Unveilling of the Bessemer's 10 laws of Cloud Computing and SaaS - Winter 2010 Release

When we first published the Bessemer’s Top 10 Laws for Being “SaaS-y" on Sandhill.com almost two years ago in conjunction with our annual Cloud/SaaS CEO Summit, we were overwhelmed with the positive response and feedback we received. We have heavily modified many of the best elements that we believe are still relevant, and have added several entirely new concepts for this update publication on Cloud Computing and SaaS.

The Cloud computing stack is currently defined by three levels: SaaS, PaaS, and IaaS. Software as a Service (SaaS), the most mature of these segments, is comprised of end user applications like Salesforce.com. Platform as a Service (PaaS) is the service and management layer of the cloud platform, and is evolving dynamically to include things such as intelligent provisioning, as well as application and network management. Infrastructure-as-a-Service (IaaS) is the foundational layer of cloud computing, and includes raw storage, compute, backup, disaster recovery, databases, and security. As the first segment to emerge in scale and the most application oriented, SaaS has lead the market to date with the largest market size, highest gross margins, and highest per-seat pricing. Recently, however, we have seen the rapid emergence of hyper-growth businesses in the PaaS and IaaS markets demonstrating that these will soon be independent, multi-billion dollar segments in their own rights with the potential for massive sales volume and attractive cash flow characteristics.

Here is the new version of the 10 Laws of Cloud Computing and SaaS:

1. Less is more! Leverage the cloud everywhere you practically can (more...)
   
   
2. Get instrument rated, and trust the 6C's of Cloud Finance (more...)
   
   
3. Study the Sales Learning Curve and Only Invest behind Success (more...)
   
   
4. Forget everything you learned about software channels. The internet is your new channel and Technology Enabled Service providers are among the few partners that actually care if you succeed (more...)
   
   
5. Build Employee Software. Employees are now powerful customers, not just their managers! We are witnessing the “Consumerization of Software” so focus on ease of use (more...)
   
   
6. By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful Cloud business (more...)
   
   
7. The most important part of Software-as-a-Service isn’t "Software" its "Service"! Support, support, support! (more...)
   
   
8. Leverage and monetize the data asset (more...)
   
   
9. Mind the GAAP! Cloud accounting is all about matching revenue and costs to consumption…well, except for professional services! (more...)
   
   
10. Cloudonomics requires that you plan your fuel stops very carefully (more...)
    

BONUS LAW: You can ignore one or two of these rules, but not more - Great companies innovate, but pick your battles! (more...)

You can download the full white paper at www.bvp.com/cloud or click here

Impact of the recession on SaaS Sales&Marketing productivity

The SaaS 13 Index representing the 13 major public SaaS companies has recovered very strongly (up 82.36%) since the beginning of the year, outperforming strongly the NASDAQ (up 29.5%). This strong recovery has highlighted the resiliency of the recurring revenue model in a downturn as well as the stength of the shift to soaftware-as-a-service and cloud computing. The growth rate has declined from an average of 46% from 07/08 to 14% forecatsed this year, but a few players are still showing a very strong growth, such as SuccessFactors (33%) and Constant Contact (49%).

However, if the SaaS & Cloud computing industry is doing relatively well in this downturn, the recession has severely impacted the sales&marketing productivity of these companies, with longer sales cycle, smaller deal size and limited upsells opportunity. One way to measure this productivity is to look at the Customer Acqusition Cost ratio that I have defined in a previous post. Typically, you want this ratio to be close to 1.0, equivalent to a one year payback on your sales&marketing investment. If the ratio is lower than 0.33 (3 year payback), you really need to rethink your sales process.

The following graph shows the evolution of the median CAC ratio by quarter for the SaaS 13 Index. As you can see, despite the strong recovery in stock value, the productivity has declined sharply in the past quarter and the figures do not show at this point that the bottom has been reached.

However, as the second graphs shows, some companies such as Constant Contact, Vocus or Salesforce do start to show a stabilization or an improvement in their productivity metrics. Just some food for thought as you build your investment portfolio...

The historical CAC trends are now available on the Google Spreadsheet that you can access by clicking on this link and I have also posted a live feed on the CAC ratio trend on the left column of the blog.

Laughing Out (c)Loud

A funny video of Larry Ellison, the CEO of Oracle on Cloud Computing. It was taken at a Churchill Club event last month. But does Larry hate cloud computing that much or is he hiding a potential future acquisition of Salesforce.com? What is the announcement hidden behind the surprising high profile slot given to Mark Benioff, the CEO of Salesforce.com, at Oracle user conference on October 13th?

United Breaks Guitar and more!

A few months ago, as I landed back from a snowboarding trip in SFO, I realized that my new snowboard bag had been cut over two inches during the handling. To cut such a thick nylon cover, the handler must have tried very hard! When I complained at the United Airlines desk, the employee looked at me in disdain, saying that this was not enough to be called a "damage" and that - of course - she could not do anything for me. Unfortunately, I am not a musician, so United got away with it.

Today, United did not: David stroke back at Goliath using the power of internet technologies.

It all started on March 31, 2008. Dave Carroll and his Sons of Maxwell bandmates were sitting in a plane at O'Hare, waiting to disembark when a fellow passenger cried out:

"My God, they're throwing guitars out there."

They looked out the window. They saw a United worker tossing one of their guitars. Carroll discovered later that among those flying instruments was his $3,500 Taylor, which ended up smashed. And so began a nine month saga of trying to get United to pay for the damage. When the airline wouldn't, Carroll made a decision. He said on his site:

"I promised the last person to finally say 'no' to compensation ... that I would write and produce three songs about my experience with United Airlines and make videos for each to be viewed online by anyone in the world."

He followed through with his threat. He posted his country ode, "United Breaks Guitars," on YouTube Monday. Since then, the video has been viewed more than half a million times and is a hit with the media.

United apologized, plans to use the video internally to help "change its culture," and, according to a spokeswoman for the carrier:

"We are in conversation with one another to make what happened right."

The lesson here? Don't piss off a musician (and don't fly United yet!)

Bessemer Venture Partners Expands BVP VII Fund

We just announced the expansion of our fund and I wanted to share with you the good news!


New Capital Earmarked for Global High-Growth Investments

LARCHMONT, N.Y., Feb. 26

Bessemer Venture Partners (BVP), the oldest venture capital practice in the United States, today announced the closing of a $350 million supplement to its current fund family, BVP VII, which closed in June 2007. With the additional capital, BVP will target innovative, high-growth companies around the world.
"Great companies have been founded during downturns and Bessemer sees a lot of investment opportunity in the current market environment," said Ed Colloton, Chief Operating Officer of Bessemer Venture Partners. "This supplement to our BVP VII fund will ensure that we can take advantage of future investment opportunities and that the companies within the Bessemer portfolio have continued access to capital."
Throughout its history, BVP has funded some of the world's most talented entrepreneurs, helping them to build their businesses and dominate growing markets. Successful exits over the last several years include the sale of Postini to Google, Gracenote to Sony, Pure Networks to Cisco, PA Semi to Apple, IAG Research to Neilsen, Skype to eBay, Flarion Technologies to Qualcomm, and Celtel to MTC (now Zain), and IPOs of IPC, Bladelogic, Mellanox, Affymax, Motilal Oswal Financial Services, OnMobile, Sirtris Pharmaceuticals, Shriram EPC, and Blue Nile.
About Bessemer Venture Partners: Bessemer Venture Partners is a global investment group with offices in Silicon Valley, Boston, New York, Mumbai, and Tel Aviv. As the oldest venture capital practice in the United States, Bessemer has partnered as an active, hands-on investor in Ciena, Ingersoll Rand, Parametric, Skype, Staples, VeriSign, and W.R. Grace. Over the last century, Bessemer Venture Partners and its predecessor funds have invested in more than 100 companies that have gone public on exchanges in Canada, India, London, and the United States. To learn more, visit http://www.bvp.com/.

2009 Bessemer Venture Partners. All marks are trademarks or registered trademarks of their respective companies.

Building Your SaaS Sales Compensation Plan

Compensating the sales force is a difficult task and the key is usually to keep things simple, so that each sales rep knows what he needs to optimize to make more money at the end of the quarter. For SaaS companies, we found that MRR is the best metric on which to base sales commissions. While it may make sense to offer very slight adjustments for favorable payment terms and one time revenue, net additions to MRR should dominate the sales rep’s thoughts. The reps’ top 3 priorities should be (i) MRR, (ii) MRR, and (iii) MRR.

