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The 10 Laws of Building a Successful SaaS Company Byron Deeter Partner Bessemer Venture Partners Philippe Botteri Senior Associate Bessemer Venture Partners Mark Trang Director, ISV Marketing salesforce.com

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Software-as-a-Service (SaaS) is the Next Major Growth Driver of the Software Industry 2008 1960 2000 Market Size $250+ billion The Mainframe Era The Client-Server Era <ul><li>Mainframe servers and green screens </li></ul><ul><li>IBM domination </li></ul><ul><li>PCs dominated by Microsoft-Intel </li></ul><ul><li>Enterprise software </li></ul><ul><li>Emergence of Open Source </li></ul><ul><li>Thin client (browser) </li></ul><ul><li>Computing power in the cloud </li></ul>The cloud computing Era: Software-as-a-Service

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Bessemer Venture Partners Snapshot <ul><li>Founded 1911 </li></ul><ul><li>The longest standing track record in the Venture Capital Industry with 150+ M&A and IPOs </li></ul><ul><li>Strong Global Platform with over $2 billion under management and eight offices worldwide </li></ul><ul><li>One of the most successful software and SaaS investors in history </li></ul><ul><li>Close partnership with Salesforce.com for SaaS investing </li></ul>

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Who We Are <ul><li>Byron Deeter </li></ul><ul><li>Seven years in venture capital, with a focus on Software, SaaS, and Internet investing </li></ul><ul><li>Current Board member of several SaaS companies, including: Eloqua, Intacct, Cornerstone OnDemand, & Retail Solutions </li></ul><ul><li>Founding CEO of Trigo Technologies, an early Bessemer-backed SaaS business acquired by IBM in 2004 </li></ul><ul><li>Strategy consulting at McKinsey & Co. </li></ul><ul><li>Degree with honors from UC Berkeley </li></ul><ul><li>Philippe Botteri </li></ul><ul><li>Joined Bessemer in 2006 to focus on Software and Internet investing </li></ul><ul><li>Actively involved in Bessemer investments in Eloqua, Cornerstone OnDemand, Intego, Wize and Intacct </li></ul><ul><li>Close to 10 years with McKinsey & Company (France, US) in the Tech and Software practice – pioneered McKinsey effort on SaaS </li></ul><ul><li>Masters from Ecole Polytechnique (Physics) and Ecole des Mines (Engineering) </li></ul><ul><li>Venture and SaaS Blog: www.cracking-the-code.blogspot.com </li></ul>

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Why did we create (and update) the 10 Laws? The emergence of Software-as-a-Service is the most important trend in the software industry of the decade, and that these tectonic shifts in the global software ecosystem are just beginning. Periods of tremendous transformation create tremendous opportunity, but the next giants of the software industry will need to abandon many of the long-held tenets of software best practices and adhere to a new set of principles .

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Bessemer’s Top 10 Laws for Being “SaaS-y”

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Bessemer SaaS Law #1 <ul><li>Your key monthly business metrics are: CMRR (Committed Monthly Recurring Revenue), Churn, and Cash flow - “Bookings” is for suckers </li></ul>From bookings and opacity… EXPENSES BOOKINGS <ul><li>Difficult to make decisions: </li></ul><ul><li>Multi-year bookings </li></ul><ul><li>Non-recurring revenues </li></ul><ul><li>Impact of churn and renewal? </li></ul>… to CMRR and transparency! <ul><li>Full transparency : </li></ul><ul><li>Employee assessment </li></ul><ul><li>Operational planning </li></ul><ul><li>Financing </li></ul><ul><li>Valuation </li></ul>CMRR New Accounts Upsell & Expansion less churn Existing Contracts Renewals EXPENSES Cash burn rate

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Bessemer SaaS Law # 2 <ul><li>Customer Acquisition Cost (CAC) and Customer LifeTime Value (CLTV) are the best indicators of long term value creation </li></ul>CAC ratio: defining your S&M spend CLTV: defining your profitability <ul><li>CAC < 1/3 (3 years payback or more): Bad! Slam on the breaks and refine your sales model </li></ul><ul><li>CAC >1 (payback in less than 1 year): Great! Invest more money immediately and step on the gas…and please call Bessemer immediately </li></ul>CLTV > 0 = Profit! Example : 1 customer generating $1 of ARR

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Bessemer SaaS Law # 3 <ul><li>Tune before you scale: the Sales Learning Curve is even more critical for SaaS and it takes at least $300k MRR to climb it. Stop at three sales reps until at least two of them are making $100K MRR quotas </li></ul>Target quota 2X fully loaded cost of a Sales Rep. ($100k MRR quota) Fully loaded cost of a Sales Rep. Sales Rep. performance SaaS company MRR run rate <$300k Staff to learn Staff to scale

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Bessemer SaaS Law # 4 <ul><li>Separate your “hunters” and “farmers” and pay them all on CMRR growth </li></ul>CMRR Growth New Sales Upsells & Renewals Hunters! Farmers! <ul><ul><li>Paid on New CMRR - rule of thumb: $1 of CMRR = $1 of bonus </li></ul></ul><ul><ul><li>Min threshold at 50% of target and 2x acceleration above target </li></ul></ul><ul><ul><li>Incentives for more favorable cash flows (e.g., multi-year pre-payment) </li></ul></ul><ul><ul><li>Typically $100k CMRR quota per year </li></ul></ul><ul><ul><li>Paid on Net incremental MRR for customer portfolio (Upsells – Churn) </li></ul></ul><ul><ul><li>Lower bonus level for renewal: </li></ul></ul><ul><ul><ul><li>Upsell: $1 CMRR = $1 bonus </li></ul></ul></ul><ul><ul><ul><li>Renewal: $1 CMRR = $0.3 bonus </li></ul></ul></ul>

