The CEO's Guide to Downturn
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After the markets pounded SaaS early this year, CEOs started gearing up for a downturn. Your company may already be tightening its belt. But that might not be enough. Gainsight CEO Nick Mehta, InsightSquared CEO Fred Shilmover, and Bessemer Venture Capital partner Byron Deeter are teaming up for an all-star webinar to outfit you with a plan for the downturn. They'll discuss: The timeline for the SaaS "reset" Optimizing customer acquisition Investing in lean revenue And much, much more
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The CEO's Guide to Downturn
- 1. THE CEO’s GUIDE TO DOWNTURN Nick Mehta CEO Fred Shilmover CEO Byron Deeter CEO
- 2. The State of the Cloud Byron Deeter Partner
- 3. The State of the Cloud ASP Delivery + Recurring Rev Cloud Computing (SaaS + PaaS) 1997 2000 2010 2015 SaaS BVP’s CLOUD INVESTMENTS Source: Bessemer Venture Partners: “State of the Cloud” June 2015
- 4. The State of the Cloud THEN… Source: Bessemer Venture Partners: “State of the Cloud” 2015. Public company data per CapIQ. 2008 as of 1/1/2008. “ Today” as of 5/29/2015 <$25bn Total Cloud Market Cap 2008 - Top 10 Public Cloud Companies ($ in mm) Count Company MarketCap 1 Salesforce $7,404 2 Netsuite $2,332 3 Concur $1,590 4 DealerTrack $1,317 5 blackbaud $1,247 6 AthenaHealth $1,161 7 Ariba $805 8 The Ultimate Software $777 9 Taleo $749 10 Constant Contact $594
- 5. The State of the Cloud …NOW! Today - Top 10 Public Cloud Companies ($ in mm) Count Company MarketCap 1 Salesforce $50,537 2 LinkedIn $26,285 3 Workday $16,915 4 ServiceNow $13,517 5 NetSuite $7,728 6 The Ultimate Software Group $4,924 7 Athenahealth $4,819 8 Veeva $4,186 9 Medidata Solutions $3,302 10 Proofpoint $2,847 THEN… Source: Bessemer Venture Partners: “State of the Cloud” 2015. Public company data per CapIQ. 2008 as of 1/1/2008. “ Today” as of 5/29/2015 <$25bn Total Cloud Market Cap ~$180bn Total Cloud Market Cap 2008 - Top 10 Public Cloud Companies ($ in mm) Count Company MarketCap 1 Salesforce $7,404 2 Netsuite $2,332 3 Concur $1,590 4 DealerTrack $1,317 5 blackbaud $1,247 6 AthenaHealth $1,161 7 Ariba $805 8 The Ultimate Software $777 9 Taleo $749 10 Constant Contact $594
- 6. CLOUD REVENUE Source: Bessemer Venture Partners: “State of the Cloud” 2015 Market size IDC, 2014. Public company data per CapIQ. Legacy software cloud revenue per AppsRunTheCloud survey on 2013 revenue and assumed growth cut in half for 2014. Private cloud unicorn data assuming average 20x rev multiple. 2008 market size from Forrester. 2008 $5.6bn
- 7. CLOUD REVENUE UP 10X IN LAST SIX YEARS Source: Bessemer Venture Partners: “State of the Cloud” 2015 Market size IDC, 2014. Public company data per CapIQ. Legacy software cloud revenue per AppsRunTheCloud survey on 2013 revenue and assumed half’d growth for 2014. Private cloud unicorn data assuming average 20x rev multiple. 2008 market size from Forrester. $18bn $9bn $3bn $26bn $56.6bn Public Pure Play Cloud Legacy Software Cloud Revenue Private Cloud Unicorns Private Cloud 2008 2014 $5.6bn
- 8. CLOUD REVENUE UP 10X, PROJECTED TO GROW OVER 2X IN NEXT 4 $18bn $9bn $3bn $26bn $56.6bn % of Total Number of Companies 47% 5% 17% 32% thousands 28 11 42 Source: Bessemer Venture Partners: “State of the Cloud” 2015: Market size IDC, 2014. Public company data per CapIQ. Legacy software cloud revenue per AppsRunTheCloud survey on 2013 revenue and assumed half’d growth for 2014. Private cloud unicorn data assuming average 20x rev multiple. 2008 market size from Forrester. Public Pure Play Cloud Legacy Software Cloud Revenue Private Cloud Unicorns Private Cloud 2008 20182014 $5.6bn $127.5bn
- 9. The 2016 “Downturn” • The stock market has bounced back from some of it’s slumps • The US Federal Government shows no signs of monetary policy tightening • New technologies such as drones, robots and Virtual reality are promising On a positive note: On a concerning note: • Highly suspect global macroeconomic forces • Tightening funding environment • Particularly around cash flow negative businesses • Uncertain political environment
- 10. Bouncing Back
- 11. The “New World” of Valuation • While evaluations have bounced back, they have not done so evenly.