I had the opportunity to exchange on this topic with Gary Messiana, a BVP Entrpreneur-In-Residence and former VP Sales and CEO of Netli and he shared with me the basic structure he was using at Netli before the company was acquired last year by Akamai.

When he initially built the sales compensation plan, he wanted the sales rep to think MRR and the most logical thing to do was to give $1 of commission for $1 of MRR sold. $1 of MRR generates $12 of annual revenue, so $1 commission equals 1/12=8.3% which is very close to the typical 8% paid for sales commissions.

The second thing he did was to define was the ramp up of the commission rate to make sure the best sales rep would get the most upside. To do that, he applied another simple rule:

• For 0-25% of the quota, $0.25 commision per $1 of MRR
• For 25%-50% of the quota, $0.5 per $1 of MRR
• For 50%-75% of the quota, $1.0 per $1 of MRR
• For 75%+ of the quota, $1.5 per $1 of MRR

To avoid reps pushing deals from one quarter to the next, the quota was set annually and the compensation rules defined above were based on the annual target instead of a quarterly target. By doing this, the sales reps had a very high incentive to perform during the entire year.

Finally, he added a “continuity rule”. As a CEO, Gary typically based his sales board plan at 70% of sales quota. To ensure he would make his number, he defined a "continuity rule" stating that a rep who is below 70% of its annualized target at any point in the year would be on a “B” plan where he basically gets nothing (may be half or 25% of the “A” plan” defined above).

This simple compensation plan structure worked very well at Netli. The company had the chance of selling a very sticky product to large customers paying upfront, so there was no need to improve the sales bonuses based on cash collection and multi-year contracts. The payment rules were also very straightforward: 50% at signature and 50% at cash collection.

To know whether it is worth adding more complexity to this sales comp plan, you need to ask yourself two questions:

• Am I better off with a one year contract to preserve my ability to raise the price or do I need multi-year contracts to reduce the churn?


• What is my cost of capital and how much is worth an incremental upfront payment?

Typically, if you churn is low (98%+ renewal rates), you will tend to favor one-year contract to preserve the flexibility of increasing prices and it is not worth adding incentives to extend the life of the contract. If not, you might want to add some acceleration in the incentive structure to push the sales of longer contracts. If you assume that the cost to renew a contract costs you 20% of the MRR, then adding increasing the commission by 10% for each additional year seems reasonable.

Accelerating bonuses for upfront cash payment depends on your cost of capital. If you assume a 20% cost of capital (typical for equity, debt is generally cheaper), then getting an upfront payment for one additional year on a $10k MRR contract saves you $24k. You can therefore pay an incremental $2k commission to the sales person (20% acceleration) and make it worth it for everyone.

The table below gives you an example on how acceleration could work for a company willing to emphasize the focus on upfront cash payment and contract length:

As a SaaS company matures, it does not want to bog down its top performing sales reps with the job of renewing their growing account bases. So invariably the team splits into hunters for new accounts and farmers for renewals and upsells. Obviously, hunting takes more effort and resource than farming--the Vice-President Sales needs to determine the ratio between the two based on how easy it is to renew an account, and apply that ratio in the sales commissions. For example, $1 of MRR might generate $1 of commission for the first year, and 20 cents for each year of renewal. In this example, the new account sales rep can be compensated for longer term contracts by paying the “hunt commission” for year one and “farm commissions” for subsequent years (e.g. $1.20-1.40 for a three year contract). In this way, the rep will apply the proper attention to closing long term contracts where the risk of churn has been mitigated. Upsells are typically worth more than renewal and less than new customers so we found that 50% of new MRR worked pretty well.

For company with complex UI or usability issue, you might also want to add a small incentive to reward the sales of training module as this will impact churn, but this should be short term fix as your engineering team works hard to improve the product.

I hope this will give you the basic structure to help you build your SaaS sales compensation plan.

Apple Introduces Revolutionary New Laptop With No Keyboard

Happy New Year 2009 and thank you for your continued readership!

I am working on a post-mortem of the SaaS 13 Index for 2008, but before getting into these gloomy numbers, I thought I would start the year with something more refreshing.

Getting through the downturn: a few thoughts for SaaS companies planning their 2009 budget

A few days ago, Bessemer West Coast SaaS Practice - David Cowan, Byron Deeter and myself, hosted a CFO Dinner for our SaaS portfolio at John Bentley's in Redwood City. A couple months ago, when we started planning this dinner, we thought we would use most of the time to debate SaaS metrics, the business model as well as our recent update on the "Bessemer 10 laws of SaaS", but, in the meantime, the macro-economic climate changed drastically and we decided to focus the discussion on the impact of the current environment on 2009 planning. Fifteen CFO's participated - about half of them from Bessemer portfolio SaaS companies (Cornerstone On Demand, Intacct. Lifelock, LinkedIn, OneStop, Perimeter and Retail Solutions) - among a total audience of about 25 people.

Overall, it was interesting to see that the economy had not affected this peer group overall, with strong results for Q3 and a healthy pipeline shaping for Q4. Despite these currently strong numbers, the attendance was very cautious: it is unclear at this date if we are going to see a budget flush supporting Q4 or if the contracts are going to sit on the CFOs desk and never close, but in any case, the consensus was that we are heading towards a difficult environment in 2009 and it is time to plan accordingly.

To start the discussion, we presented a few data points on how our SaaS 13 Index (13 public SaaS companies) has been affected by the downturn - and unfortunately, the hit has been pretty hard, with the Index losing 60% year to date as illustrated by the chart below:

SaaS 13 Index (Jan. 1st 2008 = base 100)

This number compares to the Nasdaq reaching a low point of -46% and currently showing a -40% drop year to date. The fact that SaaS valuations are being more affected by the downturn than the Nasdaq can be surprising given the supposed resiliency of the SaaS model (recurring revenues) but it translates the public investors belief that SMB software spend is going to be hit very hard by this recession. With this decline, the average EV/08 rev. multiple fell down to ~2.2x and unfortunately no one has been spared. The lowest drop in the Index is Concur at -35% and the highest is Salary.com at -84% (SLRY is trading very close to cash now!). This drop in public valuations basically means that private companies lost half of their value in a comparable way and therefore the cost of capital doubled in the past month, pushing much higher the hurdle for any additional investment, be it in sales, marketing or R&D.

How long will the downturn last? It is difficult to say, but if we look at the time required for the Dow Jones to recover after a crash since the early twenties, the answer is likely to be years, not quarters. It is also intriguing to see that the market bottom was reached only two years after the start of the decline for the 1929, 1973 and 2000 crises, so we might need another year before the market reaches it lowest point.



So were do we go from here? Here are a few strategic thoughts that might be helpful as you plan for next year:

1. Cash is King…and scarce: if you are in a funding cycle, raise as soon as possible and as much as possible. If not - plan to cash flow breakeven with what you have left. Preserving cash is your #1 priority

2. It is time to fix your key SaaS metrics:

• P&L: MRR = MRE: you control your destiny when your monthly revenue equals your monthly expenses
• Sales & Marketing: Your cost of capital doubled, so if a CAC ratio > 0.5 was OK a few months ago, the hurdle is now higher and should be close to CAC>1 – Keep only reps making quota and cut marketing activities with lower ROI
• Customer Lifetime Value (CLTV) >0 – Adjust operations, RD and GA to make your business model profitable
  

3. Be realistic on valuation: the best public SaaS companies lost 60% of their value on average, so it is likely your valuation is down too!

4. Watch for cheap MRR (M&A, Other structure to avoid buying assets?): you will soon be able to buy failing competitors. Volatility creates opportunities

5. Don’t wait for the slowdown to hit you, it will be too late


In addition to these high level comments, you might consider also consider some of these more tactical moves:


Sales& Marketing

• Focus on your farmers: account management is critical to keep your churn low and improve “up-selling”. Monitor account activities and be proactive
• Trade-off pre-payments for MRR by increasing pre-payment discount and sales bonus
• Review sales comp structure: more commission less salary
• Keep you voice up in the market: customer need to know you are still alive!
• Rethink vertical segmentation: Healthcare? Is Government a good idea?
• Review your marketing media allocation: offline media prices will go down and could generate attractive ROI, tradeshows might have less impact due to travel restrictions…

G&A

• Manage your DSOs tightly – they will go up! And check for payment that can be deferred
• Wisely manage debt: finance your A/R and leverage only when needed to extend runway
• Chase and implement “quick wins”: shut down all retained searches immediately, renegotiate services contracts and leases, limit travel…

R&D

• Review product roadmap: what new features are absolutely necessary?
• Move R&D offshore

Operations

• Follow your customer growth, don’t grow data center and support capacity ahead

That said, I would like to close this post will a couple of more cheerful comments. Firstly, keep in mind that chaos creates opportunities and there will be a huge prize for the companies able to navigate carefully through this downturn (competitors will disappear, you will be able to hire great talents...). Secondly, SaaS companies are much better positioned in this downturn than other companies given the recurring nature of the business, the lower upfront cost for customers (no need for financing in a difficult credit environment) and the overall lower total cost of ownership. So hopefully, this recession will accelerate the shift from on-premise offering to SaaS. This was one of the premise of our investment thesis and we will see if it proves to be true!

