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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.
To thrive, venture capital firms must perform three things well - ;raise capital from limited partners, source companies to invest in, and pick the best opportunities. Historically, each of these three activities has been highly centralized in a small partnership often perched on Sand Hill Road. But new networks are changing this. The latest called DAO attempts to decentralize all three at once.
At Google, we tested everything. User interfaces, advertising targeting models, even hiring practices. One product team tested 41 different shades of blue to ensure maximum click through rate; but the company is now testing black links. That's one enormous advantage of A/B testing - all the sacred cows must prove their beatitude to maintain their divinity.
The highest correlated factor to post-money valuations for Series A SaaS companies isn't revenue or revenue growth, but negative churn. Revenue growth correlates to post-money with a 0.18 R^2. Revenue correlates at 0.3 R^2. Negative churn, or account expansion, correlates at 0.54 R^2.
If you build a disruptive product in the woods and no one is around, does anyone buy it?
Just how real is the sudden importance and profitability for SaaS companies? The median publicly traded SaaS company has improved net margin from -25% to -8.8% in less than two years, after a nearly four-year trend of negative growth in net margin. The initial spike in 2014 occurs two quarters after the first SaaS correction and the second occurs in late 2015.
The notion of channel sales in SaaS companies is becoming more common than in has been in the last few years, and for some businesses like Intacct, channel partnerships drive more than 50% of sales.
In the past week, Oracle acquired two vertical SaaS companies. OPower is an Arlington Virginia based company that employs approximately 600 people. The company analyzes utility consumption patterns and helps homeowners reduce their energy consumption. Textura provides collaboration tools for the construction industry and is based in Illinois. Oracle paid $663 million, net of cash for Textura and $532 million for OPower. These two acquisitions form a notable moment in time for the evolution of the vertical software industry.
It is an election year. The Federal Reserve has changed its interest rate hike plan. Venture financing has slowed by upwards of 15% in the first quarter. Q1 GDP growth fell to 0.5% from 1.4% in Q4. How much have all these factors impacted SaaS companies? Are buyers purchasing less software?
In ServiceNow's Q1 Investor presentation are the first semblances of SaaS metrics in public company reporting. If you sift through the 40+ public SaaS businesses, you won't find mention of annual recurring revenue, churn, account expansion, or cash collection cycles in most of them - even though these are the the metrics the management teams employ to evaluate and steer their businesses.