Category: saas

Posts

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10 June / product / saas / startups
You’ve found product market fit. You’ve hired a team, including some managers. Your initial, small customer base is very happy. You’ve discovered an initial channel of customer acquisition that’s working. You’ve raised a meaningful round of capital. And then, right then, product innovation decelerates to zero. The fast pace that characterized the past 12-18 months, when you would germinate an idea and write the code in less than a few days, has evaporated.
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30 May / sales / strategy / SaaS / management
Imagine a hypothetical startup with 10 account executives that is growing quickly. This startup has two AEs that outperform meaningfully, six that are at typical quota attainment, and two that are underperforming. Where should your sales enablement team focus their time? This is the team’s performance last year. They generated 8.6M in bookings on 10M in quota capacity (which is really good). Most teams aim for 70-75% attainment. If the sales enablement teams had focus on the top quartile AEs and improve their performance by 20%, the company would have booked $9.
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10 May / data analysis / sales / saas
A public market investors asked me if there are any patterns in the list of recent software IPOs with the best sales efficiencies. As I looked through the list, I noticed one. All of these businesses sell bottom up with small initial ACVs that grow dramatically. Atlassian, Zoom, Twilio, Slack, New Relic, Elastic. All of them target small groups of users within larger organization who introduce the vendor. Over time, usage grows, accounts expand.
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As I looked through the list of public SaaS companies this morning, I read their forward multiples. ZScaler: 23.1x; Okta: 21.8x; Veeva: 18.8x; Coupa: 18.6x; Shopify: 17.0x. Those multiples are calculated by dividing the enterprise value today by its projected future revenue of the company. But what do they mean? What do they imply? First, we need to set some context. There are two kinds of companies: those valued on growth and those valued on profits.
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14 April / trends / saas / sales
Since writing The AI Agency: A Novel GTM for Machine Learning Startups, I’ve been meeting many companies who operate this way. These startups use machine learning to disrupt an industry traditionally dominated by agencies: law, accounting, recruiting, translation, debt collection, marketing…the list is long. I will publish a landscape soon on the area. If you’re operating an AI Agency, I’d love to hear from you. In meeting many of these innovative businesses, I’ve observed they face four strategic questions.
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In a world where there are no secrets, where innovations are quickly imitated or become obsolete, the theory of competitive advantage may have had its day. Realistically, ask yourself, If all your competitors gave their strategic plans to each other, would it really make a difference? In 1986, Amar Bhide wrote “Hustle as Strategy” for the Harvard Business Review. At the time, he was an assistant professor at HBS.
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In 2014, I published a post called Do Startup Require Less Capital to Succeed than 10 Years Ago? It’s been five years and time to see how things have changed. In the analysis, I created a metric, the return on invested capital (ROIC). ROIC is the number of revenue dollars that one venture dollar bought. In other words, at IPO, how much revenue per VC dollar did the company generate. In 2014 we saw increasing efficiencies over time, which was very exciting because it reaffirmed the efficiency of SaaS go-to-market.
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26 March / saas / strategy
In early and developing markets, selling complete products is often a superior go to market strategy, rather than selling an innovation in a layer in the stack. This is true for five reasons. First, for early customers to generate value from a novel technology, that technology must solve a business problem completely. End-to-end products do that. Layers in the stack don’t. They optimize existing systems. In early markets, customers want to buy a car, not a better camshaft.
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06 February / data analysis / sales / marketing / saas
Top 10 Learning about Free Trials from Tomasz Tunguz At Saastr yesterday, I presented thetop 10 learnings from the Redpoint Free Trial Survey that we distributed in October. The data confirmed many rules of thumb but also raised some interesting new questions about the best way to use trials. When we distributed the survey, we never would have expected the response. About 600 companies submitted data. They span single digit ARR businesses to publicly traded SaaS companies.
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04 February / marketing / sales / saas
As you start to go to market, there are two things to prioritize from early customers that matter more than cash. Feedback and marketing rights. The feedback matters for obvious reasons. The product is early; customer feedback will help you hew the raw granite of your initial product into shape. The second may not be so obvious. Every prospect championing a software purchase will be asked by the opponents of the sale and decision-makers: “Who else is using the software?
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How much can a customer success manager manage? I’d heard the wisdom of $1-2M in ARR per year and around 80 accounts. But I hadn’t come across any data. Last summer, Gainsight posted the results of their survey on the topic. The truth is most CSMs manage between $2-5M in ARR and somewhere between 10-500 accounts. But it varies by segment. The charts above display Gainsight’s data. I’ve reformatted them to compare segments side-by-side.
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17 January / trends / saas
In 2015, I wrote about the trade-off facing vertical SaaS companies. Vertical SaaS companies focus their efforts on a particular group of customers. Procore targets construction with their software and Veeva targets pharmaceuticals with their CRM. This concentration limits the market size, but improves product market fit. Both of those businesses are now worth more than $3B. There is a new twist in SaaS with a parallel dynamic. I’ve started to call them AI Agencies.
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04 January / benchmarks / saas / fundraising
How far along was the typical SaaS Series A in 2018? The median business was at $1.8M in ARR and growing at 250%. The chart below shows a representative sample of SaaS Series As’ ARR and projected ARR growth rate for 2018. Breaking this down a bit more into quartiles, the ARR quartiles were: 25th 50th 75th 1.4 1.8 3.0 And the ARR growth rate quartiles were:
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26 December / exits / trends / data analysis / saas
Reading the news in the past week made me wonder. Just where are we pricing SaaS companies today? The Nasdaq and the S&P have toyed with a bear market. Many stocks are down 10 to 50%. Absolute valuations are one consideration, but let’s understand it at a deeper level. Have multiples compressed? The answer is yes, they have, but enterprise value to forward revenue multiples are still at some of the highest levels for SaaS companies in the past eight years.
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11 December / sales / strategy / saas
If you have one marketing dollar to spend on your startup’s growth, should you spend it on acquiring a new customer or on expanding an existing customer? Mining the existing customer base for customer expansion seems very logical. Customers know your product and your sales team, so increasing the account value should be easier. Plus, the strategy is successful in practice. The PacCrest survey suggests upsell drives somewhere between 8-26% of new bookings for SaaS companies, depending on the scale of the business.
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03 December / strategy / product / saas
Customers will pay you to build your SaaS product. It’s one of the great advantages of a SaaS model. Annual prepay contracts - wherein customers pay for a year’s cost on day - is a free loan from customers. And every startup can benefit from this advance. There’s only one requirement: you must be able to sell your product while you’re building it. Step 1 is reaching product market fit, the point at which some group of potential customers will pay.
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25 November / sales / saas
Your startup is just getting off the ground. You might have a few account executives and a sales leader in place; maybe some revenue and a handful of customers. The sales team costs real money, and the question before the company is: how do you know what quota plan to assign to the account executives? I’ve seen four stages in early stage software companies. Some businesses employ all four, others just use one or two.
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11 November / exits / saas / trends
Another week, another blockbuster software acquisition! This time SAP has agreed to purchase Qualtrics for $8B. Qualtrics is a Utah based provider of experience management software. Qualtrics writes and sells software to ask questions of employees and customers to help businesses improve customer experience, employee satisfaction products, and brand. Qualtrics had intended to go public this week. The company generated $342M in the last twelve months and had grown 27% annually.
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01 October / strategy / saas / sales
In early markets, customers prefer entire solutions, not best in class point products. These solutions often include significant professional services and education. At the beginning of a new wave, most customers don’t understand the technology well. So, they seek experts to guide them. Companies that provide services and education often win the early market. They develop customer relationships, reinforce their expertise with a strong brand, define the purchasing criteria in their favor and ultimately grow faster.
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24 September / exits / trends / saas
About two years ago, Marketo was publicly traded and valued at roughly $1.1B. Vista Equity paid $1.8B to take the company private, a 64% premium. At the time it was taken private by Vista, Marketo generated $241M in trailing revenue, growing at 35% annually. Its net income margin was -31%. Last week, Adobe announced they acquired Marketo for $4.75B. By the time of the sale, revenues had grown to $321M, growing at about 21% annually and profitable.
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16 September / data analysis / benchmarks / saas
A founder asked me recently if there were any trends in professional services across public SaaS companies. I had examined the gross margins and share of revenue from professional services about 3 years ago. Professional services are consulting fees software companies charge to customers for software configuration, customization and education. What has changed over the past 3 years? First, we have more comprehensive data set, since many more companies have gone public.
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26 August / trends / saas
Salesforce is worth $113 billion. 1% of $113 billion is $1.13 billion. ServiceNow is worth $34B and Workday is worth $33B. 3% of $33-34B is $1B. Atlassian is worth $20.5B. 5% of $20.5B is $1B. Why am I doing all this simple math you might ask? We have reached a point in SaaS where a small fraction of an incumbent is a billion-dollar company. If you start a business tomorrow that is able to cleave 1% of revenue from Salesforce, you will have built a billion-dollar business.
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Your sales team is starting to close some terrific accounts. As your startup grows, your sales team will experiment with different sales techniques. For example, qualification, pricing, positioning, incentives and contract structure. This is a wonderful phase for a startup. However, there’s a common mistake to avoid. Your VP of Finance should model the impact and approve each experiment. Many startups don’t do this at the early stages of go to market.
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10 July / saas / management / pricing / books
Over the weekend, I read Tien Tzuo’s book, Subscribed. Tien is the founder and CEO of Zuora, and former CSO/CMO at Salesforce, where he started in 1999. He has been working in SaaS for nearly 20 years. He’s a thought leader in the world of subscriptions, and I learned a tremendous amount from his book. There were three key themes that resonated with me. First, the shift to a subscription business model reinforces customer centricity.
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08 July / saas / exits / startups / data analysis
There’s a theory to the idea that winner takes most in Startupland. The startup that grows a bit faster at the beginning demonstrates more momentum. The startup raises capital sooner, hires people, builds the product, markets and sells the product, grows more, and raises capital. Repeat the process for each round of capital. Is it borne out in reality? This theory suggests that irrespective of the category, the winner should capture most of the market value.
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The Ideal Customer Profile. The perfect customer. Can you describe it for your startup? The more precisely you can describe it, the better. That will simplify disqualification. But articulating the ICP well isn’t enough. Vague ICPs are problematic. The company will focus on too broad a customer base, waste time and effort with unqualified prospects, and blunt their sales pitch with irrelevant value propositions. Clear ICPs can also be problematic.
