Tom Tunguz noted Blogger and VC With firm Redpoint noted in a recent vLog that copying a business model is typically not a good idea since they have diminishing value over time as more folks copy. That said it is increasingly important to understand what the business models of successful companies look like as a sanity check for the numbers that you are seeing and projecting.
One of the top Questions asked by Investors.What problem do you solve and how big an opportunity (market) is that? Generally investors are interested in opportunities that have a $B+ market potential and growing. Since SaaS companies are recurring revenue generally with high operating margins a Billion Dollar valuation requires $100M+ in annual recurring revenues
(Whether your product or team can get there are two other biggies.)
For those that are on there first time building a SaaS business with institutional investor backing here are some of the key terms you are going to need to learn and track.
While this seems the most obvious. Running out of money is the end of any startup or scale up. So needless to say this is the the most import number to keep track of. Understanding the rate of your growth and being able to predict the cash burn effectively is of paramount importance while scaling.
Understanding which segment of the market you are going after is helpful vital in determining your strategy for building the company
(Ie if you are going after a Million consumers at $100/yr then you probably can’t afford a direct sales approach. In fact, You probably can’t even afford an advertising approach as Dropbox found in tests advertising cost them $287 per paid $100 user. So the incentivized/ viral strategy became necessary.)
Neeraj Agrawal at Battery Ventures was nice enough to share some insights from several of their SaaS investments. Starting from the $2M ARR several seemed to follow a very similar path. While it is possible to arrive at $100M ARR from a variety of paths having guideposts to shoot for is a very helpful tool.
A Quick look at how the path breaks down.
Without taking up too much time, use a lean Launchpad approach combined with Agile development to get to viable product ( There is an entire other deck on that process) At a minimum use the 20 interview Rule before writing the first line of code.
Product market fit is the hardest thing to capture since there doesn’t seem to be any consensus on what it will truly mean for your company. From my experience, in hindsight, it was probably when our focus shifted to internal scaling issues rather than the question of how how do we find customers. Certainly there are a myriad of issues that need to be hashed out but this seems to be a relatively easy identification point.
Mark Andreesen has a very simple approach that the only thing that matters is the Market In a great market -- a market with lots of real potential customers -- the market pulls product out of the startup. ~Rachleff’s Corollary of Startup Success, named after Andy Rachleff formerly of Benchmark Capital And you can always feel product/market fit when it's happening. The customers are buying the product just as fast as you can make it -- or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You're hiring sales and customer support staff as fast as you can….
Warning signs you aren’t there: You have ten to twenty customers… …and have for a while Founders sold the product but the sales people you’ve hired can’t figure it out Services are > 25% of your revenue You can’t get access to senior deciders Your first round of renewals goes horribly wrong
Myth’s on Product Market Fit Myth #1: Product market fit is always a discrete, big bang event Myth #2: It’s patently obvious when you have product market fit Myth #3: Once you achieve product market fit, you can’t lose it. Myth #4: Once you have product-market fit, you don’t have to sweat the competition.
Working with growing companies years ago I found that the first inhibiter to growth was that the founder/ owners had everything in their head. Replication requires that it be transferable to other individuals.
The diagram is designed to be a thought exercise in thinking through the processes inside the company and then documenting and releasing to others to use and then build on/ modify. I’ve found that focusing on the results/ metrics of the process helps allow for improvements to the process.
While having an overall system strategy is important, In order to scale sales and customer success becomes one of the critical processes. Fortunately Bessemer was nice enough to give us 30 key questions that we need to be able to answer to own growth.
Investors aren’t at all excited about linear growth companies and everyone want to see the exponential hockey stick growth. In reality very few B2B companies scale exponentially. Which is why it’s important to understand that during the growth process there are several levers that may need to be added to sustain growth. Alex Moore, CEO of Baydin, lays out the case that most true scaling companies that are investor darlings actually have a series of additive elements. That as they are applied create a Pseudo exponential growth curve that he calls Polynomial.
Why a $Billion? – It’s
Investable * Each investor has their own investment thesis, certain products, markets or business models that they prefer. Look for a good match to your product offering and market validation Typical Investor Interests: • $1B+ Market • Scalable Solution • Recurring Revenue • Past Successes • Full team • Traction
I. Key Terms & Metrics
for SaaS 1. Cash flow 2. MRR/ARR 3. CAC & LTV 4. ACV 5. Churn 6. Cohort analysis 7. LVR 8. TtV If you only read one article on SaaS metrics this would be the one: http://www.forentrepreneurs.com/saas-metrics-2/ For Developing a KPI dashboard for a SaaS company: http://christophjanz.blogspot.de/2013/04/a-kpi-dashboard-for-early-stage-saas.html
2. MRR & ARR •
The First $1M ARR Goal – 6 months • Simple Math: – $1M ARR = $83K MRR – $83K/ $1000/mo. ACV = 83 customers – 83/6 mo. = ~ 14 new customers per month (or one new customer every 2 days, simple!) http://sixteenventures.com/saas-secret-to-one-million-dollars MRR = Monthly Recurring Revenue ARR = Annual Run Rate (MRR x 12)
LTV > 3x CAC Months
to recover CAC < 12 Months 3. CAC & LTV: Viability Test Business model viability, in the majority of startups, will come down to balancing two variables: • CAC: Cost to Acquire Customers • LTV: Lifetime Value of a Customer or The ability to monetize those customers http://www.forentrepreneurs.com/startup-killer/
4. Matching CAC, LTV &
ACV • Product Pricing, Sales Strategy and Product are all interconnected. http://vcwithme.co/2015/03/30/optimizing-the-ltvcac-ratio/ http://pando.com/2013/06/15/what-the-data-reveals-about-how-to-make-SaaS-secret-sauce/ Average SaaS Companies Well marketed, easy to use and easy to implement ACV= Average Contract Value VS.
