We may have been talking about SaaS companies for more than a decade, but we're still just at the beginning. The legacy software companies including Oracle, Microsoft, SAP and and IBM control 83% of the market cap of software businesses, representing $830B in market cap. The largest SaaS company, Salesforce, is just about half the size of SAP, and Microsoft is 8x bigger.
I'm thrilled to welcome Mina Radhakrishnan as an entrepreneur-in-residence (EIR) to Redpoint. Mina, my partner Jamie, and I got to know each other about 10 years ago at Google, where we were associate product managers all working in Marissa Mayer's APM program.
In a recent podcast, Ron Gill, the CFO of Netsuite - a $7B+ market cap company with about $600M in 2014 revenue, which provides ERP software to mid-market companies - articulated the importance of the Lifetime Value / Cost of Customer Acquisition (LTV/CAC) ratio for his company. LTV/CAC is often used to justify marketing and sales investment to acquire customers. But there's much more to it.
McKinsey developed the 9 Box Matrix in the 1970s to help GE prioritize investments across its 150 business units. Not all business units were equally attractive. Some should receive investments and others should be divested. The 9 Box Matrix evaluated business units on two dimensions: industry attractiveness and competitive strength of the business unit. At some point in the last 40 years, Human Resources teams co-opted this model as a talent management tool, and replaced the two industry axes with people specific ones: performance and potential, as depicted above.
As the next generation of SaaS companies achieve maturity, they have begun to serve larger and larger customers, who in addition to demanding a great product, often request services. Professional services, as they are often called, entail training and customization. For product driven startups, the decision to offer professional services is a tricky one.
Of the 43 SaaS companies to have gone public in the time period between 2006 and 2014, 60% are trading above their IPO pop price – the price at the end of their first day of trading. The median company has appreciated 69% since its IPO. The chart above shows the trends for each of the companies in this data set.
In 2000, the majority of tech acquisitions were primarily stock. One company would buy another using its own shares, instead of paying for the target business in cash. But since then, there's been a secular trend to cash deals. In 2014, 90% of the tech M&A transactions consummated by companies, and excluding private equity firms, in the US with disclosed deal values were cash deals.
Creating a sense of urgency is one of the most powerful sales tools available to SaaS companies. There are many different ways of accomplishing this, but one of the most common ways is to offer discounts that expire. Discounts are powerful incentives to increase sales. But, they have to be crafted correctly, or they can have dramatic impact on a startup's cash position. This is why sales incentives should be designed hand-in-hand with the company's finance team.
Traditional software was initially sold by perpetual license. Then in the mid-00s with the advent of SaaS, the market shifted to per seat per year pricing. And simultaneously, freemium marketing strategies blossomed. Freemium companies provide software for free temporarily to entice users to try and use the product. Eventually, these users cross a threshold and convert to a paid subscriber. This threshold can be based on number of people using the product (Expensify), number of documents signed in a month (HelloSign), or additional product features needed by users (Yammer). Today, we're seeing a new segment of the SaaS ecosystem move to free - the SaaS Enabled Marketplace (SEM).
Orbiting the Giant Hairball is one of the most unusual business books I've read. It's irreverent, full of drawings, and completely chaotic in the most wonderful way. Gordon MacKenzie, the author of the book, worked at Hallmark cards for 30 years to the day. He started initially in the creative department imagining greeting cards and ultimately found himself with the title Creative Paradox. In his book, he described the way he injected creativity into his working life. I thought it was a great book with three salient themes.