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20 March / exits / saas
Yesterday, Salesforce announced it will acquire Mulesoft for $6.5B. A recent addition to the list of public software companies, Mulesoft is a tremendous business. The company generated $297M of revenue in 2017 at a 73% gross margin, and grew by 58%. Salesforce is acquiring the business for an astounding 21x enterprise value to trailing twelve months revenue multiple - nearly 2x the next closest. Transaction Price ($M) TTM Rev ($M) Growth Rate Gross Margin Year of Acquisition Enterprise Value EV/TTM Rev Salesforce/Mulesoft 6,500 297 58% 73% 2018 6,296 21.
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02 March / marketing / saas / startups
Recently, I met an exceptional marketer. She described the purpose, strategy and tactics of a marketing department remarkably succinctly. Marketing’s methods can seem intangible. But she explained them simply and elegantly. I drew the chart above based on her vision of marketing’s roadmap. At the highest level, marketing articulates a compelling narrative. This is step 1.The narrative brings the market forward by contrasting the current state of affairs with a persuasive view of the future.
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27 February / exits / trends / saas
At Saastr, Jason and I discussed the role of private equity in SaaS on stage as a potential acquisition path for SaaS startups. Private equity hasn’t been a common exit route for venture backed startups in the past. But that’s changing. The chart above depicts the total disclosed value of US venture-backed SaaS startups which have been acquired by PE firms since 2010. The aggregate value has grown from zero to about $13B over that time period.
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31 January / management / sales / saas
Recently, I wrote about customer/revenue operations, an idea that seems to be taking hold at many different SaaS companies. Instead of optimizing the performance of each individual step of the customer lifecycle, customer operations optimizes it over the entire journey. This is a fundamental change in the way a business manages its customers, and it’s now starting to be reflected in the organizational structure of SaaS startups Two advances in thinking have led to the idea of customer operations.
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26 January / saas
In SaaS, machine learning has become an essential component to many different products. Whether it’s automating responses to inbound sales queries, identifying expense reports for audit, or surfacing anomalies in data, machine learning improves workflow software. To date, most software imbued with machine learning reduces costs rather than increase revenues. Why is this the case? Because machine learning is focused on efficiency gains. First, to train a machine learning model requires large amounts of data.
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01 January / strategy / startups / saas / books
There’s a crisis in the scientific academic world. It’s called the Replication Crisis. Scientists have found that they cannot replicate the results published by many scientific studies. The same thing is happening in the world of business. Over the last 15 years I’ve read several hundred business books, and I’ve written one. Across those 15 years, one of the most interesting is a book called The Management Myth, which traces the history of management science back to its less than solid origins.
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01 November / sales / marketing / financials / saas
One of the major trends facing SaaS companies today is the rising cost of customer acquisition. Data on this trend has been difficult to find. Fortunately, Patrick at ProfitWell sent me his survey results across about 800 companies. The chart above shows the increasing cost of customer acquisition on a per company basis. Those surveyed have observed a ~65% increase in cost of customer acquisition over the last five years.
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22 October / trends / fundraising / saas
Last week, I participated in two discussions about the changes in the SaaS world. I believe they are fundamental. The most important force shaping the industry today is competition. The level of competition in many core SaaS segments is intense. Why? The SaaS era is about 20 years old. Salesforce was founded in 1999. Since then, many major categories of software have been saasified. Venture capitalists have financed many of those businesses.
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17 September / sales / financials / saas
How much should a SaaS startup invest in sales and marketing at different stages of the business? This is a very nuanced question, but benchmarks do provide some guidance for what is reasonable. Sales and marketing investment depends on many different factors including establishing product market fit, the business’s sales model (inside, field, freemium), and not least, cash balance and fundraising capacity. The chart above shows the sales and marketing investment of publicly traded software companies at different revenue levels.
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06 September / sales / strategy / saas
One of the most difficult go-to-market strategies for startups is platform. Platform go to markets mean selling software that can do many things, depending on the customer need. Selling a platform is challenging for five reasons. First, most customers buy software to solve a particular and immediate problem. When pitching a platform, the potential buyer has to imagine what the platform can do for them. On the other hand, point solutions present a more concrete alternative of what is, rather than what could be.
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04 September / sales / financials / saas
Every startup’s sales commission plan is different. But it’s key to understand the theory and the benchmark data that governs the creation of sales commission plans to create a good one for your business. Before we begin, let’s define a few terms. Sales compensation is communicated in OTE, On Target Earnings. OTE has two parts: salary/draw and commission. Salary is the annual amount paid to the employee irrespective of how much business he/she closes.
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27 August / trends / saas / best practices
I commuted to my first job on a bicycle. With my parent’s help, I bought a lemon yellow second-hand road bike that I pedaled 20 miles each way from 30th and N streets in Georgetown, Washington DC, over bustling Chain Bridge and the languid Potomac to an office park buried in Tyson’s Corner in Virginia. That was my workout each week. Then I moved to California and retired the bike.
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23 August / saas / strategy / trends
A founder asked me if we had reached the point that SaaS is commodified. “Can you build a venture scale SaaS company anymore?” He made three key points to support the argument. First, the technology barriers to starting a SaaS company continue to fall. Amazon, Google and Microsoft provide sophisticated, scalable, and easy to use infrastructure as a service. Next-generation machine learning tools are also available by API and improving all the time.
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21 August / fundraising / saas
We’ve seen quite a bit of volatility in the valuations of publicly traded software companies over the last 5 years. In 2014, the average software company traded at 7.7x forward revenues - the sum of projected revenues over the next 12 months. Two years later, that multiple dropped 57% to 3.3x. Today, we’re exactly where we were in 2013, at 5.4x, which is coincidentally, is the average over this time period.
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15 August / financials / sales / saas / startups
The cash conversion cycle is a key metric for startups, but one that often isn’t talked about until a business hires a CFO. Once a business established product market fit, the cash conversion cycle is a key metric of a company’s cash efficiency - how quickly a company can convert a dollar of investment into a dollar of cash flow. To calculate the cash conversion cycle for a software company, the formula is
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08 August / sales / marketing / saas / strategy
At some point in the life of most SaaS companies, the business will be faced with the question, when should we move up market? The strategic question might be catalyzed by increasing cost of customer acquisition in the core SMB segment. Alternatively, a surge of large customers paying for the product might trigger the question. Or account executives might raise it. Whatever the reason, this is a key strategic question.
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24 April / saas / exits / marketing / sales
There are approximately 22 million trucks in the US. Many of these trucks run software to track the location of the vehicle, manage inventory, and comply with regulation. There are two SaaS companies operating at greater than $100M in ARR in the space and they illustrate one of the mantras on this blog: there are many different ways to build a SaaS company. After last week’s post, Is There a No Man’s Land in SaaS ACVs, a founder asked me to highlight some of the go to market strategies in different segments.
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21 April / saas / sales / pricing
A founder asked me recently if a dead zone in ACVs (average contract value) exist around the $10k price point. Yesterday, I listened to a podcast in which an executive asserted that infrastructure software priced lower than $250k in ACV threatens the viability of the company. What does the data show? I’ve plotted the distribution of ACV at IPO for all public software companies. There are no yawning gaps but a smooth progression from $87 to $780,000.
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17 April / saas / marketing / sales
After a startup establishes product market fit, scaling demand generation becomes the the next major challenge. Doubling or tripling ARR each year for several consecutive years is not easy. The best marketers create a demand generation portfolio. There are four axes to measure this portfolio: scale of investment, sophistication, breadth and potential. At the outset, a startup may rely on a single channel of customer acquisition. But over time, in order to achieve larger and larger bookings, the company must diversify.
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13 April / strategy / sales / marketing / saas
A friend recently asked, “Which path is better for SaaS startups? SMB to mid-market to enterprise or straight to enterprise?” It’s a key strategic question for many founders building software companies. Startups that initially target small to medium businesses benefit from several key advantages. First, these businesses are faster to revenue. Simpler products satisfy SMBs, so startups can begin to charge smaller customers much sooner than enterprise customers in a product development lifecycle.
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Over the last year in particular, Revenue Ops is a term that’s gaining some mindshare in the SaaS world. Revenue operations teams combine marketing operations and sales operations into one team. Yesterday, I heard time a further refinement of this idea: Customer Operations. As one SaaS executive described to me, marketing operations teams are the engines of the marketing team. The creative marketing functions produce the fuel – the campaigns, the positioning, the art.
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27 March / marketing / saas
When I first met Jen Grant, Looker’s CMO, she told me a story from early days of Box, where she was SVP of Marketing. Jen spoke about the importance of creating tension in the marketing message. Aaron Levie, Box’s CEO and founder, spoke at conferences about the future of collaboration. His message: Box will transform the way employees work. But if you had visited www.box.net, you would have found another positioning for the company.
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07 March / product / saas / sales
After a SaaS startup has gained traction with SMBs and mid-market customers, they often feel a pressure to move up-market. Sometimes, demand for a product is so great, larger customers the pull the company up-market before they are ready. The startup finds itself in a critical position - both the product and the sales motion must evolve quickly. Zack Kass is a friend who advises SaaS startups on their enterprise selling motions and playbooks, refining the account executive profile, and developing a deal strategy.
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10 February / strategy / saas / startups
One of the hardest thing to do in sales, especially for early stage SaaS companies, is to disqualify customers. When a startup disqualifies a customer, they turn away a revenue opportunity, a chance to add $1k of MRR or $3k of MRR, and meaningfully grow the top line. But if the customer isn’t the right customer, that incremental revenue bears a hidden cost. In the earliest days of the business, those potential customers waving checks promise an attractive revenue boost.
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17 January / saas / history / financials / sales
Most SaaS companies dream of attaining the $100M ARR mark. The very fastest attain the goal in 6-7 years. Last week, Workday halted trading to announce it had signed Walmart as a customer. Brian White, research analyst at Drexel Hamilton investment bank, estimated this one customer could generate $100M-$200M per year for Workday in recurring revenue - a single customer. I couldn’t validate that this is the largest contract ever signed by a SaaS company, but if it is not the largest, it is most certainly the top 5.
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16 December / saas / management / financials
SaaS startups often find themselves in one of three different states when contemplating their burn rate. The first is the David Farragut strategy. Damn the burn rate, full speed ahead. The second is the conservative approach - attaining profitability using only the cash on the balance sheet. Those two are easy. Circumstances dictate the respective aggression or conservatism. Lots of cash or not so much. The more complicated state is the one in between, and that is the one that most SaaS startup operate within.
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30 November / financials / saas
Bookings, MRR, Revenue. All these metrics form part of the financial statements of SaaS companies. For as long as SaaS companies have existed, we’ve used one way of counting revenue, called GAAP. Starting in 2017, revenue recognition for SaaS companies will change, and SaaS startups will have more flexibility in the way they record revenue than in the past. BDO has published the clearest summary of these changes, which number more than 750 pages in the tax code.
