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.
Most interviews are a waste of time. According to Adam Grant, a professor of Organizational Behavior at Wharton, "standard interviews only accounted for 8% of the differences in performance and productivity." The typical interview fails to predict performance accurately because it is subject to interviewer biases and candidate biases, and fails to compare the candidates with a consistent rubric.
Capital is plentiful. Startup infrastructure costs continue to plummet. App stores and other novel channels of distribution are flourishing. At this point, a startup's most challenging task, aside from finding the right idea, is recruiting and retaining a great team. But if you needed another push to found a startup, just take a look at the data.
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.
The typical equity stake of US venture-backed post-Series A CEO has increased from 15% to 21%, a 40% increase in five years. This trend is also manifested in Series Bs, but as the chart above shows, post-Series C and D, total founder/CEO equity positions have remained constant.
What a difference a few quarters make! In the past nine months, Series A valuations have skyrocketed. In fact, 2014 Series A pre-money valuations have surpassed Series B valuations from 10 years ago, accounting for inflation. The same is true for Series B valuations exceeding median Series C valuations a decade before.
It's Q3 earnings season and about half of the major public tech companies and recent startup IPOs have reported their figures. I keep track of earnings to get a sense for how these companies perceive their markets. Meeting or exceeding earnings indicates companies can forecast their growth and demonstrates how predictable these businesses are. The more predictable, the more stable the business environment and consequently, the fund raising environment for startups.