Here is the full presentation if you want to dive deeper:

Bessemer 5 Cs of SaaS Finance

View more presentations from Philippe Botteri.

Hard times...

Lehman Bank employees stage a protest by blockading the entrance to the Bank's Headquarters

The Bessemer 10 laws of SaaS - Fall 2008 Release

When we first published Bessemer’s Top 10 Laws for Being "SaaS-y" in early 2008 in conjunction with our annual invitation-only SaaS CEO Summit, we were overwhelmed with the positive response and feedback we received. We continue to incorporate the best elements of this feedback into our evolving SaaS success profile that follows below. Like SaaS products themselves, we now intend for these laws to be periodically refined through major releases to reflect the changing landscape of the SaaS world. Here is theFall 2008 version:

1. Your key monthly business metrics are: CMRR (Committed Monthly Recurring Revenue), Churn, and Cash flow - “Bookings” is for suckers


2. Customer Acquisition Cost (CAC) and Customer LifeTime Value (CLTV) are the best indicators of long term value creation


3. 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


4. Separate your “hunters” and “farmers” and pay them all on CMRR growth


5. 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


6. By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful SaaS business


7. Stay local - Prove your business in North America first. Only after reaching $1M in CMRR should you consider hiring European sales and services execs behind customer demand. Save Asia for post-IPO


8. Single instance, multi-tenant, single datacenter - Have only one version of the code in production. Really. “Just say no” to on-premise deployments


9. The most important part of Software-as-a-Service isn’t “Software” it’s “Service”!


10. Be prepared to cross the desert - SaaS requires R&D and sales expense up front for a multi-year stream of revenue, so it demands enough investment capital to fund 4+ years of runway. Load up for the long trip and pace your consumption of calories!
    

BONUS LAW: You can ignore one of these, but not more than two. Great companies innovate, but pick your battles!

If you are interested in learning more about the Bessemer 10 Laws of SaaS, you can listen to the webminar we did earlier this week with Salesforce by clicking on the picture below:

You can also download the full white paper on the SaaS section of the Bessemer website or browse quickly through the slides on slidehsare

Death Sentence for SaaS...or for Lawson?

In a very entertaining interview published by Zdnet Asia last week, the CEO of Lawson, the ERP software company, forecasts the collapse of the SaaS market in two years - at the same time the recently published report from Deutsche Bank on SaaS ("SaaS and Cloud Computing" by Tom Ernst, June 2008) claims that on premise software sales have reached their peak. Flashing statements on one side, bottom-up financial analysis on the other: I will let you decide which one to believe, but I could not help reflecting on some of the comments made in the interview:

"The hype is based on one company in the software industry having modest success. Salesforce.com just has average to below-average profitability"

Everyone would agree that the value of an operating asset is defined by the sum of its discounted future cash flows. So where does Salesforce's profitability stands today compared to the most successful on premise public software companies? The Deutsche Bank report has a very interesting chart on the topic presenting the Free Cash Flow margins vs. the revenue growth four years post IPO for select software leaders:


As you can see, with 20% Free Cash Flow margin and a 50% growth rate, Salesforce is well positioned in the pack! Now let's look at Lawson: their FCF margin for the past 12 months was 5.8% and their 07/08 growth rate was around 13%. In dollars, Lawson, generated $50m of cash in the last 12 months and in the same period, Salesforce generated $191m. Which one is creating the most value for its shareholder? Well...that's probably why Salesforce market cap is 4.9x time Lawson's. If Salesforce is a "modest success", what how would you define Lawson's performance?

"People are stupid"

I am not sure this one deserves any comment. Is that how Lawson thinks about its customers (I assume some of them are using some sort of SaaS application)? Of course not - the CEO has a much better way to qualify their customers as you will see below...

"...traditional software is like cocaine--you're hooked. It's too difficult and expensive to switch providers once you've invested in one. If it were easier to jump ship, a lot of people would've hit the eject button on SAP a long time ago"

Cocaine addict!! Nice one!

"[Oracle's CEO] Larry Ellison has the same perspective as I do. He accidentally funded the CRM product and Netsuite. He didn't really mean to. They've had small successes, but overall, they've been spectacularly unsuccessful"

Ouch! Poor Larry. Did he really "accidentally" made several hundred million dollars by investing in a company (NetSuite) that raised $120m and turned it into a $1B market cap… What an unsuccessful outcome! He should have invested in Lawson obviously… I could not track back their stock price in 1998 when NetSuite was launched, but since Jan. 2002, the stock price went from $17.5 per share to $8.0 today. I find it hard to believe that Larry Ellison accidentally invested in Netsuite but I am confident he DID NOT invest in Lawson on purpose...

"because all your costs are up front, and your revenue is over a five year period, the more you sell, the more you lose. You don't break-even till the four-and-a-half year mark, but here's a bigger problem--there's no guarantee that that customer is still going to be yours in four years' time"

It is true that the SaaS business model is fundamentally different from the on-premise model and SaaS companies need to look at different metrics to pilot their business (see my blog posts on MRR and CAC ratio). But does it mean these companies are not profitable? If that were the case, most of the Cable and Wireless companies who have been using a similar business model would have gone bankrupt a long time ago and Saleforce would not have 20% FCF margins today. It is true that understanding this new business model is hard for a traditional software incumbent, as this interview demonstrates...

You can find the original article on Zdnet by clicking here.

Made to Stick!

Can you believe this?




Well if not, you are right! This video is a very smart viral marketing initiative from Cardo Systems, a provider of bluetooth headsets and it reached more than 6m eyeballs (this number includes the different versions of the video as well as the videos of people trying the experience to show it is a scam!). In addition, Cardo got a lot of press for this initiative - so, overall great PR at minimal cost and this shows how web 2.0 technologies are starting to change the way companies market their products...

... but it also shows the power of "Sticky" ideas. I am sure that months from now, if people mention this video, you will remember it.

Chip Heath, a Professor at Stanford GSB and Dan Heath, a consultant from The Aspen Institute, wrote a very interesting book, "Made to Stick" to explain why some ideas survive and others die. As they went through dozens and dozens of successful ideas, they identified six common principles:

PRINCIPLE 1: SIMPLICITY

PRINCIPLE 2: UNEXPECTEDNESS

PRINCIPLE 3: CONCRETENESS

PRINCIPLE 4: CREDIBILITY

PRINCIPLE 5: EMOTIONS

PRINCIPLE 6: STORIES

I found the book and this framework quite useful and if you look at the popcorn idea of the video, it fits this framework quite well...so may be it works!

Churchill Club 2008 Top 10 Tech Trends

I attended yesterday the 10th Annual Top Ten Tech Trends organized by the Churchill Club at the Fairmont Hotel in San Jose. This year, the panel included Steve Jurveston from DFJ, Vinod Khosla from Khosla Ventures, Josh Kopelman from First Round Capital, Roger McNamee from Elevation Partners and Joe Schoendorf from Accel. The panel was moderated by Tony Perkins, the Editor-in-chief of AlwaysOn. Unfortunately, John Doeer was not in the panel this year, but Tony said he could not believe anymore in John's forecasts after his support of Hillary's presidential campaign...

