Posts

We’ve seen a sudden decline in SaaS pricing. In the past 3 years, the median Average Revenue by Customer of SaaS companies going public has dropped by about 70%. But has the shift towards smaller customers, shorter and faster sales cycles created less profitable businesses?

Not at all.

The chart above shows the gross margin trends of public SaaS companies broken down by their ACV (average customer value). At or close to IPO, the median company, irrespective of price point, operates at about 70% gross margin.

This post is part of a continuing series evaluating the S-1s of publicly traded SaaS companies in order to better understand the core business and build a library of benchmarks that might be useful to founders.

There’s a SaaS company on the other side of the world founded nine years ago that is worth $2B, generates $100M in annual revenue and growing 80% year over year. Based in New Zealand, Xero has built a widely adopted small-to-medium business (SMB) accounting solution that counts 371,000 paying customers, a figure that grew 76% in the last 12 months. Amazingly, 30% of New Zealand GDP is processed by Xero.

Christoph Janz, one of the best seed stage SaaS investors, published a great tweetstorm on the state of the SaaS ecosystem yesterday. I’ve copied it below.

There’s no excuse for not understanding your metrics, for not providing great customer service, for not understanding the role of customer success, for not doing intelligent lifecycle marketing, for not doing great content marketing…What was hard and innovative 5 years ago is #tablestakes now.

The mechanics of SaaS startups are becoming better and better understood as the community and sites like Jason Lemkin’s SaaStr and David Skok’s For Entrepreneurs and Christoph’s own blog curate the stories, explain the complexity and reveal the metrics behind the fastest growing SaaS companies of our time. And as Christoph points out the marketing, sales and customer retention benchmarks have been well analyzed by things like the PacCrest Survey among others.

These are my two favorite devices from 2014. I use each one on a daily basis and both have changed my life in a meaningful way.

Amazon Kindle

In 2014, I slept really poorly. I had trouble falling asleep and when I did, I had chaotic dreams and I was tired when I woke. I thought it was stress. But it turned out to be my Nexus 7 tablet. Before going to sleep, I read for 45 minutes or so each night. Flipboard, New Yorker, newspapers, emails, and the Kindle App on Android - this was my routine. In December, I bought a Kindle and everything changed.

After writing about B2C2B companies last week, I received a lot of great comments about the differences between the B2C2B models, particularly the sales models after a company has acquired the initial Consumers.

These are three sales models I’ve observed B2C2B companies use to convert the initial momentum with consumers into dollars.

The first sales model is the 2 Phase Sell. LinkedIn and Duolingo employ this. LinkedIn attracts large number of consumers with a place to find jobs and post resumes. Then LinkedIn sells recruiters (and others) access to this data. The B2C2B sales movement involves using the consumer data to create a valuable data asset which is sold to someone else. Duolingo is a free language learning mobile application that asks language learners to translate sentences. These sentences are actually provided to Duolingo by big internet sites, who pay Duolingo to translate their pages into other languages, through the work of these language learners.

Since LinkedIn’s IPO in 2012, the company has grown its market cap by 6x and as of this writing is worth about $27.5B. Second to Salesforce, LinkedIn is the second largest SaaS company in the world. Unlike most SaaS companies which are B2B, LinkedIn is a B2C2B company. LinkedIn attracts hundreds of millions of consumers to post resumes online and sells this data and access to its audience to advertisers and recruiters and salespeople. The intrinsic data and people network effects of the business create reinforcing feedback cycles that have helped the business achieve tremendous revenue growth.

This week, an entrepreneur told me his startup is a B2C2B business. It was the first time I’d heard this acronym, and I thought it was a genius moniker. B2C2B (business-to-consumer-to-business) succinctly captures the critical part of the new customer acquisition model powering many enterprise startups: winning hearts and minds of the intermediate consumer, the employees of a company.

What percentage of SaaS IPOs in the last four years have the founding CEOs of the business been CEO at the time of IPO?

62.5%. In about two thirds of SaaS IPOs from 2011-2014, the founding CEO is the current CEO.

Is there a meaningful difference between the equity stake of a founder who is CEO at IPO, and a founder who is no longer CEO?

One of the most important forces in SaaS today is the Consumerization of IT. Instead of a centralized IT organization deciding which products to buy, product managers and marketers and engineers and data scientists determine which products they think would serve them best and buy them directly, often using a credit card.

This movement is transformative and its impact is immediate. The chart above plots the median Average Revenue per Customer by Year of IPO for the 50 SaaS companies that have gone public in the past five years.

Each year, I do a retrospective analysis of this blog. This year, I found something unexpected. Like many other content sites, just a handful of posts on this blog generate the majority of the traffic. I’ve plotted the distribution of traffic by post above; it’s clearly governed by a power law. The top 2% of posts generated 19% of traffic, the top 10% account for 48% and the top 20% attracted 69% (Pareto would be vindicated).