Presentation Transcript

1. Bessemer’s Top 10 Laws of Cloud Computing and SaaS

   Adam R. Fisher, Partner
2. Bessemer Venture Partners Snapshot Founded 1911 The longest standing track record in the Venture Capital Industry with 150+ M&A and IPOs Strong Global Platform with over $2 billion under management and six offices worldwide One of the most successful software and Cloud investors in history Close partnership with Salesforce.com for Cloud investing Investing in Israel since 1992, and operating in Israel since 2007
3. Why did we create the 10 Laws? The emergence of Software-as-a-Service is the most important trend in the software industry of the decade, and that these tectonic shifts in the global software ecosystem are just beginning.Periods of tremendous transformation create tremendous opportunity, but the next giants of the software industry will need to abandon many of the long-held tenets of software best practices and adhere to a new set of principles.
4. Bessemer’s Top 10 Laws for Cloud Computing Less is more! Leverage the cloud everywhere you practically can Get Instrument rated, and trust the 6C’s of Cloud Finance Study the Sales Learning Curve and Only Invest behind Success Forget everything you learned about software channels Build EmployeeSoftware and focus on ease of use By definition, your sales prospects are online - Savvy online marketing is a core competence The most important part of Software-as-a-Service isn’t “Software” it’s “Service”! Support, support, support! Leverage and monetize the data asset Mind the GAAP! Cloud accounting is all about matching revenue and costs to consumption…well, except for professional services! Plan your fuel stops (financings) very carefully
5. 1. Less is More Take advantage of other SaaS Leverage PaaS and Iaas Only single-instance, multi-tenant systems Avoid on-premise deployments
6. 2. Bessemer’s “6Cs” of Cloud Finance CMRR: Committed Monthly Recurring Revenue Cash Churn CAC: Customer Acquisition Cost CLTV: Customer LifeTime Value CPipe: CMRR Sales Pipeline
7. CMRR (Committed Monthly Recurring Revenue) From bookings and opacity… … to CMRR and transparency! New Accounts EXPENSES Upsell & Expansion less churn EXPENSES Renewals Cash burn rate BOOKINGS CMRR Existing Contracts Difficult to make decisions: Multi-year bookings Non-recurring revenues Impact of churn and renewal? Full transparency : Employee assessment Operational planning Financing Valuation
8. Cash is King! Heavy upfront financing… … requiring tight expense management Lines are still not crossing! Complex ERP sales Monthly recurring expenses Freemium model Expected breakeven point Monthly Recurring Revenue Key drivers of cash consumption: Customer Acquisition Costs, Churn, Renewal rate
9. Cash: Give the right incentives to your sales force to get longer upfront payment Payment terms mix impact on Cash Flow Company starting with $1m CMRR and growing at 60% CAGR Semi-Annual 5-year cash impact* Annual Quarterly Changes in payment mix can have a drastic impact on cash flows Sales incentive needs to be heavily biased towards annual upfront cash payment in the high growth phase Additional $38m burn Additional $52m burn
10. Churn defines the viability of your business model Addressing Churn Root causes Pricing/ Value UI and workflow complexity Downtime Monitoring Overall application usage (login frequency and time) Application usage (most frequent use case, function used…) Acting Competitive analysis/sales tools Usage monitoring (e.g., True Login Percentage, API usage) and follow-up GUI/ workflow redesign Platform stability Increased discount for early payment Benchmark MRR churn (<12% p.a. and < Upsell) Customer Churn Effect of 20 % churn on MRR base 50% MRR loss in 3 years Start of year 1 End of Year 1 End of Year 2 End of Year 3
11. The CAC (Customer Acquisition Cost) ratio measures your S&M effectiveness CAC < 1/3 (3 years payback or more): bad! Slam on the breaks and refine your sales model CAC >1 (payback in less than 1 year): great! Invest more money immediately and step on the gas during the good times and tie growth to cash flows in downturn… New CMRR (Q4 09) x 12 x % GM CAC Ratio = Sales & Marketing Costs (Q4 09) excluding account management costs Public Benchmark SaaS 13 Index, Q2/Q3 2009 Median: 0.39 High: 0.68 Low: 0.00
12. The Customer LifeTime Value tells you if your business model is profitable CLTV: defining your profitability CLTV example Salesforce.com CLTV estimates (public data) Example : 1 customer generating $1 of ARR Assumptions Customer lifetime: 5 years WACC: 15% Pro. Serv. Rev./COS included in CAC CLTV > 0 = Profit!
