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).
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.
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. Engineers insert code into their applications which sends data to New Relic's servers. New Relic processes this data and provides interactive reports to identify underperforming code. New Relic charges by the server; the more computers monitored, the greater the subscription fee. Today, the company counts 250,000 users and 10,590 paying customers. An interesting sidenote: the name New Relic is an anagram of the founder's name, Lew Cirne.
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.
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.