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The Best of Kellblog: 10 Non-Obvious Things about Scaling SaaS with HostAnalytics

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David Kellogg - CEO / Host Analytics at SaaStr Annual 2018

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The Best of Kellblog: 10 Non-Obvious Things about Scaling SaaS with HostAnalytics

  1. 1. 1 © 2018 Host Analytics, Inc., All Rights Reserved Ten Non-Obvious Things About Scaling a SaaS Company Dave Kellogg, CEO of Host Analytics @kellblog, www.kellblog.com, ceo@hostanalytics.com February 7, 2018 Revision 1.3
  2. 2. 2 © 2018 Host Analytics, Inc., All Rights Reserved Dave Kellogg Thirty-Second Self Introduction Day Jobs  CEO of Host Analytics  Cloud apps for planning, consolidations, reporting sold to corporate FP&A departments (EPM)  SVP/GM at Salesforce ($3B)  CEO of MarkLogic ($0M to $80M)  CMO of BusinessObjects ($30M to $1B)  Two prior startups ($5M to $240M) Boards and Spare Time  Alation, data catalogs  Nuxeo, content / digital asset mgmt  Granular, agtech SaaS ($300M exit)  Aster Data, NoSQL ($295M exit)
  3. 3. 3 © 2018 Host Analytics, Inc., All Rights Reserved Ten Non-Obvious Things?
  4. 4. 4 © 2018 Host Analytics, Inc., All Rights Reserved  How big is the deal we’re working on at XYZ Co?  What’s the forecast for this quarter?  How big is your company?  What number is on the first line of the first slide of your investor deck? No No’s  Answering in bookings, TCV, GAAP revenue  Failing a priorities test, connotations, interference with fundraising 1. You Must Run the Company Around ARR Everybody knows that, but do you?
  5. 5. 5 © 2018 Host Analytics, Inc., All Rights Reserved One-Slide SaaS Financials Dashboard This says you are ARR-first See: https://kellblog.com/2016/12/23/saas-startup-one-slide-financial-dashboard/ (More follows)
  6. 6. 6 © 2018 Host Analytics, Inc., All Rights Reserved CAC ratio = prior-S&M / incremental-ARR  Include or exclude upsell ARR?  Include or exclude cost of customer success?  Do on per-customer (CAC) or ARR-dollar (CAC ratio) basis? LTV/CAC = (1/churn-rate * sub-GM) / CAC-ratio  Which CAC? Churn before or after expansion? Negative churn? In try-and-buy environment if you spend 100 units to get customers worth 50 but who are reliably worth 150 in 2 quarters, is your CAC ratio 2.0 or 0.33?  What does acquisition cost really mean? 2. SaaS Metrics: Way More Subtle Than Meets the Eye See: https://kellblog.com/2014/07/30/the-ultimate-saas-metric-ltv-cac/
  7. 7. 7 © 2018 Host Analytics, Inc., All Rights Reserved  Is the renewals denominator for your CSM 100 or 115?  Inner fund-raiser wants 100, inner manager wants renewals target at 115  When do you take the 15 units of upsell?  Does the day-365 transaction count as 10 units of churn and 20 of upsell or 0 units of churn and 10 of upsell?  How can I not lose credit for the 15 units of upsell?  That’s why they made retention rates SaaS Metric Subtlety: A Churn Example Buys 90 units of A and 10 units of B Buys 15 units of A Drops 10 units of product B Buys 20 units of product A Day 1 Day 180 Day 365 See: https://kellblog.com/2016/12/27/a-fresh-look-at-how-to-measure-saas-churn-rates/
  8. 8. 8 © 2018 Host Analytics, Inc., All Rights Reserved Imagine if you spent your life talking to investors who can’t see the underlying metrics  New ARR bookings, CAC, churn, payment terms And who were forced to guess using outside-in metrics like billings  Revenue + change in deferred revenue And fed scraps like survivor-biased retention rates? If you’re raising one or two rounds before an eventual IPO, which CFO should you hire now?  Warning: boards love hiring the person you need 3 years from now  Which is great if and only if they can do (and are interested in doing) the job at hand 3. Former Public CFOs May Not Get VC SaaS Metrics
  9. 9. 9 © 2018 Host Analytics, Inc., All Rights Reserved Simple example  You have 10% churn rate and zero upsell opportunity If multi-year discount < churn rate, it’s a win/win transaction  Few companies actually break the discount in two, but it doesn’t prevent this logic from working But the deal needs to be prepaid  At a startup, a non-prepaid, multi-year deal looks a lot like a renewal processed by legal instead of customer success 4. Multi-Year Deals Make Sense in Certain Situations