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31 October / trends / saas
The number of vendors selling to sales and marketing has exploded from 500 to more than 3000 over the last three years. Are we reaching the end of an expansionary cycle? The software pendulum tends to swing between software suites, offering a collection of different tools, and best-of-breed point solutions. But, have we reached the point where the best-of-breed, fragmented ecosystem is a permanent fixture? Okta’s Businesses at Work 2016 report calculates most enterprises pay for somewhere between 10-15 corporate applications.
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26 October / marketing / saas
Demand generation is a critical limiting factor to the growth of many startups. I had the opportunity to moderate a panel of demand generation experts recently at Heavybit, an incubator in San Francisco. I asked the panelists, how well understood is demand generation, considering it is one of the core elements of business needs to sustain its growth? Unanimously, the panel concluded it’s not very well understood. At the outset of every startup that attains product market fit, a collection of innovators adopt the product.
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20 October / sales / saas
What is the optimal contract length with for your SaaS startup? Monthly, annual, multiyear? It’s common to see SaaS startups initially price their products on a monthly basis, then add an enterprise “Call Me” plan which hides behind it an annual contract. As the business increases its price point, it may eventually book contracts spanning two, three or even five years. This pricing pattern has a certain rationale to it.
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17 October / exits / saas
2016 has been a volatile year. Major capital investments fell 55% in Q3. The IPO market is a tale of two cities with some companies able to go public and catapult their valuations, but the overall number remains in the single digits. Last, M&A activity seems quite brisk with more than 30 $1B+ billion acquisitions in the last nine months alone. How do all these factors commingle to influence today’s acquisition environment?
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10 October / saas / product
What are the attributes of the ideal SMB SaaS company, an entrepreneur asked me recently. It’s a good question. There are product, marketing, and sales attributes to that ideal company that successful SaaS business have exemplified in the past. Product A beautifully designed, simple and elegant product is the first and most important thing. The product satisfies the top three priority for the software buyer and consequently the software buyer uses a software very frequently.
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21 September / saas / fundraising / startups
Recently, we examined the comparative efficiency of bottoms-up and top-down businesses. Today, we’ll dig into valuation metrics to see if there’s any systematic bias in the investor community for SMB, Mid-Market and Enterprise SaaS companies. Using public data, I categorized the 50 or so public companies by ACV at IPO. SMB is less than $10k, Mid-Market is between $10k and $100k, and Enterprise is greater than $100k in average customer value.
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19 September / sales / startups / saas
How fast could a SaaS business grow on paid acquisition? If the business decided today to sprint and acquire as many customers as possible? We can model it with some assumptions, some of which are quite aggressive. Let’s take a startup with $1.2M on the balance dedicated to customer acquisition. Assume a $10,000 CAC, an 80% gross margin and a payback period of 12 months. We’ll assume customers begin to pay the month after they sign up, and all this math implies customers pay a monthly fee of $1042 ($12,500 ACV over 12 months).
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09 September / financials / startups / saas / management
If I made a word cloud of the terms in 2016 that dominated Startupland, burn would be among them and perhaps the largest. On the contrary, burn would be absent from the 2015 list, replaced by unicorn. Starting in the end of 2015, Public companies have markedly shifted the way they manage their businesses pushing toward cash flow positive and net income positive. In parallel, startup founders and CEOs have markedly shifted the way they communicate and manage their businesses.
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02 September / sales / startups / saas
Creating and optimizing a sales plan for an early stage SaaS company is a challenging task. There are lots of different variables to manage and the truth is it’s always a work in progress even for massively successful businesses. But at the very earliest days, where do you start? Quota is a function of number of deals closed, sales cycle, price point and conversion rate. When a SaaS company is just releasing its products, none of these are known figures.
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31 August / startups / saas / fundraising
If your SaaS startup were to trade in the public markets today, what would it be worth? The true answer is we don’t know, but we can approximate it by comparing it to the other publicly traded SaaS companies and benchmarking the business by its growth rate. The chart above shows the median multiple of public SaaS companies by growth rate bucket, 25%-49%, 50%-74%, and 75%+ trailing twelve month revenue growth rate.
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29 August / marketing / saas
Jeff Wiss has managed demand generation and corporate marketing for some iconic software companies. MySQL, the most valuable open-source acquisition; Zendesk*, the $3B leader in customer support software; DataStax, The business commercializing Cassandra; and most recently Duo Security*, an Ann Arbor-based trusted access company that has some of the most sensational SaaS metrics I’ve ever seen. Recently, I had a chance to talk to Jeff and learn about the unique strategies they employ to drive one of the fastest growing and most efficient SaaS companies in the market today.
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27 July / saas / startups / strategy
McKinsey released a study of high growth software companies entitled Grow Fast or Die Slow. One salient conclusion: If a software company grows at 20% annually, it has a 92 percent chance of ceasing to exist within a few years. In other words, software companies must grow quickly to survive. Slow growing businesses suffer from the lack of oxygen that fuels growth. Raising money is more expensive. Hiring becomes challenging.
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24 July / sales / saas
Where is the budget to pay for your SaaS startup’s software coming from? There are three possible pockets. First, they are dollars the competitor you displaced used to collect. Second, the company enlarges the current budget to finance the purchase. Third, the company creates a new budget. Which budget is an important question. The answer informs product, marketing and sales strategy. It’s also a frequent question investors and employee candidates will ask during their respective processes.
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21 June / startups / saas
The rate of new software company formation seems to have declined materially in the past few years. In 2011-2013, about 1450 software companies were founded each year on average. In 2014, that figure fell to 1186 and in 2015, we count 481. Why does Crunchbase data indicate this decline? First, there might be a few data issues in the most recent years. Perhaps software companies remain in stealth longer. Perhaps there a substantial delay between when the business is founded and when it appears in Crunchbase.
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24 May / saas / sales
One question founders often ask is which is the right customer size to target? What is the optimal ACV for a SaaS startup? One way of answering this question is to reflect upon the success of previous SaaS companies and analyze how they did it. The chart above plots the total revenue of publicly traded SaaS companies by ACV bucket. Enterprise companies average contract value is greater than $100,000. Mid-market companies span $10,000-$100,000, and SMB companies generate less than $10,000 per year per customer.
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21 April / saas
About 15 years since the creation of the first SaaS companies, public SaaS companies account for 14% of total software revenues generated by public companies, a figure growing at about 17% per year. Over the last ten years, the total amount of revenue generated by software companies has tripled from $53B to $169B, meaning SaaS companies are both taking share and growing the market. The growth rate of SaaS revenues follows a geometric growth curve ramping from $1.
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15 March / product / saas
Numi is a little calculator with a twist. Unlike most calculators, it understands English and other languages. I’ve used many different types of calculators: from the Texas Instruments TI-89 graphing calculator to a HP 12C with its Polish notation, to software calculators Excel and R. All of them employ similar user interfaces. There’s a syntax to translate the user’s desires into something the calculator can understand. Numi takes that one step further.
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09 March / saas / customer success / sales
As a SaaS startup grows, recurring revenue begins to fuel the company. Not too far into the future, the existing customer base begins to contribute more of the startup’s revenue than new customers and bookings. Each startup will observe this revenue composition transition at a different point in its evolution because it’s a function of growth rate and churn rate. This evolution demands a focus on retention, upsell and cross-sell.
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At SaaStr 2016 and SaaS Office Hours in New York, I shared an analysis of the fastest growing SaaS companies over the last 3 years. In particular, I benchmarked the revenue, growth rates and round size characteristics of these businesses at their Series A. I’ve embedded the slides here. Benchmarking Exceptional Series A SaaS Companies from Tomasz Tunguz These are the key bullet points from the deck about exceptional SaaS companies.
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07 December / pricing / saas
SaaS Enabled Marketplaces employ elegant business models. They are verticalized SaaS companies that manage a marketplace to create winner-take-all market dynamics. SEMs can generate revenue in four ways: charge the buyer and/or supplier a software fee & charge the buyer and/or supplier a marketplace fee. In addition, a startup must determine what rake to charge. At Redpoint, we’ve invested in more than 15 marketplaces and have evaluated dozens more, including more than 20 SEMs in the past year.
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12 November / financials / management / startups / saas
As the temperament of the fundraising market shifts, particularly in the later stages, the question of how much a startup should burn will become increasingly important. We’re living in a historic period of very inexpensive venture capital. These cheap dollars have fueled spectacular companies with record-setting growth rates. In such an environment, growth at almost any cost is handsomely rewarded. But we’re observing the ecosystem starting a correction - particularly in the late stage of the market.
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03 November / saas / sales / financials
What is the optimal quick ratio for your SaaS startup? Is it 4? Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR) The quick ratio measures a SaaS company’s growth efficiency. The formula for quick ratio is above. It’s the new monthly recurring revenue (MRR) in a month plus the expansion MRR divided by the sum of the churned MRR and the contraction MRR. Churned MRR are customers who have not renewed contracts and contractions are those customers who have decreased their payments.
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28 October / sales / saas
Quota attainment is an incredibly powerful diagnostic tool when understanding your SaaS startup’s go-to-market health. Quota attainment measures both the success of individual account executives and the performance of the team. To achieve best-in-class quota attainment, a startup must execute the go-to-market strategy well across five dimensions. First, the startup must supply the sales team with a growing volume of high quality leads. SaaS companies generate leads in many ways including through sales development reps, search engine marketing, paid social, lead capture on the home page, events, customer referrals, evangelists and channel partners.
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22 October / marketing / saas / startups / office hours
Last night, at our inaugural event, SaaS Office Hours welcomed Bill Macaitis, CMO of Slack, former CMO of Zendesk and former SVP of Online Marketing and Operations at Salesforce. Having worked in three hypergrowth companies, Bill is an expert in building massively successful marketing teams. These are the five kernels of wisdom I learned last night. When is the right time to hire a head of marketing? The right time to hire a head of marketing for your startup is when the company has found product market fit.
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15 October / saas
The purpose of a price is to tax usage of a product. That’s how companies generate revenue. Discovering how to tax a product properly is a perpetual challenge. It’s a moving target and so it requires an ongoing discovery process as the company and market evolve together. These are some mistakes I’ve noticed. Complex or unintuitive pricing model. A good pricing model appears simple and logical to the customer. It may be complex behind the scenes, with different prices for varying customer sizes, product complexity and add ons, but the tax align itself to the customer’s perception of ROI clearly.
