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What makes a great SaaS company, r1.5

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Dave Kellogg presentation to a high-growth SaaS company's All Hands meeting / speaker series in February, 2019. Discusses the key elements of making a great SaaS company, but quantitative and qualitative.

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What makes a great SaaS company, r1.5

  1. 1. What Makes a Great SaaS Company? Dave Kellogg 2/28/2019, Revision 1.5 Presentation (and all Kellblog by Dave Kellogg materials) licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  2. 2. What is this Deck? • Revised version of a presentation I made a high-growth SaaS company all hands meeting as part of their regular guest speaker series • Since no one’s paying me (other than some very nice schwag), I made it pretty quickly, so it’s not “keynote caliber” in slide quality • Nevertheless I thought it’d be worth sharing and of interest • Certainly, it’s a great question  what DOES make a great SaaS company Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  3. 3. Agenda • Self introduction • A brief history lesson on the dark ages of on-premises software • What it takes to be a great SaaS company • Q&A Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  4. 4. Self-Introduction • CMO of two startups • Versant, Business Objects • CEO of two startups • MarkLogic, Host Analytics • Board of four startups • Aster Data, Granular, Nuxeo, Alation • Advised/invested in many more • MongoDB, Tableau, GainSight, FloQast, ClearedIn, TopOpps, Lecida • Blogger • Love learning and teaching about our amazing Silicon Valley system • Best way to learn a topic is to write an essay about it Fairly unique perspective - 10 years looking up at CE0 - 10 years being looked at as CEO - 10 years looking across at CEO Good markets and tough ones Fair weather and foul Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  5. 5. Author of Kellblog -- It’s More than SaaS Metrics! Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  6. 6. Single Most Popular Kellblog Post of All Time Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  7. 7. We Sold Host Analytics in December Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  8. 8. So I’m Out “Networking” From Mrs. Kellogg’s perspective • You have no job • Yet you have 4-8 meetings per day • (But won’t turn on Find My Friends so I don’t know where) • No one is paying you • And when you really like someone you give them money • You call yourself a businessperson? • (At least you’re not in the house all day.) Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  9. 9. What I Write About and Why, Examples • I Don’t Want to Talk To You Anymore • Sales is From Mars, Engineering from Venus • CAC Payback Period: The Most Misunderstood SaaS Metric • Interest Misalignments in Silicon Valley Startups • Answer the Question: The Key to Dealing with Senior Execs • Simplifiers go Far; Complexifiers Get Stuck • A lesson on listening to your gut • Seeing founders struggle with when to reason with people and when not to • After arguing with a junior PE guy about what payback periods measure • After leaving MarkLogic and looking back at it from different POVs • After watching too many people in interactions with senior executives • After watching too many, well intentioned complexifiers die on a hill Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  10. 10. On Complexifiers Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. “When you ask some people the time, they tell you how to build a watch. There are others who will tell you how to build a Swiss village.”
  11. 11. Agenda • Self introduction • A brief history lesson on the dark ages of on-premises software • What it takes to be a great SaaS company • Q&A Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  12. 12. Back in the Good Old Days (e.g., 1995) Sales/Customer Side • Orders immediately became revenue (perpetual license) • License/maintenance split was heavily front-loaded (85/15) • It took millions of dollars and busloads of consultants to deploy • Nobody actually cared if customers used the software or were even successful • The Salesperson of the Year sold a 30K employee company 40K seats! Finance/Wall Street Side • 90% of orders came in last week (or day) of the quarter • Gross margins were 99% (cost of the tape or download) • Shipment required to recognize revenue (“shipping bricks”) • Many white-knuckle quarters and many big misses  stock down 30-40%+ in a day • Lumpy, low predictability -- financial analysts didn’t really like software companies Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  13. 13. SaaS Movement Solved Two Problems For customers • Aligned vendor and customer interests • Made the vendor care about renewal  success  adoption  deployment • Potentially even  qualification (should we even sell these folks in the first place?) For Wall Street • Smoothed out all the lumpiness • Last-day orders have zero effect on revenue • Made software a predictable business • Fewer surprises Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  14. 