  10. 10. 10 © 2018 Host Analytics, Inc., All Rights Reserved Bookings = things that turn to cash in 90 days  Everybody cares about cash  Bookings != total contract value (TCV), which is usually not prepaid 5. Bookings is Not a Four-Letter Word Sensibly defined, it’s an important idea
  11. 11. 11 © 2018 Host Analytics, Inc., All Rights Reserved Adoption predicts renewal?  Generally necessary but not sufficient When do happy customers not renew?  Corporate (e.g., acquisition) and/or new executive dictum  Replacing a system people feel “meh” about is easy, replacing one they love is hard  Business failure (e.g., in SMB) When do unhappy customers renew?  By accident: miss an autorenewal deadline in the contract  By distraction: miss their window to migrate 6. Renewals, CSAT Less Correlated Than Meets the Eye Beware using renewals as a proxy for customer satisfaction; measure NPS
  12. 12. 12 © 2018 Host Analytics, Inc., All Rights Reserved 7. You Can’t Analyze Churn by Analyzing Churn Example churn taxonomy $300$1000 $750Business Related Lost Accounts Seat s New Player/ Team $350 Traini/Sup t Shrinkin g Accounts Discontinued Usage Discount $150 Functionalit y $150 Financial / Out of Business $300 Product Related $250 Acquisition $50 Sponsorship $20 Didn’tNeed $36 $50 MYD 30 Corp Dictum $28 Produc t Relate d$100 CorpDictum $30 Functionali ty $33 Overkill $100 $60 40 Other 20 Affordability
  13. 13. 13 © 2018 Host Analytics, Inc., All Rights Reserved Beautiful charts just classify churn by type But analyzing churners just shows what people who churned had in common  Selection (survivorship) bias When you want to analyze what separates people who churn from people who don’t  Control group You need to do some heavy stats on a range of input and a few output variables  Success, deliberate renewal, lasted N years You Can’t Analyze Churn by Analyzing Churn, II Selection bias, lack of control group The damaged portions of returning planes show locations where they can take a hit and still return home safely.
  14. 14. 14 © 2018 Host Analytics, Inc., All Rights Reserved Why hunter/farmer?  Focus QCRs on new business; pay lower rates on renewals and upsell Boards hate  Paying sales commission rates on renewals … and they’re right  Double compensation … and sometimes that’s myopic Let intelligence, not dogma, drive your model as function of situation and tier  Land and fries/burger expand: hunters and farmers  Land and salesy expand: farmers with shotguns (“account managers”)  Land and hard/competitive expand: farmers track for hunters  Small land and big expand: hunters in a zoo  Avoid: dead farmers (putting your farmer against competition’s hunter) 8. Finding Your Own Hunter/Farmer Model is Hard
  15. 15. 15 © 2018 Host Analytics, Inc., All Rights Reserved Only 20% of SaaS firms lose money on prof services  Subsidize new and renewal ARR  Lower than I’d have guessed; trend is upwards Most investors won’t care if your services aren’t that big (<15% of revenue) and roughly breakeven. High services prices / expert consulting set a benchmark for partner ecosystem Heavy services losses have two consequences  Reduce blended gross margins  Some investors may add services losses back to CAC 9. You Don’t Have to Lose Money on Prof Services Source: KeyBank/PacCrest 2017 annual SaaS study. $2.5M+ in revenue
  16. 16. 16 © 2018 Host Analytics, Inc., All Rights Reserved 10. You Need Not Sacrifice Long-Term Team Members on the Altar of Experienced Talent They’re Right  To assume you need to systematically replace executives over time as the company grows  Not everyone can or wants to grow through the zones on the rule of 1s and 3s  1-3, 3-10, 10-30, 30-100, … They’re Wrong  To underestimate the value in retaining institutional knowledge  To assume that everyone has a ego such that won’t take reassignment  If they don’t support creative solutions on title, office, and compensation (No matter what your board says) Create a culture of creativity and change, not of stasis Frequent reorganizations Mix veterans and up-and-comers Deliberate rotation through roles
  17. 17. 17 © 2018 Host Analytics, Inc., All Rights Reserved Make everyone understand that they will have more fun and make more money if they worry about being on the right bus more than they worry about the perfect seat. See: https://en.wikipedia.org/wiki/Further_(bus)
  18. 18. 18 © 2018 Host Analytics, Inc., All Rights Reserved Thank You Subscribe Kellblog.comFollow @kellblog

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