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Cloudonomics 101: Creating a Financial Plan for Your Force.com Startup <br />Tour de Force: Cloud Entrepreneurs<br />Byron...
Byron Deeter<br />Partner<br />Philippe Botteri<br />Vice President <br />VENTURE CAPITAL<br />
Content of today’s discussion<br />Who we are<br />Get Instrument Rated: the Bessemer’s “6Cs” of Cloud Finance<br />Prepar...
Bessemer Venture Partners Snapshot<br /><ul><li>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</li></li></ul><li>Who We Are<br />Byron Deeter<br /><ul><li>Ten ...
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</li></ul>Philippe Botteri<br /><ul><li>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</li></li></ul><li>Bessemer’s Top 10 Laws for Cloud Computing<br />Less is more!  Leverage the cloud ...
Content of today’s discussion<br />Who we are<br />Get Instrument Rated: the Bessemer’s “6Cs” of Cloud Finance<br />Prepar...
Don’t fly blind – trust your gauges…<br />
…or be ready to face the consequences!<br />
The Bessemer’s “6Cs” of Cloud Finance<br />CMRR: Committed Monthly Recurring Revenue<br />Cash<br />Churn<br />CAC: Custom...
CMRR (Committed Monthly Recurring Revenue) is the key metric for growth<br />New Customers<br /><ul><li>Bookings: Difficul...
Multi-year bookings
Non-recurring revenues
Impact of churn and renewal?</li></ul>Churn<br /><ul><li>CMRR: Full transparency
Employee assessment
Operational planning
Financing
Valuation</li></ul>Upsell<br />CMRR Q1<br />CMRR Q2<br />
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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 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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Transcript of "Cloudonomics 101 - Creating a Financial Plan for your SaaS or Cloud Computing Business"

  1. 1. Cloudonomics 101: Creating a Financial Plan for Your Force.com Startup <br />Tour de Force: Cloud Entrepreneurs<br />Byron Deeter, Bessemer Venture Partners<br />Philippe Botteri, Bessemer Venture Partners<br />
  2. 2. Byron Deeter<br />Partner<br />Philippe Botteri<br />Vice President <br />VENTURE CAPITAL<br />
  3. 3. Content of today’s discussion<br />Who we are<br />Get Instrument Rated: the Bessemer’s “6Cs” of Cloud Finance<br />Preparing your 2010 flight plan<br />
  4. 4. Bessemer Venture Partners Snapshot<br /><ul><li>Founded 1911
  5. 5. The longest standing track record in the Venture Capital Industry with 150+ M&A and IPOs
  6. 6. Strong Global Platform with over $2 billion under management and six offices worldwide
  7. 7. One of the most successful software and Cloud investors in history
  8. 8. Close partnership with Salesforce.com for Cloud investing</li></li></ul><li>Who We Are<br />Byron Deeter<br /><ul><li>Ten years of SaaS investing and Entrepreneurship
  9. 9. Current Board member of several SaaS companies, including: Eloqua, Intacct, Cornerstone OnDemand, & Retail Solutions
  10. 10. Founding CEO of Trigo Technologies, an early Bessemer-backed SaaS business acquired by IBM in 2004
  11. 11. Strategy consulting at McKinsey & Co.
  12. 12. Degree with honors from UC Berkeley</li></ul>Philippe Botteri<br /><ul><li>Focus on Software and SaaS
  13. 13. Actively involved in Bessemer investments in Eloqua, Cornerstone OnDemand, Intego, and Intacct
  14. 14. Close to 10 years with McKinsey & Company (Europe, US) in the Tech and Software practice – pioneered McKinsey efforts on SaaS
  15. 15. Masters from EcolePolytechnique (Physics) and Ecole des Mines (Engineering)
  16. 16. Venture and SaaSBlog: www.cracking-the-code.blogspot.com
  17. 17. Twitter/CrackingZCode</li></li></ul><li>Bessemer’s Top 10 Laws for Cloud Computing<br />Less is more! Leverage the cloud everywhere you practically can<br />Get Instrument rated, and trust the 6C’s of Cloud Finance<br />Study the Sales Learning Curve and Only Invest behind Success<br />Forget everything you learned about software channels<br />Build EmployeeSoftware and focus on ease of use<br />By definition, your sales prospects are online - Savvy online marketing is a core competence<br />The most important part of Software-as-a-Service isn’t “Software” it’s “Service”! Support, support, support! <br />Leverage and monetize the data asset<br />Mind the GAAP! Cloud accounting is all about matching revenue and costs to consumption…well, except for professional services! <br />Cloudonomics requires that you plan your fuel stops very carefully<br />Bonus Law: You can ignore one or two of these rules, but not more - Great companies innovate, but pick your battles!<br />