- 12. How to Approach Sales in a Downturn Fred Shilmover Founder & CEO
- 13. How to Approach Sales in a Downturn
- 14. Fueling Growth When Capital is Expensive Revenue from a Single Customer • The cost to acquire a new customer is recouped incrementally over time
- 15. Fueling Growth When Capital is Expensive The SaaS Cash Flow Trough • The more a SaaS company sells to new customers the more short- term negative cash flow it incurs
- 16. The Old Metrics… Cheap-Capital Metrics The Old Metrics… 1. Growth Rate 2. Size of Addressable Market 3. Long-Term Unit Economics
- 17. The New Unit Economics The New Unit Economics… 1. Near-Term Unit Economics 2. Cash Management 3. Extreme Focus
- 18. The New Unit Economics When Does the SaaS Bank Get its Money?
- 19. The Levers of Efficient Growth Lever: Reduce CAC • Marginally Less Efficient • Less of a Buffer In a Downturn… Track These Metrics: • CPL / Opportunity • Sales Rep Quota Attainment CAC
- 20. Increase Your ASP • Good Time to Consider Pricing Strategy • Increase Floor / Shift Demographics In a Downturn… Track These Metrics: • Distribution of ASP • Conversion and Cycle Time of Customer Segment Average Sales Price The Levers of Efficient Growth 0 50 100 150 200 250 300 $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 MRR Distribution MRR Customers
- 21. Lever: Improve Your Gross Margin • Fully Inspect Each Element of COGS In a Downturn… Track These Metrics: • Gross Margin Percentage • COGS / Customer Gross Margin The Levers of Efficient Growth
- 22. Cash Management The Levers of Efficient Growth Lever: Focus on Prepayment • Balance Revenue and Cash Management • Prepayment as a Pricing Lever • Anchoring In a Downturn… Track These Metrics: • Average Months of Prepaid • Average Discount • Average Contract Duration
- 23. In a Downturn… Track these metrics: • Stage-by-Stage Conversion Rates • Sales Cycle • Win Rate of Marketing-Sourced Opportunities Extreme Focus The Bank of SaaS Mantra
- 24. Building Resilience with Customer Success Nick Mehta CEO
- 25. Focusing on Customer Success in a Downturn SaaS companies spend the most money on Sales & Marketing • Sales & Marketing owns the cost of acquiring a customer (CAC) • SaaS customers pay “over time” (monthly, yearly, etc.) • Acquisition costs are incurred upfront Where does the cash go in funding SaaS growth?