13. The Cloud Dashboard 5C’s Measurement Target CMRR Growth rate Upsell vs. new customers 50%+ Upsells >= churn Cash FCF Payment terms Pro. Serv. GM breakeven @ 50% growth rate 1-year upfront mix > 50% >0 on project basis Churn Churn rate Churn < 12% CAC CAC ratio (new CMRR) CMRR renewal cost CAC > 1 < 30% of annualized GM CLTV CLTV G&A as % of sales R&D as % of sales CLTV>0 G&A ~15% at scale R&D ~10% at scale Free Cash Flow at scale: 20%+!
14. 3. Study the Sales Learning Curve Tune before you scale: the Sales Learning Curve is even more critical for SaaS and it takes at least $300k MRR to climb it. Stop at three sales reps until at least two of them are making $100K MRR quotas Staff to learn Staff to scale Target quota 2X fully loaded cost of a Sales Rep. ($100k MRR quota) Sales Rep. performance Fully loaded cost of a Sales Rep. <$300k SaaS company MRR run rate
15. Separate your hunters and farmers(pay them all on CMRR growth) Paid on New CMRR - rule of thumb: $1 of CMRR = $1 of bonus Min threshold at 50% of target and 2x acceleration above target Incentives for more favorable cash flows (e.g., multi-year pre-payment) Typically $100k CMRR quota per year New Sales Hunters! CMRR Growth Paid on Net incremental MRR for customer portfolio (Upsells – Churn) Lower bonus level for renewal: Upsell: $1 CMRR = $1 bonus Renewal: $1 CMRR = $0.3 bonus Upsells & Renewals Farmers!
16. 4. Forget everything you learned about channels SaaS is a whole new ecosystem where traditional IT channels don’t work – Focus your business development efforts on business services channels, but you will need to sell directly for a long time as these new set of partners are not easy to ramp-up From IT Channels… … to Business Channels Provider of technology enabled, managed or professional services Same customer segment focus Understand value of recurring revenue streams Limited system integration requirements No hardware pull through Different revenue model
17. CRM/SFA 6. Take advantage of online marketing By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful SaaS business Profile, Track and Segment Drive to Web PR Automate Analyze, Adapt, Act!
18. Plan your fuel stops carefully Cloud Computing Company Lifecycle All 6 C’s at benchmark level GAAP revenues Cash Flow IPO! $3-5m Series A @$5-10m pre. $8-12m Series B @$20-30m pre. $15-20m Series C @$50-80m pre. Total Cash Burn:~$40m
19. Bessemer’s Top 10 Laws for Cloud Computing Less is more! Leverage the cloud everywhere you practically can Get Instrument rated, and trust the 6C’s of Cloud Finance Study the Sales Learning Curve and Only Invest behind Success Forget everything you learned about software channels Build EmployeeSoftware and focus on ease of use By definition, your sales prospects are online - Savvy online marketing is a core competence The most important part of Software-as-a-Service isn’t “Software” it’s “Service”! Support, support, support! Leverage and monetize the data asset Mind the GAAP! Cloud accounting is all about matching revenue and costs to consumption…well, except for professional services! Plan your fuel stops (financings) very carefully
20. Some ideas for your 2010 Planning Base your plan on the 6 C’s of Cloud Finance P&L: MRR = MRE: you control your destiny when your monthly revenue equals your monthly expenses Sales & Marketing:It might be time to step on the gas…or not! Your CAC ratio will tell you Focus on customer retention: without a low churn, you cannot build a profitable business model Mange your cash carefully but don’t under-invest: capital is available but your metrics will tell you if you can raise outside capital or not in good terms Watch for cheap MRR (M&A, Other structure to avoid buying assets?): you may be able to buy failing competitors. The recession created opportunities
21. THANK YOU More information: www.bvp.com/cloud cloudvc@bvp.com