The top 10 trends this year were around the emergence of mobile platforms (thanks Apple for the iPhone!), the rise of CleanTech, and the next wave of web applications and services, with a hint to the potential of the baby boomers. It was a bit unfortunate though that 4 of the 10 trends focused on mobile computing and were somehow very close (one would say that all great minds converge, but the session had an air of "deja vu" each time a new mobile trend was unveiled. So without further dues, here is the list:

1) Demographics are destiny creating opportunity (Steve)
Every 11 seconds a baby boomer turns 60 and they already represent a market of 75 million people today. Steve believes these baby boomers will become a large market of internet savvy people up for grab. One specific example: mental exercise is bound to become widespread as people spend 1/3 of their live in retirement
Audience: 70 percent voted “Yes”

2) The device that used to be a phone will turn into a mainstream computer (Vinod)
Vinod predicted that soon cell phones will have a projector inside to project the screen anywhere and turn a small square into a decent size visual interface. His time horizon: 2 year. The main obstacle highlighted by Roger against this trend was the quality of the wireless infrastructure in the US.
Audience: 40 percent voted “Yes” (while people believed overall in the emergence of the platform, the projector example did not resonate well - may be because the audience was not composed mostly of baby boomers)

3) The rise of the implicit internet (Josh)
This one deserves a bit of explanation. The idea is that all your personal data captured when you browse and transact on the web today is held in silos (Amazon, Netflix, Google...) but we have reached the inflection point when these silos will get connected. The next wave of internet will come from companies aggregating these various data sets and leveraging them to provide more value to the user. As Roger mentioned, privacy is going to be a key element of this evolution.
Audience: 95 percent voted “Yes”

4) The mobile device industry migration from feature phones to smart phones will produce even greater disruption than what the PC industry experienced as it moved from character mode to graphical interfaces (Roger)
This is very close to trend #2, the question here, as Vinod pointed out, is whether this is going to come or if the disruption has already started - which I would tend to believe.
Audience: 75 percent voted “Yes”

5) Water tech will replace global warming as global priority (Joe)
Here is the premise behind this trend: the world is running out of water and this will kill more people than global warming. 1B people do not have proper water today for their day to day needs and this number will jump to 3B in the coming years. This opens a large opportunity for water purification related technologies (in particular technologies to convert sea water into drinking water). While the point on water is very clear to me, I don't know if it supersedes the climate issue. Global warming, by accentuating drought and melting glaciers, will have a key impact on water resources distribution and will increase the unbalance. So, which one will have the greatest impact? One would hope that mankind will be smart enough and that this question will remain unanswered...
80 percent voted “Yes”

6) Evolution trumps design (Steve)
Artificial Intelligence algorithms will be necessary for each great invention (e.g., new chemicals, biofuels)
Audience: 50 percent voted “Yes”

7) Fossilizing fossil energy (Vinod)
Biofuels will overcome oil, coal generated electricity will be replaced by solar energy. This will happen shortly (3-year horizon) as biofuels and solar energy production costs become cheaper than fossil fuels. With the oil barrel price moving from $20 in 2002 to $124 today, and cities like San Francisco in active discussion to build a 5-megawatt installation within the city limits, this prediction seems on its way - and was widely approved by the audience.
Audience: 90 percent voted “Yes”

8) Venture capital 2.0 (Josh)
For his first panel, Josh had a good trend and a more controversial one. His prediction: changing economics for start-ups and Venture Capital funds and changing markets will tumble the VC economy. This seems a bit far fetched to me. Yes, a lot of money has gone into the space recently and this will likely bring the median venture return down for a while, but that is part of the economic cycle of the industry. At the bottom of the cycle, lower amount of capital is raised, returns are increasing and this attracts new investors. At the top, there is too much capital, returns decrease and money goes elsewhere. So I don't see the breakthrough here.
In addition to this economic cycle, the main driver for the Venture industry health is the pace of innovation and today, this pace is accelerating: with SaaS on the software side, cell phones turning into computing platforms on the telecom side, CleanTech on the energy side, or biotech on the healthcare side, it does not seem that entrepreneurs are short of ideas
Audience: 40 percent voted “Yes”

9) Within five years everything that matters to you will be available on a device that fits on your belt or in your purse. This will cause a massive shift of internet traffic from pcs to smaller devices (Roger)
Roger added that these devices will be used mostly to create content not access content (Apple got it wrong?). The panel response was mixed but it gave the opportunity to Vinod to place a memorable quote: "The best way to predict the future is to invent it" - very inspirational
Audience: 30 percent voted “Yes”

10) 80% of the world population will carry a mobile device with internet access in 5-10 years (Joe)
While the trend is clear, 80% seems a high number. According to his previous prediction, 3B people will have trouble to find drinking water in the coming years, so internet access might not be their #1 priority and the little energy they can access will likely be directed toward fulfilling this primary need - but who knows?
Audience: 50 percent voted “Yes”

Measuring sales and marketing effectiveness of SaaS companies

The CAC Ratio

I read an interesting blog post from Will Price, a fellow VC from Hummer Windblad on how to measure the sales and marketing effectiveness of SaaS companies with a magic number defined approximately as the ratio of the incremental sales in a quarter (annualized) divided by the sales and marketing expenses of the previous quarter (this assumes that sales are recognized from a gap standpoint the quarter following the sales and marketing investment).

I found this approach interesting, but it seems to me that gross margin is a more relevant benchmark than revenues, given that the GM of saas companies varies by type of application and size of the company (for example NetSuite went from about 50% GM three years ago to close to 70% today). A more accurate benchmark would then be to divide the incremental GM (annualized) in a given quarter by the S&M expenses of the previous quarter. Let's call this ratio the Customer Acquisition Cost ratio or CAC ratio. The definition becomes for the last quarter of 2007:

CAC Ratio = (GM (Q4 07) - GM (Q307)) x 4 / S&M costs (Q307)

A CAC ratio of one would be equivalent to breakeven marginally on a new customer in one year. A ratio of 0,5, would mean breaking even in two years.

The next question is then: what is the right benchmark for this ratio? From our private investor experience, a breakeven in 1-2 year seems reasonable and if we look at Salesforce.com CAC ratio since its IPO, it is indeed within this 0.5-1 range:

The implications for a private saas companies are straightforward:

• If your CAC ratio is above 1, invest more to accelerate growth (and send me an e-mail at saasvc@bvp.com)


• If your CAC ratio is lower than 0.5, you need to think through your sales and marketing model and ramp up the sales learning curve before investing more


• If you are in between, stay on your course, your are doing fine
  

Refining the CAC Ratio

This CAC ratio can be refined by looking at the variation in Monthly Recurring Gross Margin defined as the Montly Recurring Revenue (MRR or CMRR) less the COGS run rate for the month (See my previous post on saas metrics for the definitions of MRR and CMRR). If you use the MRR, then the formula above is correct (just multiply by 12 instead of 4 to annualize the gross margin increase), but if you use the CMRR, then you need to divide the increase in gross margin by the S&M costs of the current quarter not the previous quarter.

The assumption here is that for most SaaS companies, the service takes a few months to get implemented, so from a GAAP standpoint, the revenue recognized in quarter N has been acquired in quarter (N-1) and therefore it is natural to use the S&M costs from the quarter (N-1) in the CAC ratio. If you use the gross margin derived from CMRR, the situation is different. The CMRR represents the revenue contracted during quarter N and not recognized yet on a GAAP basis because the service has not been implemented. Therefore it is legitimate to say that the increase in CMRR from quarter N vs. quarter (N-1) has been acquired with S&M cost of the quarter N, not (N-1), hence the need to adjust the formula.

For companies with short implementation cycle (like e-mail marketing), then the revenue can be recognized in the same quarter and therefore the formula should be calculated with the S&M cost from the quarter N, not (N-1) for the same reason.

CAC Ratio benchmarking for public SaaS companies

I also looked at all the 13 saas companies listed in my SaaS 13 Index to see how they were performing. The results for Q4 2007 are exposed in the chart below where the CAC ratio is plotted against the EV/TTM revenue mutliple (Enterprise Value divided by Trailing Twelve Month revenues):

Note: Negative numbers indicate that companies actually decreased their gross margin over the quarter.

As a SaaS VC, I tend to focus on Private companies, so I leave it up to you to design you short and long strategies on this peer group - of course a lot of other factors need to be taken into account (like growth rate and churn as $1 of recurring revenue is worth more for companies with lower churn) - but it is interesting to note that SuccessFactors is valued at more than 7x EV/TTM while it lost GM in Q4 07 and that Constant Contact is valued at the same multiple than Concur (both expecting to grow 60% 2007 vs. 2008) but with very different CAC ratios.

One order a day...

Interesting picture taken in a UK start-up! I love British humor...

Launch of the SaaS 13 Index!

How are public SaaS companies doing in such a volatile market? To answer this question, I have created the SaaS 13 Index, defined as the sum of the market cap of the 13 pure SaaS vendors quoted on the Nasdaq. It includes NetSuite, SuccessFactors, Vocus, SalesForce, Taleo, DemandTec, LivePerson, Constant Contact, Concur, Ultimate Software, Salary.com, Omniture and Kenexa. The Index reference point starts on January 1st 2008 at 19,187.81 pts and is dynamically updated via GoogleDocs. The Index is red if under this mark, and green if above and the % change is indicated.

As I was building the spreadsheet, I also included the revenue multiples for this set of companies, both for the trailing 12-month (TTM) and the forward 12-month (FTM).

You can access the detailed spreadsheet by clicking on the following link.