- 26. Two Kinds of Revenue Expensive Revenue • Revenue from new clients • Unprofitable due to Cost to Acquire the Customer (CAC) Lean Revenue • Revenue from existing clients • Includes: • Deferred Revenue Recognition • Unbilled Deferred Revenue Recognition • Renewal of Existing Customer Agreements • Expansion of Those Agreements
- 27. Expensive Revenue The Costs to Acquire $100 of Expensive Revenue include: • Base Salaries, benefits and sales team overhead • Commissions for sales team members (9% on average*) *Source: PacCrest 2015 SaaS Company Survey
- 28. Lean Revenue The Costs to Acquire $100 of Lean Revenue include: • Base salaries, benefits and overhead for Customer Success/Renewals team (CSMs, renewal managers, account managers, etc.) • Commissions for Customer Success/ Renewals team (2% on renewals and 8% for up-sells*) *Source: PacCrest 2015 SaaS Company Survey
- 29. Lean Revenue vs. Expensive Revenue
- 30. 10 Tactics to Drive Lean Revenue 1. Lean Revenue Organization 2. Lean Revenue Leader 3. Lean Revenue Compensation People
- 31. 10 Tactics to Drive Lean Revenue 4. Operationalize the Customer Lifecycle 5. Manage Customer Risk 6. Demonstrate Value 7. Enable Expansion & Advocacy 8. Enable Cross-functional Collaboration Processes
- 32. 10 Tactics to Drive Lean Revenue 9. Scale Operations 10. Advocacy Technology BonusBonus
- 33. 1. Lean Revenue Organization 2. Lean Revenue Leader 3. Lean Revenue Compensation 9. Scale Operations 10 Tactics to Drive Lean Revenue People Processes 4. Operationalize the Customer Lifecycle 5. Manage Customer Risk 6. Demonstrate Value 7. Enable Expansion and Advocacy 8. Enable Cross-functional Collaboration Technology 10. Advocacy Bonus
- 34. Discussion Nick Mehta CEO Fred Shilmover Founder & CEO Byron Deeter Partner
- 35. Nick Mehta CEO Fred Shilmover Founder & CEO Byron Deeter Partner You often hear conflicting advice: in tough times should a company first look to add new customers, or harvest it’s existing base with more upsells?
- 36. Nick Mehta CEO Fred Shilmover Founder & CEO Byron Deeter Partner There’s also the management school of thought that says you should be aggressive when other competitors are being conservative, and go “all in”… should I consider that instead?
- 37. Nick Mehta CEO Fred Shilmover Founder & CEO Byron Deeter Partner Beyond sales pipeline, what are the leading indicators that your business may be less stable than you think as the market softens?
- 38. Questions from the Audience Nick Mehta CEO Fred Shilmover Founder & CEO Byron Deeter Partner
- 39. May 10 – 12 2016 Oakland, California Use code “DOWNTURN” for 25% off!
- 40. THANK YOU
Editor's Notes
- OPTIONAL: The implication of the public market on private financing SaaS was a great innovation, but it’s really a composite of a number of business model changes: Hosting: outsourcing, economies of scale Provisioning and Service: fundamental shift that creates lower costs for customers trial and implement Billing: One time to over time (double edged sword). Creates massive alignment and more money long term (less risk adjustment of WTP), but less money short term Make no mistake about it: A big part of most SaaS businesses is customer financing (you are a bank whether you admit it or not), and financing has a cost. With lower valuations, and the commensurate higher dilution AND lower multiples at exit (M&A or IPO), when that cost of capital is higher, we have to manage sales differently.
- Here’s what it looks like for a typical SaaS company to acquire a new customer. Acq cost is incurred upfront, and revenue comes over time. Now, with perpetual license software, you got most of your fee up front (except for a smaller maintenance stream). So the CAC had to fit INTO the sale price. Since the long term economics of SaaS are better (eventually we’ll start getting the renewal revenue that Nick is going to talk about it) it’s allowed us to increase CAC relative to revenue and force out the breakeven point.