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05 October / sales / saas
How big is your SaaS startup’s sales pipeline? How big does it need to be to achieve next month’s bookings target? What is the ratio of the sales pipeline to bookings? What should it be? When asked these questions during a fundraising pitch, one CEO responded with the number of demos per account executive per day to attain next month’s bookings, impressively conveying his command of his business. A startup’s leadership should know the number of customers, sales and marketing qualified leads to meet or exceed plan at all times.
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24 September / saas
SaaS Enabled Marketplaces benefit from a unique advantage in their go-to-market. They have a panoptic view of their market place, which over time provides them an unassailable competitive advantage. SEMs provide software to suppliers and consumers, and then make a market between them. The first SEMs flourished in advertising. Google manages one of the world’s largest advertising market places. They provide software to publishers, the supply side, which manages available ad inventory with a product called DoubleClick for Publishers, or DFP.
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21 September / saas / financials / sales / marketing
One of the most powerful levers for SaaS companies to master is payback period. Payback period is the number of months a company requires to payback its cost of customer acquisition. The median SaaS startup has a payback period of 15 months on a gross margin basis. A short payback period confers two massive advantage to a startups: smaller working capital requirements and a consequent ability to grow much faster.
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17 September / saas / sales
When writing the post Vertical SaaS Startups Require Different Go To Market Than Horizontal SaaS Companies, I realized that there is a perception on my part and perhaps more broadly that vertical SaaS companies enjoy greater sales efficiencies than horizontal SaaS companies. After all, vertical SaaS companies target a smaller number of potential buyers. The marketing team concentrates their media buys to target this audience, the sales team focuses on a smaller lead list.
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14 September / saas
Vertical SaaS requires a different go-to-market than horizontal SaaS companies. Vertical software companies, a recent important trend in SaaS startups, pursue customers only in a particular industry. They trade a more narrow customer base and consequent reduction in market size for a competitive advantage in that market segment. The most salient example, Veeva, sells software to the largest life sciences companies, which are subject to a unique regulatory regime in their sales processes.
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28 August / saas
Much has been written about the consumerization of IT, the movement fueling many SaaS startup’s growth by targeting individuals in a target customer called B2C2B, rather than selling top down. But until yesterday, I hadn’t found anyone who had quantified the size of the movement. In mid-2014, CEB published Harnessing Business-Led IT to answer this question. While the entire report is worth reading, the chart above answers the particular question above.
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26 August / saas / sales
The SaaS ecosystem has been evolving incredibly quickly. Most of the time, the changes in the ecosystem are embodied in one particular company which grows exceptionally quickly. Focusing on these fast-growers, the macro shifts can be hard to discern. Last week, Okta released a report Business at Work sweeps across SaaS to reveal these recent evolutions. These are the points that I found most interesting. First, most companies, irrespective of size from 1-4k+ employees, use 14 SaaS applications.
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24 August / saas / fundraising
The public markets are down more than 10% from their highs in the last few months. Public SaaS companies have been particularly hard hit. The chart above shows the enterprise value of publicly traded SaaS companies. Many of them are down substantially more than 10%. Let’s dig in a bit more. While there are five companies who currently sit at their all time highs, as of August 21, more than 90% of the SaaS companies are below at a median decline of 40%.
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18 August / saas / sales
The most potent weapon in sales is understanding a buyer’s perception of time. As Mark Roberge wrote, “At HubSpot, this lacking sense of urgency is the number one objection we face in the sales funnel.” To succeed, SaaS startups’ sales teams must consistently create urgency in the sales process. Time is scarce. Either the seller’s time is scarce or the buyer’s time is scarce. Understanding that scarcity and focusing the buyer on it is the key to repeatable sales.
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05 August / saas / sales
The prevailing wisdom for hiring the first VP of Sales is roughly $1M in ARR, or whenever the company has figured out some repeatable sales process. The rationale behind this advice is, at this point, the company needs someone to build recruit, incentivize, coach and manage the team that will grow to acquire more and more business. While that all makes sense, I was curious to see if startups do this in practice, and whether the timing of the VPS differs by ACV.
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20 July / startups / financials / saas
I learned to drive a car at age 19 on a warm Santiago de Chile night, in an unusual way. A friend named Jose Pedro resolved to teach me after dinner at his apartment, suprised to learn I didn’t know how. It was past two am, and without anyone on the streets, it would be safe, he assured me. As we sat in the car, he showed me how to manage the three pedals and the gear shift, and explained the how the clutch worked.
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07 July / saas
According to ChiefMarTec, in 2015 there are 1875 marketing technology companies, up from 947 last year. If the number of marketing software companies is any indication, there is a huge expansion in the number of SaaS companies in almost every segment including sales tools, engineering productivity, finance, and human resources. This fragmentation trend has been happening for quite some time. In the old model of software procurement, companies would call one of the large software monoliths (Oracle, SAP, IBM, etc) and negotiate an enterprisewide license for a software suite to serve the majority of their departments.
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23 June / saas / sales
One smart SaaS entrepreneur told me last week he prefers bottoms up businesses to top-down companies because bottoms up sales and marketing efforts enable startups to pursue hundreds of paths into a company. Unlike top down sales processes which offer a startup one shot at closing an account (a meeting with a CEO or VP), for bottoms up products, each employee is a credit-card-carrying-decision-maker. As the number of total potential buyers expands, so does the universe of sales processes.
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19 June / saas
When deciding to open source software, one of the key questions teams must answer is the license under which they will distribute their software. There are a wide variety of different alternatives. But, the three most common are GPL, Apache and MIT. I was curious if there was any relationship between type of license used by startup commercializing open source software, and their ability to raise capital, and exit.
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16 June / saas / marketing
Open Source Software started the movement in the late 1990s. Since then, open source software has transformed the software industry. Today, many infrastructure software startups employ open source strategies to market their software and win dominant market share. Open source is a disruptive distribution strategy. It allows potential users and buyers of a software to try it, evaluate it, and understand exactly how it works because the source code is freely available.
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Financial discipline is a hallmark of great companies. It’s what enables businesses to build exceptional go to market models, weather difficult times, and ultimately succeed. Sometimes, financial discipline in startups is imposed by financial markets, like in 2008 when the total amount of venture capital investment plummeted after Lehman imploded. Other times, financial discipline is imposed by founders and management teams. The tweet above is from Lew Cirne, founder and CEO of New Relic, a $1.
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As I prepared the S-1 analysis for ServiceNow, the third largest public SaaS company in the world, I came across a section in their latest annual report called Key Factors Affecting Our Performance in which the company describes the two ways they evaluate churn. One is common, but another is unusual. Below I’ve quoted their definitions. Upsell rate. To grow our business it is important for us to generate additional sales from existing customers, which we refer to as our upsell rate.
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08 June / marketing / saas
The role of the marketing team within SaaS has stretched from simply engendering awareness and creating interest, to guiding customers much deeper into the funnel. Steve Patrizi created the schematic above that illustrates the idea beautifully. In traditional go-to-market models, marketing teams fill the very top part of the funnel. When a potential customer enters the consideration phase of the buyer journey, the marketing team transitions the lead to his sales account executive, who educates the customer from the consideration stage through purchase.
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05 June / saas
We may have been talking about SaaS companies for more than a decade, but we’re still just at the beginning. The legacy software companies including Oracle, Microsoft, SAP and and IBM control 83% of the market cap of software businesses, representing $830B in market cap. The largest SaaS company, Salesforce, is just about half the size of SAP, and Microsoft is 8x bigger. In revenue terms, the legacy vendors control an astounding 93% of revenue: $245B compared to $19B.
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03 June / saas
In a recent podcast, Ron Gill, the CFO of Netsuite - a $7B+ market cap company with about $600M in 2014 revenue, which provides ERP software to mid-market companies - articulated the importance of the Lifetime Value / Cost of Customer Acquisition (LTV/CAC) ratio for his company. LTV/CAC is often used to justify marketing and sales investment to acquire customers. But there’s much more to it. LTV/CAC is a powerful diagnostic tool for the performance of almost every team within the company: product, engineering, sales and marketing.
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31 May / saas / data analysis
As the next generation of SaaS companies achieve maturity, they have begun to serve larger and larger customers, who in addition to demanding a great product, often request services. Professional services, as they are often called, entail training and customization. For product driven startups, the decision to offer professional services is a tricky one. On one hand, the customer is always right and services often enable substantially larger contracts. On the other hand, selling hours to drive revenue decreases the efficiency of the business, by hiring more people in order to grow revenue linearly.
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28 May / exits / data analysis / saas
Of the 43 SaaS companies to have gone public in the time period between 2006 and 2014, 60% are trading above their IPO pop price – the price at the end of their first day of trading. The median company has appreciated 69% since its IPO. The chart above shows the trends for each of the companies in this data set. Xero tops the list that more than 17x appreciation.
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26 May / sales / financials / startups / saas
Creating a sense of urgency is one of the most powerful sales tools available to SaaS companies. There are many different ways of accomplishing this, but one of the most common ways is to offer discounts that expire. Discounts are powerful incentives to increase sales. But, they have to be crafted correctly, or they can have dramatic impact on a startup’s cash position. This is why sales incentives should be designed hand-in-hand with the company’s finance team.
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21 May / trends / saas
Traditional software was initially sold by perpetual license. Then in the mid-00s with the advent of SaaS, the market shifted to per seat per year pricing. And simultaneously, freemium marketing strategies blossomed. Freemium companies provide software for free temporarily to entice users to try and use the product. Eventually, these users cross a threshold and convert to a paid subscriber. This threshold can be based on number of people using the product (Expensify), number of documents signed in a month (HelloSign), or additional product features needed by users (Yammer).
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19 May / saas / history / data analysis
In the late 1990s, two of the dominant talent management platforms were founded. Taleo and SuccessFactors grew very quickly after they entered the market, bringing novel delivery to the human capital market. Both companies eventually offered talent acquisition, performance management, and learning tools for human resources teams. But they started in different places. Taleo initially focused on recruiting tools and SuccessFactors on performance management. As the chart above shows, both companies scaled revenue rapidly, reaching $100M in revenue 7 years after founding.
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14 May / data analysis / saas / history
Ariba went public in 1999 three years after having been founded. In its first year of selling, the company generated $800,000 in revenue. Then it ramped. $8 million, then $45 million, then $274M. In a three-year period, the company had grown 33x and achieved an astounding CAGR of 224% over the same period. Ariba shares increased 300% on its first day of trading at IPO, valuing the company at $6 billion.
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07 May / data analysis / saas / history
In the late 90s, one company changed its name five times before they settled on one which today is a well-known brand. The business started as Silver Computing in 1995, then Stellar Computing in June 1997. Six months later, the company would rebrand as next ActiveTouch Systems, then six months later to ActiveTouch Inc., and finally, six months before IPO to WebEx. WebEx went public in June 2000 with $8.