14. This Smoothing Hid Certain Realities of Underlying Execution • For example, new business sales stayed lumpy and back-loaded • But it was impossible to see that looking just at revenue • Of course, companies hit revenue target, but that was kind of locked • How do I know if you hit your new business sales target? • I want New ARR but you’re not publishing that • Perversely generated new, ambiguous, proxy metrics like billings • Billings = revenue + change in deferred revenue. • Attempts to triangulate internal metrics that can fail – e.g., can’t tell renewals from new orders, payment terms can mislead Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  15. 15. VCs/PEs and Public Investors Ergo Use Different Metrics VC/PE Investors • ARR and growth • Upsell rate • CAC ratio / CAC payback period • Gross / net dollar retention • Free cash flow The real levers in the business Public Investors • Revenue and growth • Billings and growth • Implied ARR and growth • Implied CAC • Subscription gross margin • Free cash flow The best you can do from outside Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  16. 16. Agenda • Self introduction • A brief history lesson on the dark ages of on-premises software • What it takes to be a great SaaS company • Q&A Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  17. 17. What is a SaaS Company? A leaky bucket full of annual recurring revenue (ARR) Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  18. 18. What is a SaaS Company? A leaky bucket full of annual recurring revenue (ARR) Sales Customer Success Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  19. 19. This Begs Two Immediate Questions • What does it cost to put new ARR in? • Customer acquisition cost (CAC) ratio • Dollars of S&M / dollars of new ARR • Typical rate: $1.00 to $1.50 • How fast is it leaking out? • Forgetting, for a minute, expansion within customers • At what gross rate is water leaking out of your bucket? • Typical range: 10 to 15% See https://www.key.com/businesses- institutions/industry-expertise/library- saas-resources.jsp Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  20. 20. Gross vs. Net Dollar Retention • Gross dollar retention, typical 80-90% • Value of cohort today, excluding expansion / value of cohort a year ago • Net dollar retention, typical 100-120% • Value of cohort today / value of cohort a year ago  Look at both because “one train can hide another” • Beware survivor bias in calculations (sad, but true) Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  21. 21. Why Do SaaS Companies Burn Cash? • If you want $100M in ARR • And every $1.00 costs you $1.50 • And you leak out 10% every year • You’ll need $1.50 * $118M = $177M just for S&M (Includes zero money for building product, running product, G&A, etc.) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Starting ARR - 1,000 2,409 4,446 7,438 11,880 18,519 28,478 43,455 66,008 New ARR 1,000 1,509 2,277 3,437 5,186 7,827 11,811 17,824 26,899 40,593 118,363 Churn ARR - 100 241 445 744 1,188 1,852 2,848 4,346 6,601 18,363 Ending ARR 1,000 2,409 4,446 7,438 11,880 18,519 28,478 43,455 66,008 100,000 Churn rate 10% New ARR growth rate 51% Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  22. 22. The Genius of Tien Tzuo • Conceptually break a SaaS company in two • One part is about serving the customers (gross recurring margin) ARR - COGS (subscription and services) - R&D - G&A • One, totally separate part, is about acquiring new customers • CAC ratio See https://kellblog.com/2014/05/1 5/the-box-s-1-delayed-ipo-and- the-genius-of-tien-zuo/Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  23. 23. Why Does ARR Growth Matter? (Caution: old chart) Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  24. 24. Rule of 40 • Attempts to balance and growth and profitability • R40 score = revenue growth + FCF margin • R^2 = 0.42 • Have heard but don’t have data that growth alone results in higher R^2 Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  25. 25. Does Professional Services (PS) Revenue and Margin Matter? • Generally looked-through on valuation • Valuation = multiple * ARR • Provided not heavily losing money • Typically PS margins -10% to 10% • Generally accepted to subsidize subscriptions through foregone margin on professional services • Not to be confused with “do professional services matter” • Yes, but mission is to maximize ARR -- not maximize services margin Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  26. 26. What Makes a Great SaaS Company? Efficient Sales Model Customer Centric Culture Product Gets Job Done Vision That Leaves Competition Behind Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
  27. 27. Q&A Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

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