- So if you apply that in aggregate to a company, what happens is that with every new customer signed, the company incurs more losses (increase in WC). That means that the faster you grow, the more losses you incur. The counterpoint to those losses is that the faster you grow, even at the same multiples, the higher your company’s value In order to get to breakeven, you would have to improve your sales efficiency or slow down growth, but you could kick the can on that problem. If capital was cheap and available, companies had incentives to take the deeper J curve. That’s a big IF
- In the times of cheap and available capital, these were the metrics companies focused on: including Growth at all costs & a 1% of China strategy (are you targeting a $B market) When companies chose “growth at all costs” it was different than during the dot-com boom. Then, it was believed that it was ok to have negative margins and unprofitable customers. “We can make it up on volume”. In hind sight, it’s unclear how that logic passed muster. So the market didn’t make the same stupid mistakes, we made new ones. This time we did focus on long term unit economics. We looked at LTV:CAC. Assuming renewal and expansion (hopefully based on historical data), could we finance the customer to profitability. ------ But cheap capital was necessary for this model to work. SaaS companies required inexpensive capital for two reasons: 1) to finance fixed costs (everything in the business that isn’t a component of unit economics, and 2) to cover the payback period of a new customer until that customer became unit-profitable or the scale at which the company would have unit-profitable customers.
- Markets have changed, and companies have to change the way they manage sales. Near-Term Unit Economics: Payback period Cash Management: measure cash collection separately from revenue recognition Focus execution Growth is notably omitted – not that it doesn’t matter. You have to stay in a growth range for different funding sources (PE, VC) but the expectations have come down relative to the importance of cash and profitability
- So let’s dig in. My first strategy is to orient sales around payback period rather than LTV. Become a bit more myopic about how long it takes you to break even on that first contract or payment Then let’s look at each of the components, CAC, ASP, GM and how to adapt
- So obviously you need to spend less to get more. But you can’t will your way to that. Reduce CAC: Marginally Less Efficient Less Buffer 1. Your 101st customer costs more than your first. Marketing: Focus on marketing campaigns that produce a known volume of leads and opportunities. Focus more on quality over quantity. Sales: Reduce the buffer between sales team quota and company bookings goal. This might increase the chance that you miss your number, but it reduces the amount of capital you spend on sales salaries. 2. Run your sales like a factory not a bunch of artisans Measure tightly, think about it like a supply chain. Better execution will reduce waste and extra carrying cost
- A lot of companies move up market to larger price points to help amortize CAC, but that could have huge ramifications! There are tactics you can take that are less likely to require large organizational or fundamental business changes 1. Structure your pricing model to maximize revenue vs. capturing market share. Examples: InsightSquared hasn’t changed pricing in 3 years… now is time. Product is better. There may be a better model 2. Price Increase or raise floor 3. Change mix/focus (image) 4. Move Upmarket: Have sales and marketing focus on bigger deals in an effort to offset CAC and Gross Margin with larger contracts. BUT BEWARE OF CHANGING BUSINESS It’s a 3 variable equation. Decreasing gross margin might be hard, but increasing ASP could be easier with the same effect.
- When growth is the only focus, it’s easy to deprioritize efficiency. Shine a light on COGS… Expect what you inspect Areas to explore: Hosting Services Product offerings to reduce onboarding (can you build features) Example: AWS (compute expensive) Remember: 3 variable equation
- We’ll cover this in a lot of depth in the eBook Payback period looks at revenue. Collections are critical. Depending on how expensive capital is, you may want to use prepayment as a lever. 3 for 2 Start by asking: anecdote - our transitions It will be a balance of sacrificing LTV and revenue for cash. Do the math
- As a VC-backed high-growth SaaS company, it used to be that you were only attractive if you had a large addressable market. There are benefits to gain from owning a smaller market. Easier to get 25% of a small market than 1% of a big market If 25% of your TAM is a $500M business… keep shrinking your focus until it gets uncomfortably (maybe suffocatingly) uncomfortable What you’ll see: More WOM leads & better marketing efficiency Better conversion rates Lower Sales sales cycle This is not a new concept. G Moore talked about this in crossing the chasm. If you can’t be the dominant player in your space in 12 mo, pick a smaller space, especially in this environment that favors the efficient. And btw, your sales job gets a lot easier if your bucket isn’t leaky…