Yesterday, I met with a bright entrepreneur who asked me to clarify four numbers for SaaS companies: bookings, monthly recurring revenue, recognized revenue and cash collections. These four numbers are critical to understanding the health of a SaaS startup, so it's important to have a strong grasp on the distinctions between them.
"Is there a bubble?" is a question that seems to be asked every day. But it's the wrong question. Maybe there is a bubble. Maybe there isn't. Instead of asking the question, let's just presume we are in a bubble. Then, the far more important debate surfaces: given the bubble, how should a team manage a startup differently?
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 Atlassian told me, there's another way, a novel way of building companies that still isn't very well understood: the Flywheel SaaS Company.
Sales cycles, the time from acquiring a lead to closing an account, vary quite a bit by industry, product type, and price point. But universally speaking for startups, shorter sales cycles are better. Maintaining a short sales cycle is a competitive advantage for several important reasons.
How many companies sell each year for $1B or more? In the last ten years, on average, 2.5 US venture backed IT companies are acquired for $1B+. In the last ten years, a total of 20 companies have sold themselves for greater than $1B. Over the past 20 years, that trend has been relatively constant, with the exception of the euphoria in 1999 and 2000.
Performance reviews tax organizations, managers and employees to such an extent that some companies have abolished them outright. Reviews are emotionally complex conversations. Positive and negative feedback are intertwined with conversations about career progression, raises and equity grants. These meetings are emotional powder kegs; and it's no wonder they stress us.
In a post earlier this week, Josh Kopelman coined the term Private IPO to describe patterns in the runaway late stage financing market. In addition to the points Josh makes about the dangers of stale valuations, there is another important and related implication for founders.
here'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?
Yesterday, Redpoint announced something amazing: Andy Rubin, the creator of Android is joining Redpoint. I remember reading about Google's Android acquisition in 2005 and wondering what would become of the technology; and then later at Google seeing some of the first versions of the G1, the first Android phone. Since then, Android has become a standard, and powers 81% of phone shipped last year. My partner, Jeff, has worked with Andy for about 20 years. Jeff and Andy's relationship is an example of one of the special things that struck me about Redpoint when I joined seven years ago: the importance Redpoint places on long term relationships.
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. Surprisingly, the answer so far is no.
In 2013 with 40 employees, Stripe adopted email transparency, a policy that makes most emails public to everyone in the company. They posted an update about the success of email transparency in late 2014 with 164 employees. At first blush, it may seem radical to funnel emails of 164 other people to everyone's already overflowing inbox. But it works brilliantly because it creates a policy around Institutional Memory, something very few companies do well.
Every morning, it seems like a startup raises a massive growth round. In fact, the data proves the point. In 2014, there were 251 working days and 211 $40M+ growth rounds - just about one per day. In contrast to the frenetic private market, there were 15 US IT venture-backed IPOs with offerings greater than $40M last year, slightly more one IPO per month in 2014. Private market rounds were 16x as common as IPOs in 2014, compared to the 2004-2007 era, when IPOs were about as equally common as large private financings.
Like most things in a startup, a sales commission plan should evolve as the company scales. For example, as Mark Roberge, CRO of Hubspot, wrote in The Sales Acceleration Formula, Hubspot adopted three different sales compensation plans throughout its early evolution.
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
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.
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. Above, the line chart shows the astounding growth in the number of Adobe Creative Suite subscribers from the launch of CreativeSuite 6 in mid-2012 through March 2014 growing at 31% per quarter.
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 to 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. Below are the five marketing channels I've observed at SaaS companies.
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.
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.
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 stable, but Series B rounds have seen a dramatic acceleration recently.
When you walk into Looker's offices, the first thing you'll see are the surfboards standing in a corner, still sandy from a morning's outing. Looking around, you'll notice the sunny outdoor patio where a chef once made enough paella in one enormous *paellera* for Looker's 100 employees, and you might sit at the long tables where they shared the feast. As you entered the building, you would have passed a motorcycle glinting in the sun, a gift from the company to an early engineer for his outstanding contributions to the business. All around the office, you can feel the culture Frank, Lloyd and the rest of the Looker team have imbued into company from the very earliest days.
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.
Over the past four years, the amount of seed investment has increased by more than 200%. And the typical seed investment size has risen by 25% in just the last 12 months. In 2014, for the first time in four years, median Series A round size have increased.
After writing about the Seed Market in 2015, I wondered whether I could find some data to support Sam Altman's observation that acquihires have fallen in frequency over the past year by 66-75%. The chart above shows an estimate of the acquihires in US technology companies over the past four years.
A few weeks ago, I joined Mike Volpe, CMO of Hubspot, on the Growth Show where we had a great time talking about a few SaaS topics. A few listeners to the podcast picked a line from that podcast that I think is a really important point for content marketing. I said, "Content is one of the few forms of marketing that has a compounding return."