When discussing customer success for SaaS startups, the conversation focuses mostly on retaining customers and reducing churn. These are two fantastic benefits with meaningful return-on-investment. But great customer success organizations can meaningfully impact another critical part of the customer lifecycle, customer acquisition, by catalyzing evangelists to refer new customers.
Are startups growing much faster than they have in the past? The chart above plots the time required for startups to raise rounds at $1B or greater valuation, over the past ten years. The blue line is a logarithmic regression demonstrating the decrease from about 7.5 years to less than 2.5 years. The answer seems to be an unequivocal yes.
Are you a Barry, Jill, Buzz, Angel or a Devil? This is the question Best Buy store managers posed each time a potential customer walked into one of its stores when the company decided to segment its customer base in 2005. Barrys are high-income family men. Jills are soccer moms. Buzzes are gadget lovers. Angels are the best, most-profitable, customers and buy new products at full price. Devils, on the other hand, erode Best Buys' profits because they use coupons, find the best deals and return products frequently. After launching this segmentation, restructuring its stores to meet the needs of these segments, and focusing on the profitable segments, Best Buy's revenue increased 8%, an impressive figure for a retailer.
Crisis in startups is inevitable. Products break, deadlines are missed, legal issues arise, customers raise issue, employees quit, bad press circulates. To survive, founders and management teams have to respond well and quickly. In Managing the Unexpected, two University of Michigan Professors examine the characteristics and behaviors of great teams during crisis. Factory workers, miners, fire fighters, aircraft carrier flight deck hands, railroad operators and many others.
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. In the past two quarters, some of the key financial characteristics trajectory have improved materially.
Growth is king in today's public markets. Most of the SaaS IPOs we've analyzed have traded growth for profitability and they have been rewarded handsomely for it. For the large tech companies, this trend is no different. The public market prizes growth. Some public tech companies sustain growth through internal efforts, but many use their cash reserves to acquire fast-growing startups. These public market cash reserves total $430B or so across the top 250 or so public tech companies, a massive war chest that will fuel startup M&A in 2015.
In which sectors have software companies created the most financial value? I asked myself this question over the weekend. I categorized the top 250 IT companies which spans $675B in market cap (AAPL) to $3B in market cap (ASOS) and created the chart above. B2B Software, which includes Microsoft, Oracle, IBM, and SAP among others represents about 30% of the total IT market cap today. The consumer web (GOOG, FB, Baidu, eBay) is second at 20% of market cap. Semiconductors and Consumer Hardware (led by Apple), tie at 17% each.
When will the tech bull market end? It's a question that I'm asked with some frequency. There are three fundamental reasons for the bull market. First, technology is changing nearly every part of the economy. Consequently, there are many huge opportunities for entrepreneurs to seize. Our internal analysis shows that only 2% of IT budgets are spent on cloud today. Second, the capital startups require to pursue those opportunities is plentiful. 2014 will be the third largest year in VC fundraising since 2000. Third, the exit market is vibrant and rewards market leaders with massive outcomes. In other words, there is a lot of strength in the fundamentals of the tech ecosystem.
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.
I've been reading a book called Legacy Of Ashes, which is an exhaustive history of the CIA since its founding more than 50 years ago through to 2007. Reading spy stories is always enthralling, but surprisingly, the book is a fascinating case study in management.
What are the pains and aspirations of your customer? Does your product truly solve your customers problems? And fulfill its promise of doing something in a better way? Most startups wrestle with these questions at their outset, when they are in the customer discovery and customer validation phases of the lean startup cycle. But all startups should reevaluate these questions periodically. After all, a company's customers evolve with time and so do their jobs. The product-market fit assumptions that held true six months or year ago or three years ago may no longer be valid.
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.
At the DEMO conference, Danielle Morrill, the founder and CEO of Mattermark presented an impressive statistic. Seed, Series A, Series B and Later Stage startups employ 1M people, up from 650,000 just six months ago, according to Mattermark's data sources.
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. The chart above shows Veeva, Workday, Responses and MobileIron each generate 20% or more of their revenues from professional services (PS).