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An entrepreneur last week asked me if bottoms up businesses are more efficient software companies than top down sales processes. Enabled by web and mobile app distribution, the bottoms up software business acquires individual users, small teams and eventually departments. The top down model sells to a C-level executive (CEO, CIO, CFO) and captures the relevant part of the organization through one sales process. Because the bottoms up processes tend to rely on seemingly less expensive customer acquisition techniques like content marketing and in-product up-sell initially, this founder suggested, quite reasonably I thought, that bottoms up companies are more efficient.
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28 April / saas / data analysis / history
The first SaaS startup started as a packaged software company. After selling floppy disks and CD-ROMs of expense software in computer software stores, the company changed models for the first time, and sold software licenses directly to enterprises. The company went public on this model in 1998. But soon after the crash of 2001, the startup’s market cap totaled only $8M. So the business evolved again and became a pure SaaS business, selling software accessible to anyone with a browser.
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19 April / saas / marketing / sales
In the Innovator’s Dilemma for SaaS Startups, I outlined the path of many software companies, which disrupt incumbents by first serving the small-to-medium business and then move up-market by transitioning to serve larger enterprises with outbound sales teams. I argued this transition is largely due to the more attractive characteristics of larger customers, namely higher sales efficiency and reduced churn rates. This is the “traditional” way of disrupting. But, as Kenny van Zant of Asana and Mike Cannon-Brookes of Atlassian told me, there’s another way, a novel way of building companies that still isn’t very well understood: the Flywheel SaaS Company.
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09 April / saas / management / strategy
See also: Innovator’s Solution for SaaS Startups There’s a familiar path now to SaaS companies that start in the SMB (small-to-medium business) part of the market. Over time, they seem to inevitably begin serving larger customers. Box, Hubspot, Zendesk and among many others have exhibited this pattern. Why does this happen? I believe we’re seeing Clay Christensen’s Innovator’s Dilemma at play. In short, new startups leverage a distribution advantage to acquire SMB customers at scale.
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05 April / exits / saas / data analysis
In the Runaway Train of Late Stage Fundraising, I analyzed the growing disparity of the public and private markets. Ten years ago, we saw 2-10x as many IPOs as $40M+ rounds. Today, we see 16x as many $40M+ growth rounds as IPOs. There’s no question that companies are waiting longer to go public, fueled by late stage private investment. I was wondering if as a consequence, we might see bigger IPOs.
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26 March / saas / sales / startups
Whether implicitly or explicitly, it’s critical for a startup to map out accounts to understand the purchasing dynamics of a buyer. When sales teams start selling, their goal should be to create the sales playbook. The playbook all begins with understanding the key dynamics among the five players in the sales process. These are the five people: The Proponent of the Sale champions the sales. The Salesperson must equip this champion with all the tools to convince the other stakeholders to pursue the transaction.
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24 March / saas / startups / sales / books
If you want to understand how to build a great SaaS sales organization, you should read Mark Roberge’s The Sales Acceleration Formula. It’s the single best book on the topic. Mark is the Chief Revenue Office at Hubspot, a company which has created tremendous success by perfecting the inbound marketing plus sales model. The book is invaluable for every founder, CEO and member of the management team because it not only explains how the Hubspot sales team is structured, but why the structure came to be.
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22 March / saas
In 2.5 years, Adobe has transformed its business from a software license business into a SaaS business. It’s been a remarkable transition, and one not talked about very much in the SaaS world. Transitions from licensed software to SaaS are rare. The travel and expense management behemoth, Concur, recently acquired by SAP for $8.3B, is another great example that made the transition first from CD-ROM packaged software, then to enterprise license software and then to SaaS.
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18 March / fundraising / saas
Over the last 15 months, the typical high growth public SaaS company’s multiple has halved. The chart above plots the average enterprise value to forward revenue multiple for established SaaS companies and high growth SaaS companies. High growth companies peaked in February last year at about 22x forward revenues and have fallen to 11x on March 1, 2015. Established companies dropped similarly from 6.6x to 4.5x. The chart above shows the same figures per company.
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18 March / saas / marketing / channel
Leads are the lifeblood of every SaaS company. As a SaaS startup grows, the limiting factor of the business quickly becomes demand generation. Can the marketing team generate enough leads for the inside sales team to attain their monthly quota? The Marketing team’s mandate is to generate these leads in a cost-effective way and develop a portfolio of lead-generation mechanisms. Ideally, these generate inbound leads, who often convert at 2-3x the rate of outbound leads.
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Every SaaS company should be focused on mitigating churn because greater retention enables a business to grow far more rapidly, to reduce the cost of customer acquisition, and to slash the amount of capital required for the business to grow. But there’s one additional reason to focus on churn: predictability. The more dollar churn a business creates, the less predictable its performance - and vice versa. Let’s paint the picture for a hypothetical startup which generated $2M in revenue last year and forecasts growing to $5M this year for 150% annual growth.
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13 March / fundraising / data analysis / saas
In a recent survey, 40% of VCs pointed to SaaS as the startup sector most likely to be impacted by a market correction. There’s no question that the early stage SaaS founders are benefiting from substantial multiple expansion and pre-money valuation increases. But I was curious about how widespread aggressive investments are in software companies. As the data below shows, the seed and Series A markets have been relatively stable, but Series B rounds have seen a dramatic acceleration recently.
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10 March / saas / startups / sales
There’s a magical property to the classic sales funnel SaaS startups use to evaluate the effectiveness of their go-to-market organizations: an increase in effectiveness at any stage of a sales funnel cascades through to the end funnel. But improvements to the early parts of the funnel are more important than those later in the funnel, because they meaningfully improve key SaaS metrics like cost-of-customer acquisition and pay-back period. Most startups employ a four stage funnel: prospect, lead, opportunity, customer.
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25 February / financials / saas / startups
Once a startup has found an initial product market fit, the business must evolve the way it models its growth. Before product market fit, a startup’s financial projections focus on costs. The company has no visibility into their revenue growth. So, the management team should minimize costs, maximize cash and lengthen runway to provide as much time as possible to find that product market fit. As we’ve seen, staff are both the greatest asset of a business and also the greatest cost, at least initially, and modeling those is straightforward.
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13 February / sales / startups / saas
In 2009, the Corporate Executive Board, a consultancy providing expertise to some of the world’s largest companies, studied the distinguishing characteristics of great sales people and well-run sales processes. They surveyed more than 6,000 sales reps across 90+ businesses. The analysis revealed three interesting things. First, most customers don’t perceive a difference between competitive products. Over and over we found that customers, generally speaking, see significantly less difference between us and the competition than we do ourselves.
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09 February / sales / saas / startups
After a SaaS startup has achieved some degree of product market fit, the business will likely ramp the go-to-market teams, and in particular the sales team. Measuring and tracking the performance of a growing sales team is critical to the growth and financial health of a business. The report above is the most effective view of the performance of a sales team I’ve found for SaaS startups. A VP of Sales at a Redpoint portfolio company introduced this report to me, and now I can’t live without it.
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05 February / data analysis / startups / saas / sales
SaaS companies are marvelous businesses. They are more predictable than most other kinds of companies and in addition they demonstrate leverage from technology. The best SaaS companies are able to build strong brands, develop scalable products and hire teams to bring those products to market effectively. To show the power of the convergence of these forces, I’ve analyzed the employee productivity patterns of the 50+ publicly traded SaaS companies.
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02 February / saas / data analysis
How much should your startup budget for its employee stock option pool? One way of answering this question is a blanket addition per year, say a 2% renewal. Another way is to look at the cash based cost of the stock based compensation. We’re going to examine the second one today by looking at the basket of 50+ SaaS companies. The chart above shows the average stock-based compensation (SBC) per employee by years since founding across the basket of publicly traded SaaS companies.
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23 January / fundraising / data analysis / saas
In 2015, SaaS companies trade at a 30% lower multiple of revenue than last year. In early 2014, the typical SaaS company traded at about 9.2x their next-twelve-months of revenue. Since August 2014, that figure has dropped by about 30% to about 6.0x. Almost every public SaaS company has seen multiple compression. Only RealPage, Qualys, NewRelic, ConstantContact and Hortonworks are at highs in 2015 compared to 2014. The other companies in this basket have have all fallen between 1% and 60%+.
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22 January / data analysis / saas / fundraising
Figuring out how much capital your startup may need to raise will inform lots of different strategic decisions. A startup’s growth rate is often highly correlated with the amount of capital it can invest in sales and marketing. More customers means more bookings, which means more capital and so on. The chart above shows the cumulative dollars raised across a basket of more than 50 enterprise software companies. The median company raises $88M before IPO in year six.
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19 January / data analysis / saas
SaaS startups are growing faster than ever before. Publicly-traded SaaS companies founded from 2008 through 2014 needed 50% less time to reach $50M than their counterparts founded between 1998 and 2005. I stumbled across this trend when looking at a different chart used in my S-1 analyses that compares the time to $50M for each of the 51 or so publicly traded SaaS companies. I’ve colored the companies founded in the last ten years in red.
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16 January / saas / data analysis
We’ve seen a sudden decline in SaaS pricing. In the past 3 years, the median Average Revenue by Customer of SaaS companies going public has dropped by about 70%. But has the shift towards smaller customers, shorter and faster sales cycles created less profitable businesses? Not at all. The chart above shows the gross margin trends of public SaaS companies broken down by their ACV (average customer value). At or close to IPO, the median company, irrespective of price point, operates at about 70% gross margin.
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14 January / saas
Christoph Janz, one of the best seed stage SaaS investors, published a great tweetstorm on the state of the SaaS ecosystem yesterday. I’ve copied it below. There’s no excuse for not understanding your metrics, for not providing great customer service, for not understanding the role of customer success, for not doing intelligent lifecycle marketing, for not doing great content marketing…What was hard and innovative 5 years ago is #tablestakes now.
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12 January / marketing / saas / sales
After writing about B2C2B companies last week, I received a lot of great comments about the differences between the B2C2B models, particularly the sales models after a company has acquired the initial Consumers. These are three sales models I’ve observed B2C2B companies use to convert the initial momentum with consumers into dollars. The first sales model is the 2 Phase Sell. LinkedIn and Duolingo employ this. LinkedIn attracts large number of consumers with a place to find jobs and post resumes.