  18. 18. Content of today’s discussion<br />Who we are<br />Get Instrument Rated: the Bessemer’s “6Cs” of Cloud Finance<br />Preparing your 2010 flight plan<br />
  19. 19. Don’t fly blind – trust your gauges…<br />
  20. 20. …or be ready to face the consequences!<br />
  21. 21. The Bessemer’s “6Cs” of Cloud Finance<br />CMRR: Committed Monthly Recurring Revenue<br />Cash<br />Churn<br />CAC: Customer Acquisition Cost<br />CLTV: Customer LifeTime Value<br />CPipe: CMRR Sales Pipeline<br />
  22. 22. CMRR (Committed Monthly Recurring Revenue) is the key metric for growth<br />New Customers<br /><ul><li>Bookings: Difficult to make decisions
  23. 23. Multi-year bookings
  24. 24. Non-recurring revenues
  25. 25. Impact of churn and renewal?</li></ul>Churn<br /><ul><li>CMRR: Full transparency
  26. 26. Employee assessment
  27. 27. Operational planning
  28. 28. Financing
  29. 29. Valuation</li></ul>Upsell<br />CMRR Q1<br />CMRR Q2<br />
  30. 30. Cash is King!<br />Heavy upfront financing… <br />… requiring tight expense management<br />Lines are still not crossing!<br />Complex ERP sales<br />Monthly recurring expenses<br />Freemium model<br />Expected breakeven point<br />Monthly Recurring Revenue<br />Key drivers of cash consumption: Customer Acquisition Costs, Churn, Renewal rate<br />
  31. 31. Cash: Give the right incentives to your sales force to get longer upfront payment <br />Payment terms mix impact on Cash Flow<br />Company starting with $1m CMRR and growing at 60% CAGR<br />Semi-Annual<br />5-year cash impact*<br />Quarterly<br />Annual<br /><ul><li>Changes in payment mix can have a drastic impact on cash flows
  32. 32. Sales incentive needs to be heavily biased towards annual upfront cash payment in the high growth phase</li></ul>Additional $38m burn<br />Additional $52m burn<br />
  33. 33. Churn defines the viability of your business…<br /><ul><li>Root causes
  34. 34. Pricing/ Value
  35. 35. UI and workflow complexity
  36. 36. Downtime
  37. 37. Monitoring
  38. 38. Overall application usage (login frequency and time)
  39. 39. Application usage (most frequent use case, function used…)
  40. 40. Acting
  41. 41. Competitive analysis/sales tools
  42. 42. Usage monitoring
  43. 43. GUI/ workflow redesign
  44. 44. Platform stability
  45. 45. Increased discount for early payment
  46. 46. 5-year cash impact: $12m
  47. 47. 12% vs. 20% churn</li></ul>Benchmark = 3% per quarter<br />Gross Churn<br />Net Churn (incl. upsells)<br />Benchmark = 0% per quarter<br />Actual<br />Forecast<br />
  48. 48. The CAC (Customer Acquisition Cost) ratio measures your S&M effectiveness<br /><ul><li>CAC < 1/3 (3 years payback or more): bad! Slam on the breaks and refine your sales model
  49. 49. 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…</li></ul>New CMRR (Q4 09) x 12 x % GM<br />CAC Ratio = <br />Sales & Marketing Costs (Q4 09)<br />excluding account management costs<br />Public Benchmark<br />SaaS 13 Index, Q2/Q3 2009<br /><ul><li>Median: 0.39
  50. 50. High: 0.68
  51. 51. Low: 0.00</li></li></ul><li>CAC ratio: very difficult to scale with less than 1-year payback<br />CAC impact on Cash Flow<br />SaaS company starting with $1.6m in revenues<br />GAAP revenues<br /><ul><li>Very hard to scale if you CAC ratio is not close to 1.0
  52. 52. Productivity is unlikely to improve with scale, so don’t invest and burn your cash if the model is not tuned</li></ul>Cash Flow for CAC = 1.0<br />Cash Flow for CAC = 0.5<br />Additional $66m burn<br />
  53. 53. The Customer LifeTime Value tells you if your business model is profitable<br />CLTV: defining your profitability<br />CLTV example<br />Salesforce.com CLTV estimates (public data)<br />Example : 1 customer generating $1 of ARR<br />Assumptions<br /><ul><li>Customer lifetime: 5 years
  54. 54. WACC: 15%
  55. 55. Pro. Serv. Rev./COS included in CAC</li></ul>CLTV &gt; 0 = Profit! <br />
