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.

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. 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. 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. 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. 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. 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. We Sold Host Analytics in December
Kellblog by Dave Kellogg is licensed under a Creative Commons
Attribution-NonCommercial 4.0 International License.

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Q&A
Kellblog by Dave Kellogg is licensed under a Creative Commons
Attribution-NonCommercial 4.0 International License.