The 10 laws of SaaS unveiled at Bessemer CEO Summit

A few times per year, Bessemer organizes a CxO event for our portfolio companies and we decided to focus our first session of 2008 on Software-as-a-service (SaaS). 2007 was a turning point for the SaaS industry with the successful IPOs of NetSuite, SuccessFactors, DemandTec, Salary.com, Aprimo and Constant Contact. As SaaS companies are reshaping the competitive software landscape, we thought the time was ripe to gather the thought leaders of the sector together with our portfolio company executives to talk about the key challenges ahead and be better prepared for 2008.

The Bessemer CEO Summit on SaaS took place on January 22nd and 23rd at the Palo Alto Hills Golf and Country Club. This invite-only event for our portfolio companies and close friends of the firm was designed to be fairly intimate and interactive. The response rate has been overwhelming and we ended up with 40+ companies and 80+ attendees, most of them CEOs and CxOs of leading public and private saas companies representing around 80% of the revenues of the SaaS industry in 2007.

The conference began with an optional golf outing in the afternoon of the 22nd, followed by cocktails and dinner. The dinner gave us opportunity to hear the war stories of Postini presented by Quentin Gallivan, the former CEO. The dinner was followed by rounds of poker, Liar's Dice, and drinks. The 23rd started with a quick overview of the achievement of our Software and SaaS portfolio in 2007 presented by Byron Deeter, the co-head of our West Coast SaaS practice. Among others, I would quote the Bladelogic IPO, the acquisition of Postini by Google for $625m, the two largest SaaS deals in history signed by Cornerstone OnDemand (160k and 350k seats), Eloqua almost doubling its revenues and LinkedIn adding more than 10m users. This introduction was also the opportunity to illustrate the amazing growth of our software and saas portfolio in the past years, with aggregated revenues reaching $1.2B in 2008 as illustrated below:

Parker Harris, EVP Technology and co-founder of Salesforce.com was our keynote on the 23rd and Gary Griffith, president of Webex, spoke later in the day as well. The different sessions of the day also included senior executives from Saleforce, NetSuite, Eloqua, Perimeter eSecurity/USA.NET, Broadsoft, Ariba and Cornerstone OnDemand as well as select industry experts like Dilip Wagle from McKinsey&Co, Ian McLeod from Goldman Sachs or Jason Maynard from CFSB.
The full agenda is available by clicking here but the day was a great opportunity to dive into the key questions that SaaS execs are wrestling with: How to design a sales comp plan? What's the right strategy for Europe? Do I need a second data center? How can I best partner with the large public saas vendors? What metrics should I be using to drive a saas business? or What do I need to do to get ready for an IPO...

The Bessemer SaaS team was deeply involved in the discussions with Rob Stavis, Bob Goodman and myself moderating respectively the IPO and M&A, SaaS ecosystem and international expansion panels and David Cowan presenting the lessons learned on SaaS metrics after investing in 15 SaaS companies (Verisign, Postini, Cyota, Counterpane, Qualys, psi-net, Lifelock, Telocity, Keynote…).

Some of the content presented during the event as well as select articles are available on the SaaS section of the Bessemer website. If you want to learn more on SaaS metrics, you can read my previous blog post. For an overview of the the international expansion panel, I will write a dedicated post, so stay tuned.

We also took advantage of this event to unveil the long awaited "10 Bessemer laws of SaaS" - these laws are based on what we have observed at Bessemer by investing in 25+ SaaS companies in the past years and we hope it will be an interesting reference for SaaS executives getting ready for 2008:

1. Your key business metrics are CMRR (Contracted Monthly Recurring Revenue) and cash. “Bookings” is for suckers.
2. Separate your hunters and farmers. As soon as you’ve climbed the Sales Learning Curve, begin ramping your sales force by hiring renewal-oriented account managers. Keep the hunters moving, and let farmers tend to the crops.
3. It takes at least $300k of monthly recurring revenue to climb the Sales Learning Curve. Stop at 3 reps until at least two of them are making $100k CMRR quotas.
4. It's a whole new ecosystem. Channels are very hard for SaaS companies to build, so don’t base your plan on SI’s and traditional ISV’s. You will need to sell directly for a long time.
5. Stay local. Prove your business in North America first. Only after reaching $1M MRR, consider hiring European sales and services execs behind customer demand. Save Asia for post-IPO.
6. One Datacenter. Invest early in backup and disaster recovery, but stick to one data center, at least until well after IPO.
7. Single Instance, Multi-tenant. Only one version of code in production. Really. Just say No to on-premise deployments.
8. By definition, your sales prospects are online! Savvy online marketing is a core competence (sometimes the only one) of every successful SaaS business.
9. Constantly trade off cash vs. growth. If you must replenish supplies while still crossing the desert, optimize your growth rate (sales rep recruitment and marketing spending) so that you maximize your recurring revenue run rate when you need to fundraise next.
10. Be prepared to cross the desert. SaaS requires R&D and sales expense up front for a multi-year stream of revenue, so it demands enough investment capital to fund 4+ years of runway. Load up for the long trip and pace your consumption of calories!

You can ignore one of these, but not more than two. Great companies innovate, but pick your battles!

Happy New Year 2008!

Happy New Year to you, Cracking-the-code reader! You have been 2,950 to visit the site in 2007 and you looked at 3,920 pages. This represents an outstanding 2,298% growth vs. 2006 (this type of growth seems big but you get used to it when reading business plans is you day job).
The second part of the year has seen a lower flow of blog posts, but part of my 2008 resolutions are to remedy to this shortfall, so be prepared for a strong 2008.

Looking back at 2007, I wanted to give a quick overview of the investments I have been involved with, since I have not blogged about any of them yet. Overall, I spent about 1/3 of my time looking at Web 2.0 and online gaming companies and 2/3 looking at the software and SaaS industry.


Online marketing has revolutionized consumer marketing by providing a clear return on each dollar spent and making the marketer accountable for results. In the past, CMOs used to say that half of the spend was wasted but they could not tell which half. Online marketing changed it. Eloqua is bringing this revolution to the B2B marketers by providing on-demand applications and best-practice expertise for B2B marketers to execute, automate and measure effective marketing programs that drive revenue. Today, thanks to Eloqua, CMOs have a clear visibility on their return allowing them to better allocate their budget and sales people can prioritize prospects to maximize their effectiveness.

Want to be the best marketer on earth? Watch this!



The first internet wave managed to solve pretty well the "Where to buy" problem, with sites like Kelkoo, Shopzilla, NextTag, PriceGrabber, or Shopping.com. But the key questions of "what to buy" or "which product does really fit my need and budget at the same time" remained unanswered. As more than 70% of people perform online research before buying, we felt this was a compelling need and a large market. We decided to fund Wize.com to answer this question. Wize provides consumers with a unique way to leverage the online wisdom by aggregating the opinions of millions of users and by letting people ask questions about a specific product or need to the Wize community. So next time you are looking for something to buy, think WIZE!

Cornerstone on Demand is a fast growing Learning and Talent management company based in Los Angeles. Although Learning Management is old news, Talent Management represents a broader set of emerging functionality around internal employee management and development, and has come to define the broader category which is also known as Human Capital Management. The development of this market has been accelerated by two trends: (1) the need for large and mid size companies to turn their workforce into a competitive asset by optimizing and measuring its performance and (2) the emergence of Software as a Service that reduces significantly cost and deployment time. Cornerstone is at the convergence of these trends and hopefully poised to strong growth. This has proven to be true in 2007 and we will see how resilient these trends are in a recession. We are optimistic though, as bearish markets tend to increase the need for more workforce productivity.

Intego is the leading Security Software Suite for Mac. As Mac is gaining market share (shipments have been growing 35%+ in the past years), the Mac platform becomes more attractive for spamers and hackers and Mac users need to protect their digital assets. Intego is here to help them! For those who are skeptics, check this latest Mac security alert.

Blogged with Flock

How to fish a salmon

When there is a will, there is a way!

SaaS business metrics: why are they different?

I was surprised today when I went through the NetSuite IPO filling (S1) to see that it looked very much like any Enterprise software document - not a single mention of churn or % of recurring revenues.
However, SaaS companies are trading today at an average of 5-6x trailing revenues (salesforce leading the pack with 8.7x), while traditional software companies are in the 2-3x range. The reason for this difference, from an investor perspective, is that the SaaS model provides far clearer visibility into future revenues. In addition, they grow organically from service usage expansion from their existing accounts and are better positioned to upsell since they interact with their customers regularly. This is fairly different from the traditional perpetual license model, where companies can experience huge variability between quarters depending on when large contracts are closed.