5. Churn = # MRR
this month / # MRR lost from last month http://www.slideshare.net/03133938319/saastr Big impact on value over time What’s good, what’s bad ‣ What you want ‣ Get to $1M ARR ~12 months after launch ‣ Net New MRR keeps increasing quarter over quarter ‣ Maintain a Churn Ratio > 4 ‣ What to watch out for ‣ A Churn Ratio < 2 – churn is too high /new sales aren’t working ‣ Net New MRR is flat or down quarter over quarter ‣ As a result takes 18+ months to get to $1M ARR
6. Cohort Analysis • With
a SaaS business there is a simple way to understand Customer Retention/ Churn through multiple product iterations. http://andrewchen.co/the-easiest-spreadsheet-for-churn-mrr-and-cohort-analysis-guest-post/
7. LVR - Lead Velocity
Rate • Qualified Lead Velocity Rate (LVR), your growth in qualified leads, measured month- over-month, every month. • Grow your LVR about 10-20% greater than your desired MRR growth — you’ll hit your revenue goals. • You’ll see the future of your business 12-18 months out, clear as can be. http://www.saastr.com/why-lead-velocity-rate-lvr-is-the-most-important-metric-in-saas/
8. TtV- Time to Value
• How fast can a customer derive value from your product? • Ways to Improve: – Simplicity wins… be feature-complete, not feature-rich – Hack the onboarding flow – Document, Document, Document – Quantify, Set goals and Benchmark http://www.rre.com/blog/89
5 ways to build a
$B business http://christophjanz.blogspot.com/2014/10/five-ways-to-build-100-million-business.html http://tomtunguz.com/2015-saas-multiples/ In SaaS to get a Billion Dollar valuation you need somewhere over $100M in Annual Revenue. You essentially need: ~ 1,000 enterprise customers at $100k+ /Yr or ~ 10,000 medium-sized at $10k+ /yr or ~ 100,000 small businesses at $1k/yr or ~ 1 million consumers at $100+ /yr each or ~ 10 million active consumers who you monetize at $10+ per year each by selling ads Examples: 2014 Rev Valuation* HUBS $115M $1.3B ZEN $127M $1.9B MKTO $149M $1.1B *Also dependent on growth rate and Cost of Revenue. Avg 5-10 x Rev multiples
T2D3 Cont’d • Phase 1:
Establish a great product-market fit • Phase 2: Get to $2 million in ARR (annual recurring revenue) • Phase 3: Triple to $6 million in ARR • Phase 4: Triple to $18 million • Phase 5: Double to $36 million in ARR • Phase 6: Double to $72 million • Phase 7: Double to $144 million http://techcrunch.com/2015/02/01/the-saas-travel-adventure/
Phase 0: Lean Startup Process
http://www.slideshare.net/KellySchwedland/lean-startup-basics-evidence-based-entrepreneurship Also: The 20 Interview rule http://www.saastr.com/planning-to-do-a-saas-start-up-dont-forget-the-20-interview-rule/ Note: If you are still starting out, then you need this presentation:
Phase 1: Product/Market/ (Team) Fit
• The Simple definition – When your problems shift to keeping up with demand rather than finding more customers. • The only thing that matters: Market • Warning signs you aren’t there: • Product Market Fit Myths http://pmarchive.com/guide_to_startups_part4.html http://vcwithme.co/2014/11/10/five-signs-your-product-market-fit-isnt-real/ http://www.feld.com/archives/2015/01/illusion-product-market-fit-saas-companies.html
Median GP Ratio by year
for Public SaaS companies How fast? • Rule of thumb – Growth Rate +Profit Margin should equal 40%... for a $50M business • Early on it should probably be higher. http://tomtunguz.com/rule-of-40
Accelerating Customer Acquisition and Retention
• Remove Buyer Roadblocks: – Increase Awareness – Facilitate Evaluation – Streamline Purchase – Simplify Onboarding • Improve Retention – Remind Customers of Value they are getting – Triggered up-selling and cross-selling that expanded usage of your service (and revenue) http://chaotic-flow.com/SaaS-marketing-accelerating-customer-acquisition/ http://sixteenventures.com/customer-retention-profitability
Improving Lead to Conversion Ratio
• Measure and optimize each conversion channel. http://blogs.salesforce.com/company/2014/11/b2b-sales-benchmark-research-finds-some-pipeline-surprises-infographic-gp.html B2B Sales Benchmark Research by Implisit using Salesforce data
Polynomial Growth By Alex Moor,
CEO of Baydin Overcoming the Growth Challenge http://www.slideshare.net/500startups/alex-moore-25097027 Polynomial Growth: The Additive Value of new Sales Channels
Median revenue per Employee by
year since founding Two development tracks one goal • Efficiency and Product Value always seem to be competing for internal talent. • But they are flip sides to the same productivity coin. http://tomtunguz.com/employee-productivity-patterns-saas/ Note: Best in class companies like Salesforce and FinancialEngines are able to achieve more than $300k in revenue per employee per year
Benchmarking • How Does your
SaaS business stack up? – Pacific Crest SaaS survey data (2014) http://www.forentrepreneurs.com/2014-saas-survey- 1/ – Sales Reps http://blog.bridgegroupinc.com/sales- development-metrics – Customer success http://blog.totango.com/2014/05/2014-customer- success-salary-survey-report-and-infographic/