  56. 56. CPipe: CMRR Sales Pipeline gives you forward visibility<br /><ul><li>Critical to get a good forward visibility into the grow of the company
  57. 57. Should not include professional services and support (unless delivered in a subscription)
  58. 58. Need to include deal CMRR view into Salesforce.com!</li></ul>Time frame: monthly, quarterly, or rolling?<br />Σ [ deal CMRR x probability]<br />Cpipe = <br />Probability: show the pipeline as a total number or a factored number?<br />Stage: all qualified and above? Probable? Only Committed? <br />
  59. 59. The Cloud Dashboard<br />6C’s<br />Measurement<br />Target<br />CMRR<br /><ul><li>Growth rate
  60. 60. Upsell vs. new customers
  61. 61. 50%+
  62. 62. Upsells >= churn</li></ul>Cash<br /><ul><li>FCF
  63. 63. Payment terms
  64. 64. Pro. Serv. GM
  65. 65. breakeven @ 50% growth rate
  66. 66. 1-year upfront mix > 50%
  67. 67. >0 on project basis</li></ul>Churn<br /><ul><li>Churn rate
  68. 68. Churn < 12%</li></ul>CAC<br /><ul><li>CAC ratio (new CMRR)
  69. 69. CMRR renewal cost
  70. 70. CAC > 1
  71. 71. < 30% of annualized GM</li></ul>CLTV<br /><ul><li>CLTV
  72. 72. G&A as % of sales
  73. 73. R&D as % of sales
  74. 74. CLTV>0
  75. 75. G&A ~15% at scale
  76. 76. R&D ~10% at scale</li></ul>CPipe<br /><ul><li>CMRR
  77. 77. 3-5x your CMRR target for the quarter</li></ul>Free Cash Flow at scale: 20%+!<br />
  78. 78. Content of today’s discussion<br />Who we are<br />Get Instrument Rated: the Bessemer’s “6Cs” of Cloud Finance<br />Preparing your 2010 flight plan<br />
  79. 79. A year ago, the world collapsed…<br />The SaaS 13 Index<br />5.0x Multiple<br />Base 100 = Jan 1st 2008<br />-60%<br />2.3x Multiple<br />
  80. 80. …but we are more than half way back!<br />-13%<br />3-4x Multiple<br />
  81. 81. However things have changed<br />…and sales productivity declined<br />Average growth rate is down…<br />SaaS 13 Index, Percent<br />SaaS 13 Index, CAC Ratio<br />Is 15% the new SaaS growth rate?<br />Market recovery?<br />Staff reduction?<br />08/09 growth projection<br />
  82. 82. Some idea for your 2010 Planning<br />Base your plan on the 6 C’s of Cloud Finance<br /><ul><li>P&L: MRR = MRE: you control your destiny when your monthly revenue equals your monthly expenses
  83. 83. Sales & Marketing:It might be time to step on the gas…or not! Your CAC ratio will tell you
  84. 84. Focus on customer retention: without a low churn, you cannot build a profitable business model</li></ul>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<br />Watch for cheap MRR (M&A, Other structure to avoid buying assets?): you may be able to buy failing competitors. The recession created opportunities<br />
  85. 85. Plan your fuel stops carefully<br />Cloud Computing Company Lifecycle<br />All 6 C’s at benchmark level<br />GAAP revenues<br />Cash Flow<br />IPO!<br />$3-5m Series A<br />@$5-10m pre.<br />$8-12m Series B<br />@$20-30m pre.<br />$15-20m Series C<br />@$50-80m pre.<br />Total Cash Burn:~$40m<br />
  86. 86. Mind the GAAP! 6 pitfalls to avoid<br />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<br />Don’t recognize your professional services too early<br />Don’t forget to amortize your sales commissions<br />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<br />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<br />Exclude your deferred revenues from your “quick ratio” in your debt covenants<br />
  87. 87. Summary<br /><ul><li>Don’t fly blind: the 6 C’s matter
  88. 88. Small changes (positive and negative) can have massive impact on your cash consumption
  89. 89. Sales productivity is the most important lever that will define your cash burn: climbing the sales learning curve is critical before scaling
  90. 90. Plan your fuel stops carefully and keep the faith: at scale, there is a pot of gold at the end of this rainbow!
  91. 91. Best time to build a successful business, so don’t under-invest if your indicators are green!</li></li></ul><li>Bessemer Law #1: Less is more: leverage the cloud… <br />
  92. 92. Byron Deeter<br />Partner<br />Philippe Botteri<br />Vice President <br />VENTURE CAPITAL<br />More information: <br />www.bvp.com/cloud<br />cloudvc@bvp.com<br />Thank You!<br />

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