Different models require different performance metrics. David Cowan, the Bessemer Managing Partner who pioneered early stage investments in automated subscription services (Verisign, Postini, Netli...), developed a white paper on performance metrics for Technology service Vendors (TSV) and this post present the key elements of his reflexion adapted for SaaS companies.

Why the traditional "bookings" number does not work for SaaS companies:

• Firstly, bookings foretell revenues in a perpetual license model, but for a SaaS company, it is not the case, since the contract is subject to churn on one hand and seats expansion on the other hand
• secondly, the bookings number often include renewals and upsells. While upgrading a customer in a perpetual license model is comparable to a new sales, a renewal for a saas company is significantly easier to get than a new account sale. so the bookings would need to be split into "renewal/upsells" and "new sales". But even if we do this, the renewal number would mask the churn
• Finally, the booking number does not make the difference between the "recurring" revenue of high value and the non-recurring revenue (implementation services, training...) of lower value

The right metric: MRR/CMRR

As recurring revenue (RR) is the primary source of value for a SaaS company, the primary metric must derive from it. New accounts, higher pricing, lower churn and upsells all contribute to RR, so they should become components of the primary metric.
To make it practical, the best is to look at Monthly Recurring Revenues or MRR, since this number changes a lot each month for a fast growing company. It also facilitates cash management since expenses varies by month.
The MRR equation from one month to the other is straightforward:
MRR (month+1) = MRR (month 1) + MRR from new accounts + MRR from upsells - MRR from churn

This simple metric becomes the key indicator to drive sales reps. Their objective becomes to increase the MRR for their territory by the target amount. It is up to them to drive this growth from new accounts or upsells. Minor adjustments can be made based on faster cash payments and one time revenues, but the key focus should be MRR.

The MRR is a great metrics, but it can be perfected. For example, there can be a few months delay to set-up the service, and SaaS company cannot recognize the revenues before the service is up and running. Conversely, if an account already mentioned its willingness to churn at a specific date, it would be misleading to represent that customer as a recurring revenue account.

So a more meaningful metric is the Committed Monthly Recurring Revenue or CMRR.

CMRR = MRR + purchase orders for future recurring revenues - revenues that is likely to churn within the year

This graph presenting the different components of the CMRR communicates all the highlights of the business: new accounts (green), organic growth (purple), renewals (blue) and churn (red arrows). Comparing the CMRR to the monthly expenses is a also a key indicator of the health of the business.


In addition to the CMRR, there are a few other key metrics that SaaS companies need to monitor on a monthly basis:

• Number of customers
• Average CMRR per customer
• Average number of "product" or "module" per customer
• Average CMRR per "product" or "module" per customer

I wish I had seen these numbers in the NetSuite S1!

Blogged with Flock

Save the planet!

The earth is warming-up - so for those who don't have a Prius yet, you can download this small application for your PCs: it will optimize the power on your machine and save energy. Your contribution to the environment is measured in lbs of C02 that you saved from being emitted... and by the way, it will also save you money!

To download the application, click here

This application has been developed by the team of Snap (the great company thanks to which you can preview any link on this blog) and Idealab.

Don't click on this link!

Devil's link

...it will hurt your productivity seriously!
Desktop Tower Defense is the most addictive online game I have ever played with...and it is entirely browser based, so no need to download an additional client to your PC

Software 2.0: How the use of internet is transforming the software industry

In the past seven years, Internet has changed the business landscape and software has not been an exception to the rule. The web has brought simplicity and transparency in a world of complexity and opacity, empowering a new generation of public software companies like Salesforce.com, NetSuite, Webex and WebSideStory who learned how to take advantage of it.
So what changed so dramatically? Several things - and I like the way Tin Tzuo, the Chief Strategy Officer of Salesforce.com illustrated them during his speech at the Stanford Technology Venture Program. These changes fall into 6 main buckets:

1) Product Awareness: From Gartner to the blogosphere
In 1994-95 - the great age of traditional Enterprise software, the only way to learn about a software application was to read the ad-hoc Gartner report or various esoteric software reviews. Today, all the information is free and available on the internet. Through sites like Gizmodo, the NY Times Online or thousands of technology and software blogs, IT managers can gather all the technical information they need, as well as in-depth customer and user feedback. To win in this new space, software companies need new marketing skills. On top - or sometime instead of developing relationships with Gartner, IDC and other market research firms, Software 2.0 companies need to be extremely good at online marketing. Both on the spend side (keywords, banners...) and on the organic side (SEO optimization, buzz among influential bloggers and journalists...). Companies need to be prominent on the web (see my previous post on online marketing for more details)

2) Product evaluation and testing: From seminar and demo to free online trial
The second element that radically changed in Enterprise software is how people evaluate and test products. In the 1990's, the only way to get an overview of a product was to attend a seminar or call a sales rep. for a demo. Today, people find software applications on the internet and they can test the product with a free trial. This radically change the purchasing process. Before, a product demo was a great opportunity for a sales team to start partnering with a potential client - they would spend several days to customize the product and populate it with real customer information and it was a great opportunity to spend time and develop a relationship with the key decision makers. With a free trial - populated with dummy data - potential customers can see and test the product very easily and it makes them comfortable - or not. To "get the foot in the door", Software 2.0 companies need to do their best to easily show the value they are providing and let user "touch and feel" the product easily by leveraging the web.


3) Product design: From complexity to usability
In the old days - may be not that old - enterprise software products were designed to be complex. Complexity was a necessity, as it allowed vendors to control their customers. SAP understood that very quickly. Now, the new generation of applications is going against this principle, designing their product with several layers of functionality. The first layer is easy to use and provides basic functionality. The second layer is more complex and the deeper the user goes, the more complex it becomes, but the key here is to have this hierarchical filtering that enables basic users to go around the product and understand its value.


4) Sales model: From seasoned sales people to a tiered sales engine
To buy, people needs to be comfortable with the product. To be comfortable with the product, people need to talk to someone. Basic sales principle. But this can be done in different ways. In the pre-internet era, software sales meant highly seasoned sales executives with a big Rolodex. The post-internet sales force evolved into a more agile tiered engine, starting with leads generated on the website, followed by a telesales team that would further qualify the lead and assigned it to the proper sales team (telesales for SMB or direct sales for Enterprise). And this human touch is necessary even if you have a free demo on available on the web. People want this human interaction before buying to get answers to the final questions they have and feel good about it. Having widgets on the website that enables customers to call directly a sales person proved to work very well.

5) Segmentation: From solutions to packaged services
Before, enterprise software companies developed very segmented offerings articulated around the magic word "solution": you had the Enterprise solution, the Corporate solution, the SMB solution... These solutions were a mix of hardware, software and services and required usually the involvement of several companies (or divisions). ISVs, SIs and Hardware vendors were combining their strengths to offer a complete package that would solve a business issue. Today, SaaS companies have changed the model: they owned all the hardware and infrastructure, run a single instance of the application for all their users and provide the limited integration services required to make the whole thing work. And to maximize economies of scale, they need to run a single instance of the application to cover all the customer segments. To differentiate their service offering and maximize the value captured, Saas vendors package their services by segment with different price point. Each package will have specific features of the application enabled and with a maximum load (# of seats). The key benefit of this approach, is that instead of being "stuck" with a specific application, vendors can easily change their packaging and adapt it to the customer demand to maximize their profits and the customer satisfaction

6) Usage: From services to monitoring
In the 1990's, once the deal was closed, the sales team would drop a CD on the customer desk and it was up to the customer to figure out how to implement it. Alternatively, they would sell services to drive the implementation "now that you are stuck with the product, you'd better find a way to use it!". Today's world is different. With a service model, customer can stop their subscription any time. So, to limit the churn, Software 2.0 companies need to monitor and ensure that their application is widely used in the customer organization. Successful companies have developed specific teams focused on developing and monitoring key usage metrics. And the good news, is that is it easy to implement, as the application is hosted by the vendor, not the customer.


This post covered the new ways "software 2.0" companies design their products and interact with their customers. The next question is "what do these companies need to change in their internal management processes to be successful"? In a subscription model, are the "bookings" number still relevant? How should the sales force be incentivized? What metrics drive the value of this new generation of software service providers? The answer will come in a follow-up post...

Global warming: a plague for humanity?

After all, global warming might not be a bad thing for everyone. As the globe heats up, some people can now:
- play tennis 100 feet above the sea
- pay $15k for a hotel night
- enjoy drinks in bars surrounded by sea and coral fishes
- live in a rotating skyscraper (powered with solar panel of course!)
- See dinosaurs in real size
... and much more!