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Bessemer SaaS Law # 5 <ul><li>SaaS is a whole new ecosystem where traditional IT channels don’t work – Focus your business development efforts on business services channels, but you will need to sell directly for a long time as these new set of partners are not easy to ramp-up </li></ul>From IT Channels… … to Business Channels <ul><ul><li>Limited system integration requirements </li></ul></ul><ul><ul><li>No hardware pull through </li></ul></ul><ul><ul><li>Different revenue model </li></ul></ul><ul><ul><li>Provider of technology enabled, managed or professional services </li></ul></ul><ul><ul><li>Same customer segment focus </li></ul></ul><ul><ul><li>Understand value of recurring revenue streams </li></ul></ul>

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Bessemer SaaS Law # 6 <ul><li>By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful SaaS business </li></ul>Profile, Track and Segment Analyze, Adapt, Act! Automate PR Drive to Web CRM/SFA

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Bessemer SaaS Law # 7 <ul><li>Stay local - Prove your business in North America first. Only after reaching $1M in CMRR should you consider hiring European sales and services execs behind customer demand. Save Asia for post-IPO. </li></ul>SaaS companies don’t need significant international sales to go public Key challenges of International expansion <ul><li>Technical: latency, data access and security </li></ul><ul><li>Legal: Privacy issues in Europe (need local data center) </li></ul><ul><li>Customer maturity: SaaS adoption is 3-year behind in Europe and Asia is slightly behind Europe </li></ul><ul><li>Focus: distract management from core US market </li></ul><15% 13% <5% International revenues at IPO Percent

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Bessemer SaaS Law # 8 <ul><li>Single instance, multi-tenant, single datacenter - Have only one version of the code in production. Really. “Just say no” to on-premise deployments </li></ul><ul><li>Incremental support cost </li></ul><ul><li>Different operational model </li></ul><ul><li>Less attractive for a potential acquirer </li></ul>No Hybrid model! Keep one data center <ul><li>Cost effective/low overhead </li></ul><ul><li>Latency no more an issue </li></ul><ul><li>No need to go abroad initially </li></ul><ul><li>Rule of thumb: Need more than $2M+++ MRR for 2 nd datacenter </li></ul>

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Bessemer SaaS Law # 9 <ul><li>The most important part of Software-as-a-Service isn’t “Software” it’s “Service”! </li></ul>Monitor Service = Customer data = key asset! Gather feedback Benchmark <ul><li>Track key usage metric </li></ul><ul><li>Prevent churn </li></ul><ul><li>Track upsell opportunities </li></ul><ul><li>Track user flow and functionality used </li></ul><ul><li>Input into product roadmap </li></ul><ul><li>Enhance your offering with industry benchmark </li></ul><ul><li>Codify and share best practices </li></ul>

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Bessemer SaaS Law # 10 <ul><li>Be prepared to cross the desert - SaaS requires R&D and sales expense up front for a multi-year stream of revenue, so it demands enough investment capital to fund 4+ years of runway. Load up for the long trip and pace your consumption of calories! </li></ul>Capital raised pre-IPO for selected public SaaS companies USD, million <ul><li>SaaS companies have historically raised an average of $30-65m before going public </li></ul><ul><li>Capital requirements are expected to decline thanks to: </li></ul><ul><ul><li>Lower CAC (SaaS becoming mainstream, new channels…) </li></ul></ul><ul><ul><li>Lower IT costs (PaaS, LAMP stack…) </li></ul></ul><ul><li>It takes time to get the flying wheel spinning, so don’t be too optimistic in your planning! </li></ul>

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Bonus Law <ul><li>You can ignore one or two of these rules, but not more…Great companies innovate, but pick your battles! </li></ul>

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Bessemer’s Top 10 Laws for Being “SaaS-y” <ul><li>Your key monthly business metrics are: CMRR (Committed Monthly Recurring Revenue), Churn, and Cash flow - “Bookings” is for suckers </li></ul><ul><li>Customer Acquisition Cost (CAC) and Customer LifeTime Value (CLTV) are the best indicators of long term value creation </li></ul><ul><li>Tune before you scale : the Sales Learning Curve is even more critical for SaaS and it takes at least $300k MRR to climb it. Stop at three sales reps until at least two of them are making $100K MRR quotas </li></ul><ul><li>Separate your “hunters” and “farmers” and pay them all on CMRR growth </li></ul><ul><li>SaaS is a whole new ecosystem where traditional IT channels don’t work – Focus your business development efforts on business services channels , but you will need to sell directly for a long time as these new set of partners are not easy to ramp-up </li></ul><ul><li>By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful SaaS business </li></ul><ul><li>Stay local - Prove your business in North America first. Only after reaching $1M in CMRR should you consider hiring European sales and services execs behind customer demand. Save Asia for post-IPO </li></ul><ul><li>Single instance, multi-tenant, single datacenter - Have only one version of the code in production. Really. “Just say no” to on-premise deployments </li></ul><ul><li>The most important part of Software-as-a-Service isn’t “Software” it’s “Service”! </li></ul><ul><li>Be prepared to cross the desert - SaaS requires R&D and sales expense up front for a multi-year stream of revenue, so it demands enough investment capital to fund 4+ years of runway. Load up for the long trip and pace your consumption of calories! </li></ul><ul><li>BONUS LAW : You can ignore one of these, but not more than two. Great companies innovate, but pick your battles! </li></ul>

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Thank You! More Info: www.bvp.com/saas Contacts: Byron Deeter Philippe Botteri [email_address] [email_address] Come meet us at Nov 2-5, 2008 www.dreamforce.com