I’ve been reading Creativity, Inc., a history of Pixar and autobiography of Ed Catmull, the founder and CEO. Given how captivating Pixar’s seminal movies are, I wasn’t surprised to find the book is engrossing and well written. But I was dazzled by the wealth of management wisdom the book shares. These are my five favorite insights from the book so far.
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.
Salesforce went public more than 10 years ago. This harbinger of subscription, internet delivered software created one of the most exciting waves in software and the single most valuable SaaS company today, worth $37B as of this writing.
In 2015, SaaS companies trade at a 30% lower multiple of revenue than last year. In early 2014, the typical SaaS company traded at about 9.2x their next-twelve-months of revenue. Since August 2014, that figure has dropped by about 30% to about 6.0x.
Almost every public SaaS company has seen multiple compression. Only RealPage, Qualys, NewRelic, ConstantContact and Hortonworks are at highs in 2015 compared to 2014. The other companies in this basket have have all fallen between 1% and 60%+. Xero, which once traded at a 50x multiple (!) is down to 15x (still the highest multiple of all).
Figuring out how much capital your startup may need to raise will inform lots of different strategic decisions. A startup’s growth rate is often highly correlated with the amount of capital it can invest in sales and marketing. More customers means more bookings, which means more capital and so on.
The chart above shows the cumulative dollars raised across a basket of more than 50 enterprise software companies. The median company raises $88M before IPO in year six. These companies typically raised $4-6M in their first and second year of existence. Then raised a Series B of about $15-20M, then a Series C of about $20M and finally a growth round of about $40M.
The best teams share two common attributes, according to MIT research:
The first characteristic makes sense. A team led by a single dominant person will perform according to the strengths and weaknesses of the (benevolent) dictator. Another team in which the strengths of one member complement the weaknesses of another will certainly be stronger.
The second quality, high emotional intelligence, while talked about quite a bit in interviewing training and management training, surprised me. But understanding and anticipating others’ feelings seems to the lubricant to help teams achieve greater performance. Amazingly, emotional intelligence impacts team performance as much when working remotely, by email or Skype, as in person.
SaaS startups are growing faster than ever before. Publicly-traded SaaS companies founded from 2008 through 2014 needed 50% less time to reach $50M than their counterparts founded between 1998 and 2005. I stumbled across this trend when looking at a different chart used in my S-1 analyses that compares the time to $50M for each of the 51 or so publicly traded SaaS companies.
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.