Popular Media: the key to viral marketing

Geoffrey Arone, the founder of FLock, who is now an Entrepreneur-In-Residence in our Menlo Park office, mentioned this company to me and I thought it was worth writting a post about it.

Popular Media is a hosted, web-based technology platform that enables customers to quickly create, optimize, and scale viral marketing programs - and it seems to work pretty well.

UNICEF USA used their solution and the results have been fantastic. The following chart compare the impact of the tsunami in 2005 on the website traffic vs. the viral marketing campaign that they launched in 2007 with Popular Media.

Through the course of testing and optimization, the number of daily REGISTRATIONS swelled to beyond 30,000 people a day — people registered at a rate of more than 1,000 people per hour. To learn more about the story, you can go to their website: http://popularmedia.com/blog/index.php

Their cost is reasonable (entry point is ~$5,000/month).

Getting the most of your online marketing: the In & Out of SEM/SEO

SEM: Search Engine Marketing (aka: paid search) is set of marketing methods to increase the visibility of a website in search engine results pages

SEO: Search Engine Optimization (aka: organic or "free" search) attempts to improve rankings for relevant keywords in search results by improving a web site's structure and content

SEM and SEO are the hottest topics of online marketing at the moment if we believe the 50+ executives of our portfolio companies who gathered recently at Spago in Palot Alto for the Bessemer Online Marketing Workshop. Attendees included Blue Nile, Postini, LinkedIn, Lifelock, Wize, Sparter , Zopa, Revver, Wikia, Flock, Vimo, Delivery Agent, Gerson Lehrman Group, Pure Networks, Zensys, Summit, T3Ci, Endeca and Nominum - a wide spectrum of companies, both in terms of stage (very early to pre-IPO) and sectors (consumer internet, software, chipsets...). Bessemer was also heavily represented with David Cowan , managing partner and co-founder of VeriSign (see his post about the event), Rob Stavis, BVP’s New York-based managing partner who led our investment in Skype, Byron Deeter, partner and founder of Trigo and our COO/managing partner Ed Colloton.

It took us some time to put together the agenda, but here is how the 1/2-day event eventually looked like:

- In-depth analysis of SEM best practices - Abe Mezrich, Director of Communications from Did-It
- SEO best practices and case studies - Andreas Mueller, President and Founder of Bloofusion

- Online marketing metrics - Chini Krishnan, BVP operating partner and founder and CEO of Vimo

- What it means for customers - Phil Braden, GM Customer Interactions, Endeca
- The future of online marketing - GeoffreyArone, founder of Flock and EIR at Bessemer
- Roundtable - moderated by Rob Stavis

- Cocktail and networking

The workshop was a great learning experience for all the participants (who rated the event at 3.6 on a scale of 1-4). Here are a few interesting insights

On the SEM side:
- Know when your customers buy: the conversion rate varies tremendously within the day, between days and by geography (even within the US)

- Understand how the customer sees a Google page (top right and top left are the first areas screened by the eyes)

- Inserting the key words in your word ad can be very effective if done properly (Watch out though, as automated insertion can lead to very interesting results: e.g., I loved the "Great deals on Plutonium - shop on Ebay and save!")

... and on the SEO side:

- Go for market share: Google is ~50%, Yahoo ~30%, MSN ~10% (for the US - there are some notable exception as France where MSN is the leader)
- Eventhough the "relevance" criteria of search engines are kept secret, respecting a few rules can make a great difference:

1) Determine the best set of key words that consumers will type to look for your product or service. This requires time and market research, but is really key

2) Optimize one page for each target search term

3) Link your site with relevant/ thematic link websites (use Google page rank as a benchmark)

4) Work on your site architecture: avoid frames, dynamic URLs, text within images, flash navigation, AJAX and JavaScript navigation for example

If you are interested to learn more about SEM and SEO, Abe and Andreas presentations can be downloaded at the following links: Abe Mezrich – Did-it and Andreas Mueller - Bloofusion.
The videos can be watched at Bessemer Online Marketing Portal (the other materials are not public).

Get your own helicopter for $50!

...and you can also make it fly on AirWolf tune. Our office is full of them! The name of the bird is PiccoZ .
- hurry up, the retailers are out of stock!

iPhone, Apple TV and more from Mac World

iPhone wonder
I was one of the lucky few to have a first sight at Apple's next wonder: the iPhone. The long awaited product was at last presented to the public and it was worth waiting. It is the most innovative product I have seen for a long time. Apple came up with the first multi-contact touch screen and an amazing user interface that will completely change the way people interact with an electronic device. It is the 2.0 version of the iPOD click-wheel.
But let's start with the beginning: what can you do with an iPhone? Well, it is basically the mix of a video iPOD, a smart phone, a camera and an internet browser. So, you can listen to music, watch videos, take pictures, look at pictures and slide shows, make calls, browse e-mails and calendar, send pictures, access Google map and weather information, and browse the web. The connectivity is both wireless (Cingular EDGE network) and wifi. The iPhone will be available in two versions, a 6GB at $500 and an 8GB at $600. Pricey, but as Steve Jobs explained, it is the addition of an iPod nano ($200) and a blackberry ($300)...
Aside from the sleek design, the iPhone has an amazing user interface. The multi-touch screen enables the user to perform several operations at the same time and everything is very intuitive. A few examples:

• the SMS interface looks like chat bubbles
• you can scroll down your voice mails (like you re-mails) and select the one you want to hear
• you can zoom in an out of pictures by scrolling your fingers
• you can select the exact part of a picture that you would like to keep as screen saver by zooming in and out with one finger and moving the picture with the other
• to look at an horizontal picture in the full screen, you just have to rotate the iPhone and the picture will rotate as well

So it is a fantastic product, for sure, but there are still a few unanswered questions:
1) Will the iPhone support a VOIP client like Skype. That would make a lot of sense with the wifi connectivity, but Apple executives at Mac World remained silent on the topic
2) What is the battery life? With the current video iPOD, I can watch 3-4 hours of video, so if you are on a transatlantic flight and you enjoyed a couple of movies in the plane, it will be challenging to check your e-mails or make a call when you land...
3) The iPhone is a high-end Nokia killer, but is it a Blackberry killer? Apparently not if you trust the stock market. As Apple skyrocketed and Nokia plunged, RIM remained steady. And it is true that the current version of the iPhone is a fantastic consumer product, but the key business feature (push e-mail and calendar) are not there yet: the iPhone will support yahoo push e-mails, but not Outlook (only cache and carry). So, for now and I believe for a few more years, RIM will remain the leader. Here are a few reasons:
- I don't see businesses buying massively $500-$600 entertainment device for their employees ($300 for a Blackberry is already expensive)
- As mobile devices become pervasive, IT departments will try to minimize the number of devices to support and are unlikely to add a new mobile OS with a marginal number of users
- Push e-mail capabilities require a server product (e.g., blackberry, goodlink or exchange) and neither RIM, nor Microsoft nor Motorola has any interest in pushing the Apple mobile platform.
So it seems the iPhone is on its way to be the best high-end consumer product, but business users will still have to carry around their blackberry for some time
4) The size of the memory is limited. The size of a typical movie downloaded on iTunes is 1.2GB, that means the 6GB iPhone can carry only 5 movies...pretty limited. 6-8GB makes sense for music and photos, not video. How long will it take before Apple increases the memory?

So bottom line, it is an amazing product. It will not replace my Blackberry or my 60GB iPOD video, but I can carry a third device - not because I need it - just because it is cool!

AppleTV

My first question was why AppleTV, not iTV? Well, iTV is the biggest commercial television network in the UK and "eyeTV" is also an application from Elgato (it is a TV/DVR product for Mac) - so the name was already crowded. But by simply replacing Apple by a logo, the achronym was safe...
But let's get back to the product. I was really enthusiat about the iPhone story, but much less by the AppleTV.
The AppleTV is a small box with a 40GB hard drive that is plugged to your TV via and HDMI connection (high definition) and connect wirelessly to any iTunes library in your home. So, you just have to select the songs/photos/movies you want to stream to your box on your iTunes application and you can then see them on your TV. You can also stream in real time the same content directly from your computer to your TV (except the pictures). And of course, the design of the interface is super sleek. It is Apple first beach-head into the living room and a smart strategic move to get there without a gaming console. To be fair, the product is nice way to access all your iTunes content on your TV, but I was not completely convinced - for several reasons:
First, the storage space is relatively small for a device supposed to carry videos. My iTunes library is more than 70GB (and I have only 30 movies). Well you don't need space if you stream. That's fair, but to start watching the movie, you will have to wait 10mn to complete the buffer (similar to a movie download service such as movielink) - not a very pleasant experience. When I asked the question to the Apple representatives, the answer I got three times was "we can say, it depends on the wireless connection" - great answer...
Second, who wants to by an HD TV to watch low resolution movies and videos? Apple is trying to simplify the media experience by providing a single format for an iPOD screen and a large screen High Def TV. It just does not work. The quality of a 1.2 GB movie on the iPOD video is fantastic, but on a large screen, it sucks. And the sound is only stereo, not 5.1 or 7.1. No surprise: a DVD is 5-7GB, so 5-6 times the size of a movie downloaded on iTunes. At Mac World, the Apple staff presenting the AppleTV kept saying movies were DVD quality, but I don't know who would believe it...
Finally, Apple TV supports only iTunes content - fairly restrictive compared to the other media center solutions.