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07 January / saas / sales
This week, an entrepreneur told me his startup is a B2C2B business. It was the first time I’d heard this acronym, and I thought it was a genius moniker. B2C2B (business-to-consumer-to-business) succinctly captures the critical part of the new customer acquisition model powering many enterprise startups: winning hearts and minds of the intermediate consumer, the employees of a company. B2C2B models are behind much of the innovation in every part of the enterprise stack, from applications to platforms to infrastructure.
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06 January / startups / saas / management
What percentage of SaaS IPOs in the last four years have the founding CEOs of the business been CEO at the time of IPO? 62.5%. In about two thirds of SaaS IPOs from 2011-2014, the founding CEO is the current CEO. Is there a meaningful difference between the equity stake of a founder who is CEO at IPO, and a founder who is no longer CEO? About 1.1 percentage points.
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05 January / saas / data analysis / sales / pricing
One of the most important forces in SaaS today is the Consumerization of IT. Instead of a centralized IT organization deciding which products to buy, product managers and marketers and engineers and data scientists determine which products they think would serve them best and buy them directly, often using a credit card. This movement is transformative and its impact is immediate. The chart above plots the median Average Revenue per Customer by Year of IPO for the 50 SaaS companies that have gone public in the past five years.
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11 December / data analysis / exits / saas / s 1 analysis
This post is part of a continuing series evaluating the S-1s of publicly traded SaaS companies in order to better understand the core business and build a library of benchmarks that might be useful to founders. Box is a 1000+ person company providing collaboration and document sharing software. We had previously analyzed the business when the company filed their first S-1. Yesterday, the company filed an updated version of their S-1.
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04 December / data analysis / saas
2014 has been a great year for SaaS companies. By my count, 9 of them will have gone public. Meanwhile, SaaS companies in both the public and private markets continue to fetch premium valuations. To illustrate the rapid appreciation in the value of these SaaS companies, I’ve plotted the share price by round of each business. The color bars in the chart represent Series A, B… through to IPO. The last bar, called Q414, is yesterday’s share price (if the company has already IPO’ed).
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24 November / customer success / sales / saas
It’s hard to overstate how powerful negative churn is for a SaaS company. Both New Relic and Zendesk have grown to billion-dollar-plus publicly traded businesses by achieving fantastic negative churn figures: 114% and 120% respectively. in other words, each year existing customers pay these businesses 14 and 20% more than last year. The recent 2014 SaaS benchmark survey aggregated by Pacific Crest and Matrix indicates that expansion revenue accounts for between 8-26% of total annual bookings, increasing as the company scales.
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20 November / saas / financials / data analysis
Hortonworks filed their S-1 last week. Reading through the document, I noticed the company had quite a substantial fraction of professional services revenue; 41% of trailing 12 month revenue is services. Of the companies we have studied in our S-1 analyses, Hortonworks generates more professional services revenue as a fraction of total revenue than any other company. But, many companies do book a meaningful amount of revenue from professional services.
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18 November / saas / customer success
Negative churn is an incredibly attractive characteristic of a SaaS company because it means that customer accounts are like high-yield savings accounts. Every month, more money comes in, without much effort. This is a powerful effect and can fuel SaaS companies to huge success, as we saw in New Relic’s S-1. The concept of negative churn is a bit amorphous so let’s illustrate the impact on a startup. The chart above plots the revenue growth of a hypothetical SaaS company for a year.
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17 November / data analysis / exits / saas / s 1 analysis
This post is part of a continuing series evaluating the S-1s of publicly traded SaaS companies in order to better understand the core business and build a library of benchmarks that might be useful to founders. New Relic is San Francisco based, 534 person company providing tools for engineers to understand how well their code is performing. The company operates in the Application Performance Management category, which New Relic calls Software Analytics.
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14 November / startups / saas
At the beginning, a startup is only people, a group of friends who share a passion to change the world in some way. There is no product, no brand, no management team, no PR, no swag, no internal processes, no hierarchy. Over time, by virtue of all the effort of the people within the company, startups evolve into semi-autonomous machines; machines that acquire and serve customers with a great product in exchange for revenue.
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12 November / saas / sales / best practices
The modern SaaS startup asks marketing to fill the top of the funnel, sales to qualify and close leads, and customer success to retain customers. Conceptually, this trinity works in unison to grow a business rapidly. But sometimes, SaaS companies struggle with this model, particularly when churn rates increase in a business. The knee-jerk response may be to ask how to change the customer success team’s structure or incentives to increase the revenue at risk save rate (the fraction of dollars that might have churned, if not for the efforts of the customer success team).
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05 November / pricing / saas / startups
Most startups play defense when discussing pricing with customers. They dance between asking for too little, leaving money on the table, and asking for too much, only to lose the customer’s interest. The very best companies lead their customers in that dance. They use pricing as an offensive tool to reinforce their product’s value and underscore the company’s core marketing message. For many founding teams, pricing is one of the most difficult and complex decisions for the business.
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24 October / saas / best practices
I met a really smart vice president of sales a few weeks ago working in a company with mid-market customer values in the $10-100k per year range. When I asked her about her sales process, she described how her team employs statements of work (SOW), which isn’t something I hear about very frequently in startups, despite the fact they are very powerful sales tools. Statements of work describe the proposed working relationship between a vendor and customer.
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23 October / saas / pricing
Startups struggle to set the right price for their products because pricing dynamics in the field don’t obey the laws taught in the classroom. The standard supply and demand curves, drawn above, imply that as price increases demand decreases; that buyers act rationally and that this law is immutable. But this simply isn’t the case. Buyers in the market place violate the traditional supply and demand model all the time.
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22 October / marketing / saas / startups
Bill Macaitis, the former CMO of Zendesk, articulates how a SaaS marketing team should operate better than anybody else I’ve met. At a recent Point9 conference, Bill outlined the 9 marketing disciplines of great SaaS companies and how they fit together to create a marketing powerhouse. I’ve copied my notes from Bill’s talk below. Ops & Analytics Team The operations and analytics teams is the first marketing team every SaaS company should build because this team erects the experimental infrastructure for determining which marketing tactics are viable.
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20 October / benchmarks / saas / data analysis
Of the ten most important metrics on a startup’s financial statements, revenue might seem to be the most important. But it isn’t. Gross margin matters more because it is directly tied to a company’s ability spend to grow and achieve profitability. Imagine two startups, both selling products at $1M price points. The first has 5% gross margins and the second has 95% gross margins. The first company will be able to spend about $50k per sale on Sales & Marketing, Research & Development and general operational costs.
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19 September / saas / exits / benchmarks
Yesterday, SAP announced it would acquire Concur for $8.3B, the single largest SaaS acquisition in history in dollar terms. To put this acquisition in context, I looked at six other public-to-public acquisitions, where one publicly traded company acquired another. Because the acquired target is public, much of their financial information is readily available. As the chart above shows, the Enterprise Value/Trailing 12 Month Revenue (EV/TTM Rev) multiple SAP paid for Concur is tied for the highest among any public-to-public SaaS acquisitions.
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18 September / saas
Jason Fried, co-founder of 37Signals and Basecamp, published a blog post today called Faith in Eventually that captures the emotional tensions of building a product: During the development of most any product, there are always times when things aren’t quite right. Times when you feel like you may be going backwards a bit. Times where it’s almost there, but you can’t yet figure out why it isn’t. Times when you hate the thing today that you loved yesterday.
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16 September / data analysis / benchmarks / saas
After reading a few of the S-1 analyses on this blog, an entrepreneur asked me to look into the balance sheets of public SaaS companies. More specifically, how much cash should SaaS hold? How much equity do they raise? And do they employ debt to grow? The chart above shows the median cash on the balance sheet by year of founding for publicly traded SaaS companies. By its second year in business, the median SaaS company in this data has about $7M on its balance sheet at year two, from either the combination of a large seed round and Series A, or just a large A.
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09 September / data analysis / saas / startups / benchmarks
Is there an optimal price for a product to maximize a SaaS startup’s sales efficiency? As I’ve been analyzing the S-1s of publicly traded SaaS companies, most recently of HubSpot and Zendesk, I’ve been asking myself that question. Do million-dollar enterprise price points and field sales people create more efficient sales organizations than content-marketing-driven SMB startups? Or are the high-velocity inside sales teams of the pursuing the mid-market, the most efficient?
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03 September / data analysis / exits / saas / s 1 analysis
This post is part of a continuing series evaluating the S-1s of publicly traded SaaS companies in order to better understand the core business and build a library of benchmarks that might be useful to founders. Zendesk is a 700 person company that builds customer support software. Zendesk went public earlier this year. It’s a remarkable business primarily because the founders and the team have built an incredibly efficient customer acquisition funnel.
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28 August / data analysis / benchmarks / saas
Following this week’s post Benchmarking HubSpot’s S-1, Josh and Nikos raised an interesting question on Twitter. What are the right ways to benchmark SaaS companies from their early days through IPO? I have always used years-since-founding as the time axis to compare companies, because if I were a founder, that’s how I might think about benchmarks. But after their comments I wondered if there were better ones. Some potential alternatives are:
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27 August / data analysis / exits / saas / s 1 analysis
One of the best ways I’ve found to understand SaaS companies is to pore through their public filings. A few months ago, I analyzed Box’s S-1. In this post, we’ll look at HubSpot’s IPO filing and compare their journey to a public company with a basket of about 40 other publicly traded companies, in the hopes that this data will help other founders chart their path to IPO. In the next seven charts, we’ll explore how HubSpot built their business.
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19 August / saas / startups / data analysis
Consumer companies on the whole tend to grow faster and do so will less spending on sales and marketing, and research and development than SaaS companies. The chart above shows the revenue growth rates of 60 or so recent consumer and enterprise IPOs by years since founding. Enterprise/SaaS companies in the sample achieved very small revenue in their second year and grew consistently through year 8, at which point there’s a decline.
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12 August / customer success / saas
When I started in the venture business and met software companies, I never heard the words customer success during pitches or throughout diligence or in board meetings. A few years later, customer success has become equal in importance to sales and marketing and engineering and product within SaaS companies. The steady increasing drumbeat of the Customer Success mantra is reflected in Google search traffic, whose volumes have tripled since 2009 .
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05 August / saas / trends
For consumer products, the power of mobile distribution is hard to overstate. Facebook serves more than 1B mobile users each month. Angry Birds reached 50M users in 35 days, a feat that took Instagram 18 months and Facebook more than 3 years. But the distribution advantages of mobile app stores hasn’t been observed as powerfully in SaaS or enterprise software for driving revenue. The majority of the top 20 slots of the Business Apps Category in the iTunes store aren’t occupied by startups.
