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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
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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)
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3 © 2018 Host Analytics, Inc., All Rights Reserved
Ten Non-Obvious Things?
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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?
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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)
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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/
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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/
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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)
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Thank You
Subscribe Kellblog.comFollow @kellblog
The leaky bucket
Not even sure how to count churn. Then we’re going to put it into a rate where were not sure what to divide it by and then we’re going to invest $50M based on that.
Building blocks – learn this stuff from the bottom up.
Retention rates, cohort-based – correct/forward vs. survivor-biased/backward
Story of changed payment terms (bi-annual) in a down economy – billings drops, looks like renewals crash. Reality is different.
Renewals processed by legal are worst case – you probably won’t sue your customers and they’re not getting the love/tracking from customer success
Adoption/renewal – parallel systems, 100% adoption up until they turn it off.
On accidental renewals, tough question – obviously prefer to see as second chance to save. In the end, the world is small and for apps at least you may well see the person again
Begs tough question: do you “be nice” and offer sub-1-year renewal?
During World War II, the statistician Abraham Wald took survivorship bias into his calculations when considering how to minimize bomber losses to enemy fire. Researchers from the Center for Naval Analyses had conducted a study of the damage done to aircraft that had returned from missions, and had recommended that armor be added to the areas that showed the most damage. Wald noted that the study only considered the aircraft that had survived their missions—the bombers that had been shot down were not present for the damage assessment. The holes in the returning aircraft, then, represented areas where a bomber could take damage and still return home safely. Wald proposed that the Navy instead reinforce the areas where the returning aircraft were unscathed, since those were the areas that, if hit, would cause the plane to be lost.[9][10][not in citation given] His work is considered seminal in the then-fledgling discipline of operational research.
Key is what is the CSM role and how do you hire for it? Increasing people are hiring account managers (farmers with shotguns) … not “your best friend” CSM. then CSM role becomes more escalation manager.