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

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!

Who we are

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

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

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 > 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%+!

Who we are

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!

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

by Philippe Botteri on Nov 19, 2009

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