • Pro. Serv. Rev./COS included in CAC
    CLTV &gt; 0 = Profit!
  • CPipe: CMRR Sales Pipeline gives you forward visibility
    • Critical to get a good forward visibility into the grow of the company
    • Should not include professional services and support (unless delivered in a subscription)
    • Need to include deal CMRR view into Salesforce.com!
    Time frame: monthly, quarterly, or rolling?
    Σ [ deal CMRR x probability]
    Cpipe =
    Probability: show the pipeline as a total number or a factored number?
    Stage: all qualified and above? Probable? Only Committed?
  • The Cloud Dashboard
    6C’s
    Measurement
    Target
    CMRR
    • Growth rate
    • Upsell vs. new customers
    • 50%+
    • Upsells >= churn
    Cash
    • FCF
    • Payment terms
    • Pro. Serv. GM
    • breakeven @ 50% growth rate
    • 1-year upfront mix > 50%
    • >0 on project basis
    Churn
    • Churn rate
    • Churn < 12%
    CAC
    • CAC ratio (new CMRR)
    • CMRR renewal cost
    • CAC > 1
    • < 30% of annualized GM
    CLTV
    • CLTV
    • G&A as % of sales
    • R&D as % of sales
    • CLTV>0
    • G&A ~15% at scale
    • R&D ~10% at scale
    CPipe
    • CMRR
    • 3-5x your CMRR target for the quarter
    Free Cash Flow at scale: 20%+!
  • Content of today’s discussion
    Who we are
    Get Instrument Rated: the Bessemer’s “6Cs” of Cloud Finance
    Preparing your 2010 flight plan
  • A year ago, the world collapsed…
    The SaaS 13 Index
    5.0x Multiple
    Base 100 = Jan 1st 2008
    -60%
    2.3x Multiple
  • …but we are more than half way back!
    -13%
    3-4x Multiple
  • However things have changed
    …and sales productivity declined
    Average growth rate is down…
    SaaS 13 Index, Percent
    SaaS 13 Index, CAC Ratio
    Is 15% the new SaaS growth rate?
    Market recovery?
    Staff reduction?
    08/09 growth projection
  • Some idea for your 2010 Planning
    Base your plan on the 6 C’s of Cloud Finance
    • P&L: MRR = MRE: you control your destiny when your monthly revenue equals your monthly expenses
    • Sales & Marketing:It might be time to step on the gas…or not! Your CAC ratio will tell you
    • Focus on customer retention: without a low churn, you cannot build a profitable business model
    Mange your cash carefully but don’t underinvest: capital is available but your metrics will tell you if you can raise outside capital or not in good terms
    Watch for cheap MRR (M&A, Other structure to avoid buying assets?): you may be able to buy failing competitors. The recession created opportunities
  • Plan your fuel stops carefully
    Cloud Computing Company Lifecycle
    All 6 C’s at benchmark level
    GAAP revenues
    Cash Flow
    IPO!
    $3-5m Series A
    @$5-10m pre.
    $8-12m Series B
    @$20-30m pre.
    $15-20m Series C
    @$50-80m pre.
    Total Cash Burn:~$40m
  • Mind the GAAP! 6 pitfalls to avoid
    GAAP revenue should be recognized ratably: even if your contract if paid upfront, you need to recognize the revenue ratably over the lifetime of the contract
    Don’t recognize your professional services too early
    Don’t forget to amortize your sales commissions
    Stock options ARE expenses: you need to recognize the fair value of stock option grants as a compensation cost and amortize it over the vesting period in your financial statements
    Watch out for investors warrants: as your company grow and their value increase, and you need to record the negative impact on your GAAP income statement
    Exclude your deferred revenues from your “quick ratio” in your debt covenants
  • Summary
    • Don’t fly blind: the 6 C’s matter
    • Small changes (positive and negative) can have massive impact on your cash consumption
    • Sales productivity is the most important lever that will define your cash burn: climbing the sales learning curve is critical before scaling
    • Plan your fuel stops carefully and keep the faith: at scale, there is a pot of gold at the end of this rainbow!
    • Best time to build a successful business, so don’t under-invest if your indicators are green!
  • Bessemer Law #1: Less is more: leverage the cloud…
  • Byron Deeter
    Partner
    Philippe Botteri
    Vice President
    VENTURE CAPITAL
    More information:
    www.bvp.com/cloud
    cloudvc@bvp.com
    Thank You!