Posts

There many ways of measuring a SaaS company’s efficiency: magic number, payback period on cost of customer acquisition, lifetime value to cost customer acquisition ratio, quick ratio. These metrics primarily focus on measuring efficiency in customer acquisition. But, a software company’s true efficiency also have to include the cost to service contracts. A SaaS company’s revenues are a collection of annuities, contracts that pay fees on an ongoing basis. And the goal of a subscription businesses is more than to acquire those streams, but to nurture and sustain them.

Your startup is just getting off the ground. You might have a few account executives and a sales leader in place; maybe some revenue and a handful of customers. The sales team costs real money, and the question before the company is: how do you know what quota plan to assign to the account executives?

I’ve seen four stages in early stage software companies. Some businesses employ all four, others just use one or two. Knowing about the options ahead of time may help you figure out the right sales plan for your startup.

Another week, another blockbuster software acquisition! This time SAP has agreed to purchase Qualtrics for $8B. Qualtrics is a Utah based provider of experience management software. Qualtrics writes and sells software to ask questions of employees and customers to help businesses improve customer experience, employee satisfaction products, and brand. Qualtrics had intended to go public this week. The company generated $342M in the last twelve months and had grown 27% annually.

Over the weekend, IBM announced the largest software acquisition of Red Hat, an open-source software company, for $35B. It is the largest software acquisition in history, and the third largest technology acquisition (Dell/EMC at $67B and JDS/SDL for $41B were both larger hardware mergers). IBM will spend 31% of their current market cap for Red Hat and pay a 70% premium to Red Hat’s closing price on Friday.

Earlier this year, I wrote about MadKudu’s analysis of free trials and asked if readers were interested in another benchmarking survey on the topic, and the response was overwhelming. Over the last few weeks, my colleague Patrick Chase, and I (along with help from many people in the community) have been busy putting the survey together. I’d like to thank Ryan Janssen for lending a hand.

If you’d like to participate, please fill out the survey here. Surveys are due November 2. It takes about 6 minutes complete. All the data collected is anonymized. Those participating will receive access to the raw, anonymized data. In a few more weeks, we’ll publish our findings on this blog.

I’ve written quite a bit about the public market software multiples. They’ve increased to near historic levels with forward revenue multiples approaching 9x. As the public markets have appreciated, something has happened that I didn’t expect. Some public companies are now fetching the mulitples of the most attractive private companies. I thought valuations between the markets would normalize because of a deflation in both public and private. Today, we have the beginnings of normalization by inflation.

Last week, AirBnB proposed granting their most valuable hosts shares in the company, much like employees. This requires a change in securities law. It’s a novel idea that has a history, promise and some risks.

In 1998, an online travel agency, TravelZoo, tried this. They granted free shares to 700,000 people who signed up to use the service. Administration of these shares proved a headache for the company. Many of those who received the shares were unaware of conversion deadlines. The company honored its commitments anyway. The company bore some additional regulatory burden. In 2004, six years later fewer than 1000 of these shareholders had traded their shares for cash. Not a ringing success.

In early markets, customers prefer entire solutions, not best in class point products. These solutions often include significant professional services and education. At the beginning of a new wave, most customers don’t understand the technology well. So, they seek experts to guide them.

Companies that provide services and education often win the early market. They develop customer relationships, reinforce their expertise with a strong brand, define the purchasing criteria in their favor and ultimately grow faster.

Dr. Richard Cook, formerly an associate professor at the University of Chicago, published a paper in 1998 entitled How Complex Systems Fail. In his paper, Dr. Cook lists 18 observations from his research in medicine about failure of complex systems. His insights are directly applicable to running software at scale, and those observations informed our latest investment in Gremlin.

Some of his Cook’s are obvious. Complex systems are intrinsically hazardous systems. Complex systems are heavily and successfully defended against failure. Catastrophe requires multiple failures – single point failures are not enough.

About two years ago, Marketo was publicly traded and valued at roughly $1.1B. Vista Equity paid $1.8B to take the company private, a 64% premium. At the time it was taken private by Vista, Marketo generated $241M in trailing revenue, growing at 35% annually. Its net income margin was -31%.

Last week, Adobe announced they acquired Marketo for $4.75B. By the time of the sale, revenues had grown to $321M, growing at about 21% annually and profitable. Presumably, the company traded investments in growth for profitability to service the new debt.