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31 July / saas / customer success
Customer Success is a relatively new discipline in the Software-as-a-Service world. Consequently, there are many unanswered questions about how best to build and manage great Customer Success teams for SaaS companies. Because the financial impact of a great CS team is compounded monthly and can meaningfully increase the growth and decrease the cash needs of SaaS startups, it’s critical for CS leaders to get it right. Last night, I attended a dinner with many heads of Customer Success from prominent valley SaaS companies.
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14 July / saas / trends
Vik Singh wrote a great post in VentureBeat last week titled “Why Salesforce Needed to Buy RelateIQ” in which he talks about a new era in SaaS, the Predictive Era, the era of intelligent software. We’ve just seen one of the first acquisitions in the category with RelateIQ*, but I believe we will see many, many more for a few reasons. First and most importantly, prediction provides competitive differentiation in an increasingly competitive market.
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A terrific SaaS VP of Marketing once told me, “If the sales team is focused on hitting this quarter’s revenue target, then the marketing team ought to be focused on next quarter and the following quarter.” In SaaS companies, one of the marketing department’s primary responsibilities is generating sufficient customer interest to enable the company to achieve their revenue targets. If that’s the case, determining how and when to scale a sales team in a SaaS company is contingent upon the marketing team’s metrics.
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13 June / saas / data analysis / benchmarks
Several weeks ago, I wrote a post about the Optimal Contract Value for a SaaS company. I wondered whether startups serving enterprises might be more or less valuable than those serving small-to-medium businesses (SMBs). Interestingly, the data showed there was no optimal customer value to build a publicly traded SaaS company. Having written that post, I began to wonder about other differences between different types of SaaS companies. In particular, do SaaS startups serving SMBs spend more or less than their counterparts in the mid-market and enterprise?
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02 June / saas / marketing
In his book Behind the Cloud: The Untold Story of How Salesforce went from Idea to Billion Dollar Company and Revolutionized an Industry, Marc Benioff shares the 111 plays he learned through Salesforce triumphant rise to the most valuable SaaS company in the world. Play 15 is my favorite from the book. Benioff writes “position yourself either as the leader or against the leader in your industry.” Play 15 highilghts the most frequently forgotten of marketing’s four Ps, positioning.
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30 May / saas / startups / marketing
Is there a common characteristic of successful freemium companies? Piotr asked this question earlier this week. This is the framework I’ve seen work well for freemium startups. At its core, freemium is a novel marketing tactic that entices new users and ultimately potential customers to try a product and educate themselves about its benefits on their own. By shifting the education workload from a sales team to the customer, the cost of sales can decrease dramatically.
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28 May / saas / sales
What are the tradeoffs when considering different sales hiring plans and which is the right one for your startup? There are many different considerations in creating a sales hiring plan. Balancing them all can be tricky, but thinking through the trade-offs is important to scaling the business well. First, let’s compare the financial impact of three different sales hiring strategies: six sales people hired at once, two sales people hired for each of three quarters and one sales person hired each month.
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22 May / saas / pricing
I’m a perpetual freeloader. Like a houseguest who has overstayed his welcome with hundreds of people, I depend upon the generosity of strangers - in particular, software teams. I’ve used HelloFax to sign documents for years, but I haven’t paid them a nickel. The same is true for GMail, Google Docs, TripIt, TypeKit, UberConference, LogMeIn, Evernote, the list goes on. For all of these companies and products, harboring freeloaders like me is part of their growth strategy.
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21 May / saas / sales
One of the single most effective tools SaaS companies can use in order to grow faster isn’t tweaking the product in a particular way or implementing an AB optimization framework or adopting new marketing tactic. Rather, it’s financial judo for structuring contracts and cash collection. Cash is the lifeblood of startups. Cash empowers management teams to invest in all kinds of growth mechanisms. So, it’s no surprise that maximizing a company’s cash to invest in growth is a good thing.
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15 May / saas / customer success
Yesterday, I spoke on a panel at the Gainsight Pulse conference with Aaron Ross, the author of Predictable Revenue, Jason Lemkin of Storm Ventures who authors SaaStr, and Brian Stafford, a customer success expert from McKinsey. It was great fun to be on the panel and discuss how customer success is transforming SaaS companies by increasing revenue growth, decreasing capital needs, building better products and consequently retaining more customers. I’ve embedded my slides below.
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01 May / saas / fundraising
What a difference three weeks make! Since I wrote “The Correction in SaaS Company Valuations”, SaaS company valuations have continued to fall. As a basket, SaaS companies have fallen 33% from their highs (median), wiping all the gains for the last year. To make that point more explicit, below I’ve charted the total value of public SaaS companies over the last ten months. In that time period, the aggreggate enterprise value has fallen from greater than $150B to $117B today.
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One of the key metrics that I don’t think gets enough notice when reviewing the health of a SaaS business is revenue-at-risk or RaR. For SaaS businesses with quarterly or annual contracts, each month some subset of the customer base’s contracts must be renewed. The RaR is the sum of the revenue from these customers in a given month or quarter. RaR is a useful measure because it captures the company’s opportunity to minimize lost customer revenue.
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17 April / saas / sales
Tien Tzuo, the founder and CEO of Zuora* and former CSO/CMO at Salesforce, knows SaaS businesses better than most. So when he pens an opinion about the subscription economy, a term which I believe he coined, I read it with great interest. Yesterday, Tien wrote “These Numbers Show That Box CEO Aaron Levie Is A Genius”, explaining Box’s business and growth in great detail. In the post, Tien argues two important points.
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15 April / saas / benchmarks / data analysis
Last week, we proved SaaS startups are raising more than they have in the past and newer SaaS companies seem to be generating more revenue per dollar invested. But do newer SaaS companies actually spend less on sales and engineering than their older counterparts? In fact, the 2014 cohort of public SaaS companies spend more on sales & marketing and engineering than previous IPO cohorts. But this increased spend results in faster revenue growth and consequent higher revenue.
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09 April / saas / benchmarks / data analysis
If you visit Yahoo Finance today, type in the ticker of every SaaS stock, copy and paste the image into a document, you might create a chart that looks like the one above. A cursory glance at the plunging lines in most of these names might send you into a panic, only to tweet in alarm that the bottom is falling out of the SaaS market. Chicken little. Chicken little.
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Last week, we analyzed the fund raising history of billion dollar SaaS companies and determined SaaS startups are raising nearly twice as much capital as 16 years ago before going public. Given that trend, I wondered if there is there any truth to the idea that startups today require less capital than before to succeed. To answer that question, I’ve taken the same basket of public SaaS companies and computed a revenue-on-invested-capital (ROIC) across the four 4-year IPO cohorts from 1998-2014.
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Yesterday, Box filed for its IPO and released its S-1. I enjoy going through S-1s because quite a bit about a private company is revealed and though only a subset of information is released, the S-1 discloses some very important details about the business operations. Over the past several months, I’ve analyzed the basket of the roughly 40 public SaaS companies many different ways. With the Box S-1 in hand, I can now benchmark Box’s business against other publics, and in particular, SaaS companies nine years after founding.
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Last week, Sean Ellis made an interesting comment in response to this post on public SaaS companies’ growth rates: I’m guilty of giving the same advice to startup founders without providing a transparent rationale. This post is my explanation of why the 15-20% MRR growth number is a reasonably good target for post-Seed/pre-Series A SaaS startups to aim for. Let’s create a hypothetical SaaS startup called SaaSCo with a set of founders who aspire to a fund-raising trajectory like the one in table below.
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13 March / saas / fundraising
At the time of the IPO, the median Software-as-a-Service (SaaS) company generates $100M in revenue, creates $2.6M in profit and holds $85M in cash on the balance sheet. A company in this position typically raises $107M in its IPO and trades at 11x revenue, for a $1.1B market cap. The path to getting there is revealing. Below is a chart showing the median revenue ramp of the 41 publicly traded SaaS companies by year since founding.
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11 March / saas / fundraising / exits
SaaS companies are the darlings of the public market. The average publicly traded SaaS company enjoys twice as strong a revenue multiple as ten years ago. SaaS companies’ time to IPO has been decreasing steadily from over 10 years since founding to under 7. Despite the decrease in time to IPO, the average dollars raised at IPO has tripled from the early nineties and grown by 50% since 2000. I analyzed the 41 publicly traded SaaS companies comparing to understand the trends in SaaS IPO.
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05 March / saas / sales
Most SaaS companies provide tools to help people accomplish a goal in a better way than they could before. A key part of a SaaS startup’s toolkit, then, is changing end user behavior. A startup that doesn’t change the behavior of a customer will see the customer churn in a few months or at the expiration of their contract. Customers don’t change their behavior for many reasons. Sometimes the friction to adopting a new workflow is too great.
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20 February / saas / startups / marketing
When a startup is confronted with the prospect of hiring a head of marketing, founders heads often spin. What should be the day-to-day tasks for this person? What skill sets are important? Because of the seeming abstract nature of marketing, founders sometimes delay finding a head of marketing until they feel acute pain, at which point they can clearly identify the attributes of the right candidate. But underinvestment in marketing, like underinvestment in infrastructure or software or product, isn’t a good idea.
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03 February / saas / sales / data analysis
What should the optimal revenue per customer be for a SaaS company? I could say million dollar contracts typical of enterprise sales provide more long-term stability and total revenue opportunity. On the other hand I might contend larger customer bases paying smaller license fees enable more predictable growth. Which is the correct argument? First, lets examine the relationship between average customer value and total revenues, to see if smaller customers create a glass ceiling for total revenue.
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29 January / saas / fundraising / data analysis
​ An entrepreneur asked me the question, what is the maximum viable churn for a startup? Within that question, a few others are embedded. How should a founder think about trading off efforts to grow revenue and mitigate churn? What is the impact of account growth on net churn? Startups must walk a tight-rope to balance growth, churn and cash. Below is the framework I use for working through maximum viable churn.
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27 January / saas / sales
Last week, I spent some time at HeavyBit, the community for developer focused companies in SoMa, chatting with a few companies reaching scale. Across a handful of meetings, a recurring theme surfaced for these B2D (business-to-developer companies). How should their sales and marketing apparatuses be built? Do the field sales models of infrastructure companies or the inside sales models of software companies apply when the initial user is a developer?
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15 January / saas / customer success
Churn is one of the most important metrics for businesses. Churn dictates customer lifetime, lifetime value (CLV), customer acquisition spend and customer success spending. In short, churn is pivotal number to evaluate a startup’s business, both for founders/management teams and investors. Unfortunately, accurately measuring churn rates/lifetime value is more complex than I initially thought. I was researching the topic after Ryan Shank asked me how best to calculate an average customer’s lifetime value.
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13 January / startups / sales / saas
I’ll never forget the first time I was assigned a sales quota. I was six months into a sales role at Google in which I on-boarded and managed the accounts of social networks running AdSense ads. Our key metric was customer satisfaction and retention. After a few months, I was starting to get into a groove. And then, our team was assigned a new manager who put the team on a quota, sending me into a tailspin.
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09 January / saas / sales / data analysis
For Google, seasonality is an important factor in forecasting quarterly revenue growth. In the advertising business, Q4 is always the strongest, followed by Q1. Q2 is the weakest. In Google’s latest financial year, the difference between the weakest and strongest quarters was 22%: $14.4B in Q4 and $11.8B in Q2. I wondered if the same were true for SaaS companies. Should SaaS startup forecasts account for differences in underlying customer purchasing habits?
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07 January / saas / marketing
Tien is the founder and CEO of Zuora [1], and was formerly CMO and CSO at Salesforce. He is a brilliant marketer and created the notion of the three doors to SaaS success. He spoke about this innovation at a recent CMO summit; the video is here. If you visit Zuora’s website, you’ll see Zuora’s three doors along the top of the page: Subscription Economy, Why Zuora & How It Works.
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05 December / saas / customer success
Credit: National Geographic I was lucky enough to spend some time with Monica Adractas, a former McKinsey partner who is now Churn Czar at Box. She and I chatted about the challenges in managing churn and her view on how to handle it. I thought she had some terrific insights and a clear understanding of the methods to reduce churn from her experiences. These are my notes from that conversation:
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A key component in a startup’s formula for success is educating customers about the product and driving sales. The sales and marketing teams of a startup are responsible for this. There are many ways to structure sales and marketing teams. The diagram above outlines a sales and marketing team structure that I’ve observed across many startups. It is consistent with the organizational design Salesforce used to drive revenue from $0 to $100M, described Aaron Ross’s book, Predictable Revenue.
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11 November / startups / benchmarks / data analysis / saas
Constrained by a limited budget while seeking to grow as quickly as possible, startup founders must decide how to balance growing their engineering teams with their sales & marketing teams. To help inform those decisions, I’ve benchmarked the relative sizes of the sales and engineering teams of the 36 publicly-traded SaaS companies from founding to IPO, typically 7 years later. The graph above shows the average Sales & Marketing allocation in turquoise and Research & Development investment in red.
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31 October / saas / customer success / sales
Every SaaS business suffers from churn. If churn isn’t managed properly, the lost revenue from churned customers offsets new revenue and the business flat-lines or suffers negative revenue growth. I’ve seen startups employ three patterns for offsetting churn: acquiring new customers faster, upselling existing customers to buy more software, or structuring pricing to grow with customers. Each strategy requires different levels of investment but achieves similar results. These strategies are often deployed in addition to a customer success team, which require their own investment.
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22 October / saas / data analysis / fundraising
In the past 24 months, something extraordinary has happened. The value of publicly traded SaaS companies has grown by 200 to 400% while the underlying customer unit economics of those businesses hasn’t changed. Below is a chart of the ratio between enterprise value to revenue for two segments of SaaS companies. The All Segment contains 36 publicly traded SaaS companies. The High Fliers comprises the upper half. From about 2004 to 2011, the average publicly traded SaaS company held an EV/Rev multiple of 3 to 5x.
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It’s an important question and one that arises most often as a SaaS startup scales. Churn, masked by growth, becomes a limiting factor of growth. How much should the business invest in managing churn? Our SaaS benchmarks from earlier this week tell us the average public SaaS company has a 3% monthly revenue churn or a 2 year lifetime and a sales efficiency of 0.8, which implies a 5 quarter pay back period on cost-of-sales and cost-to-serve.
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11 October / customer success / saas
If a typical SaaS business loses about 2 to 3% of their customers each month to churn, the business must grow by at least 27% to 43% annually to maintain the same revenue. The idea written as an equation: Revenue Growth = Customers x Avg. Contract Value x (Growth Rate - Churn Rate) At the beginning of a SaaS startups' life, when the company generates $1M in annual revenue, churn in absolute dollar terms is small, about $300k for the year.
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10 October / saas / benchmarks / sales
One number investors use to benchmark SaaS startups across sectors and industries is sales efficiency. There are a handful of variants of this metric, sometimes called the magic number, but ultimately they all aim to provide some sense of the incremental revenue returned by sales and marketing investment. To make it more concrete, if a startup invests $500k in marketing and sales this quarter and generates $1M in incremental revenue, net of the cost to provide the service, for the next 12 months, the sales efficiency would be 2.
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01 October / saas / best practices
A technology advantage isn’t enough to build an enduring enterprise SaaS company because at the core, all SaaS software share the same architecture. A relational database stores data and a web site presents the data. This is true for CRM (Salesforce), marketing automation (Marketo), email (Exchange), content management systems (Sharepoint) and so on. Because SaaS apps use standard databases, engineers can easily transfer the data from one database to another.
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27 September / saas / customer success / sales
The three words roll off the tongue: monthly recurring revenue (MRR). What’s not to love about subscription models? Negative working capital, predictable revenue growth and an average of 13x market cap to annual revenue in the public markets, with some darlings reaching 50x multiples. The list goes on. But the words recurring revenue belies one small detail. These recurring customers must renew their subscriptions, at which point another three word phrase is uttered: revenue-at-risk, the amount of MRR that might be lost to customers who choose not to re-enlist.
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11 September / saas / data analysis / benchmarks
One of the most frequent questions entrepreneurs ask me is how does their business compare to others? Benchmarking is a great tool, if you can get access to representative data. Pacific Crest and David Skok have released a fantastic survey benchmarking SaaS metrics for early and growth stage companies. The entire report is well worth reading. Below is my list of the six most important benchmarks and observations from that report.
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How much should your SaaS startup spend on sales and marketing? I’ve written about using unit economics and lead funnel performance to answer this question. Emulating the patterns of successful SaaS companies is another technique. There are about 34 publicly traded SaaS companies that have published their revenue and sales & marketing expenses. Though their revenue growth rates are each unique, the sales and marketing spend patterns are quite similar. The revenue ramps of public SaaS companies follow the familiar exponential growth path.
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15 July / saas / benchmarks
With more than 80% of venture capital investments occurring in enterprise and with the public markets disproportionately rewarding SaaS companies with huge enterprise value-to-revenue multiples (median is 7.6), it’s no surprise that interest Software-as-a-Service is booming. After meeting quite a few SaaS companies, I’ve compiled a list of my ideal characteristics for a SaaS business below. Characteristic 1: Product Is Core to the Operation of the Business The product is essential to the operation of a customer’s business.
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23 May / saas / marketing
At today’s Under the Radar Consumerization of IT (CoIT), the predominant theme will be antagonism. Friction, dislike, resentment within organizations marks opportunity for consumerization of IT startups. Taking advantage of this sentiment, Expensify employs a very deliberate marketing tactic: “Expense reports that don’t suck.” Talk to anyone who uses antiquated expense report systems and they are bound to sigh and complain, frustrated by the experience but resigned to the fact they can’t do much about it.
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06 May / saas / sales / marketing
Kenny van Zant drew this diagram for me on white board and I think it’s the best visualization of how SMB SaaS freemium business grow. The diagram highlights a few important mechanics of the SMB SaaS business model. In any given freemium user base, small-office/home-office (1 to 20 employee shops) users tend to be a few times larger in size than true SMB customer (20 to 500 employees). Most of these SOHO customers remain unpaid evangelists.
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17 April / saas / sales / marketing / strategy
At first glance, SMB SaaS companies, those who sell Software-as-a-Service to small to medium businesses, may seem like any other software company. But they are quite a different breed. Successful SMB SaaS companies have reinvented their businesses eschewing the expensive enterprise sales model in favor of end-user centric marketing, support and product development. These businesses often look more like consumer startups than enterprise startups. It’s all because of the nature of the market.
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25 March / saas
If at any time in the past ten years, you might have asked someone at Intuit about the size of the QuickBooks user base, they would have told you the same number: about 4M. This figure hasn’t grown because Intuit’s customer base, the small-and-medium business market, is a leaky bucket. On the small end of the spectrum, about 750,000 businesses are created each year and about the same number fail.
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07 February / saas / sales
Kenny Van Zant is a marketing wizard. Before his current role at Asana, Kenny managed products and marketing for Solarwinds, a publicly traded company that sells networking equipment to the mid-market. Solarwinds pioneered the low-friction, high-velocity sales model in their segment to great success. SolarWinds offered free products to their customers to gain usage data that informs their sales and marketing efforts. As one might expect, inside sales reps would call upon the most likely customers to up-sell them to paid.
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15 January / saas / sales / product
Many of the SaaS companies I work with are buzzing about a new concept: product qualified leads (PQL). It’s typical to see outbound sales teams create new leads by cold-calling - think Glengarry. And marketing also qualifies leads (MQL) using online advertising, branding, content, email and other channels. But the PQL concept is novel. PQLs are potential customers who have used a product and reached pre-defined triggers that signify a strong likelihood to become a paying customer.
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18 September / saas / marketing / sales
SMB SaaS companies cannot afford to pay for distribution. At 2 to 4% conversion to paid rates and $5 to $10 monthly subscription fees, the breakeven CPC for these products on search is $0.40. The average Google click costs three times this and the iOS average cost-per-install is more than twice as expensive. The most successful SMB SaaS companies (Zendesk, Expensify, Square) build communities to drive distribution. Those communities reinforce and build a brand.
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21 August / saas / sales / marketing
I love freemium businesses. I have met with many of them, work with one and if I were to start one, this would be my game plan, the characteristics of the product, market, distribution channels, conversion point and team. Product Characteristics The existing solutions are either email and spreadsheets or software architected before the turn of the century. In either case, the alternative is painful to use, so excruciating in fact, that individual employees are willing to circumnavigate IT’s policies in search of something better.
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20 August / data analysis / saas / sales
Developing a sales strategy is critical for software-as-a-service (SaaS) startups. The first step in developing a sales strategy is to build a robust market segmentation. I’ve used data from the US Census to develop a segmentation that reveals some surprising facts about the SMB market and may help inform your startup’s sales strategy. Chart 1: 98% of businesses in the US employ fewer than 100 people. 98% of businesses in the US employ between 1 to 4 people.
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26 April / saas / marketing
On first glance, SMB SaaS companies, those who sell Software-as-a-Service to small to medium businesses, may seem like any other software company. But they are quite a different breed. It’s not just the sales process that differs from traditional software. The entire business has be built differently. So must the product. And typically these products have a 2 step value proposition. SMB SaaS companies sell to a radically different market than enterprise software companies.