To conclude, I would say that for $300, the AppleTV is an expensive gadget to port your iTunes library into the living room. To make it successful, Apple will need to upgrade the quality of its content and start differentiating mobile and home video content. You can listen to compressed audio without noticing it a lot, but video is a different game, especially with surging sales of high def. screens and home theater systems

My favorite gadgets from the show
I found two products at Mac World that I really liked:
The first one is the $60 Shure PTH device (Push-To-Ear). The PTH is small device that connects to your iPOD (or any player) on one end and to your earphones on the other end. When you activate it, it reduces the sound level from your iPOD and enables a conversation without removing your earphones. Any person using noise cancelling phone will appreciate this gadget - especially in planes, where you won't have to take out your ear piece to talk to the flight attendants.
The second one is the BT 359 bluetooth GPS receiver from GlobalSat. It is a small GPS device that connects via bluetooth to any PC or mobile device (smart phone or blackberry) and cost less than $150. You will need to buy the mapping software though (around $80-100).

VC lifestyle

How does the lifestyle of a VC look like? This video from Blueprint Ventures will give you good insights!



Happy New Year 2007!

Best Venture and Technology Podcasts for 2007

Being a San Francisco-Menlo Park commuter, I spend an average of 90mn per day on the road... I make the most of this time by listening to my favorite tech and venture podcasts.

Here is the short list for your 2007 travel time:

Wall Street Journal Tech News Briefing: My daily starter - a five minutes overview of the latest technology news and trends plus a rundown on technology stocks on the move

MarketWatch Morning Stock Talk : A 5mn snapshot of how the stock market is doing

CNET Daily Tech News: The daily news from CNET. More consumer oriented than WSJ - a nice complement.

Foo Casts: Podcasts from O'Reilly & Friends: A 30mn peak into the Web 2.0 world. Recent interviews include Jack Ma, Eric Schmidt and Jeff Bezos. New post every 3-7 days.

I innovate: a 20mn podcast on innovation and entrepreneurship. The bi-weekly podcasts feature interviews of entrepreneurs and silicon Valley leaders. Recent guests: Heidi Roizen (Mobius), Philip Rosedale (Linden Labs) and the founders of Meebo.

VentureCast : Bi-weekly anecdotes on the Silicon Valley venture world.

Sandhill.com Podcast: 40mn podcasts on Enterprise software. Unfortunately, Sandhill publishes new posts only around their conferences, but they have an interesting history of 4-5 podcasts. This is the only podcast I found on Enterprise software.

Enjoy!

Why I disagree with Tony Zingale on the future of SaaS

A couple weeks ago, I attended the 13th Silicon Valley Annual VC/Entrepreneur luncheon organized by NVCA. The guest speaker was a well known and highly successful Silicon Valley veteran: Tony Zingale, President and CEO of Mercury Interactive. Great choice for the last event of the year. The theme was "the future of software".

Tony Zingale started his speech with an overview of his career and - leaving aside the comments on how to handle option backdating - his key advice could be summarized as: do sooner, assemble a great team, select board members wisely. He is a great speaker and I enjoyed the speech, but after 40mn, I was still waiting to hear about the future of software. At last, he addressed the subject and presented his perspective:
1) Growing need for application management and mapping software
2) Future is in Service Oriented Architecture (SOA) - more and more applications will be built from building blocks
3) Security will continue to remain a key element of the stack
4) Software as a Service (SaaS) business model will not pay off in the long run as the cost of sales and services will increase (main argument was that SaaS companies have to "resell" their service every year - even sometimes every month)

I was in line with his first three points, but the last one on SaaS really surprised me. It is true that the SaaS model faces some challenges like service reliability, data privacy, lower level of customization, integration with existing applications, vendor viability concerns... however, public SaaS companies like Concur, Saba, Taleo, LivePerson and Ultimate are growing 50-100% per year and trading at an average 5x trailing revenue multiples (I excluded salesforce leading the pack with 9x!) whereas traditional software companies of this size have a growth rate of less than 10% and revenue multiples of 2-2.5x.

Why? There are several reasons driving the success of SaaS:

From the customer standpoint:
- SaaS provides superior economics to the customer: lower TCO (20-30% less than the traditional software model), no/small upfront payment (pay as you go) and low ratio of upfront integration services
- SaaS takes out a lot of IT pain: it is easy to try and buy (and lots of services have free trials, so you can see what you will get before buying it), it is a predicable cost model for companies, it can scale up or down easily, customers do not feel "locked-in" by their vendor and it requires less infrastructure
- SaaS accelerate the pace of innovation: as traditional software company provides new versions every 3-4 years, SaaS companies have new releases every six months, and the upgrade is transparent for customers. In addition, SaaS companies can monitor the usage patterns of their customers and therefore better align innovation with customer needs

From the SaaS company standpoint:
- The service model provides more predictable revenues and cash flows
- Capital requirements are much lower than for traditional software development: a start-up can launch a product and acquire several customers with less than $1m
- The time to market - and therefore break even - is also shorter: 6-12 months for SaaS vs. 18-24 months for a traditional software company
- All the customers are on the same version of the application: this makes the maintenance and support a lot easier

To get back to Tony Zingale's concerns about the cost of sales, I am not sure it is relevant - the payment method is independent from the delivery model. Companies like Microsoft have developed subscription-based licensing contracts without a SaaS delivery model and SaaS companies are selling multi-year contracts for their services.

So, to conclude this post, I think that all the benefits provided by the SaaS model will overcome the challenges, in particular for small and medium businesses (SMBs), which are the most price sensitive customers. SaaS will give them access to technologies that were accessible only to larger companies in the past, giving them a new edge to compete. With time, SaaS will also penetrate larger enterprises (main challenges being integration with legacy systems, reliability and privacy), starting with applications that are not touching their core competencies. Salesforce has started to move up this path with large customers like Symantec.

Betting on the right guy

Venture Capital is about investing in the small, fast and agile company hoping that it will beat the large and slow incumbent. In this game, sometimes you win and sometimes you loose...

McKinsey highlight #1: the art of cost cutting or how to save 70m with a measuring spoon

Paris, November 1998. First week on the job.
The phone rings - it was the staffing manager: "Philippe, come in my office, your life is gonna change!". I come to her office to learn that I would be on the next plane for Rome, where a team was waiting for me to start a TOP project in an electronic components factory. I was super excited!

TOP or Total Operational Performance, is a cost cutting approach, where your objective is to cut 40% of all the "not-strictly-necessary costs" by doing things differently. The methodology is simple: run brainstorming sessions and generate ideas to save costs. Any investment has to breakeven in less than 18 months.

I was in charge of the SG&A budget. As you probably guessed, 100% of SG&A costs are "not-strictly -necessary", so we had a good share of the objectives. After looking at all the major ideas to redesign the QA process, outsourced payroll, cut the office supplies ect... we started to tackle the plant food service where the 2,000 employees had their daily lunch. The options were simple: either we could find creative ways to reduce the spend, or we would have to outsource the whole operations and reduce the quality of the meals (it was one of the best restaurant I ever found in a company - the social pressure was high). The overall budget was around $2.5m, so we had to find a way to save $1m. After a week of brainstorming, we were still short of 4% of the savings or $40k. This close to the objective, we had to find something...

As I was queuing up for lunch, I realized that the employee in charge of adding the parmesan on each pasta plate was using a normal spoon and was VERY generous - a bit TOO generous for the acute eye of a cost cutting project leader. Back to the team room, I looked at the yearly cost of parmesan and discovered that the spend was above $75k per year, or equivalent to 15g or parmesan per person per lunch! Simply by replacing the traditional spoon with a 7g measuring spoon we could save more than 50% of the parmesan or close to $40k. Done deal: after a quick syndication with the kitchen team (their job was at stake, so they were easy to convince...), we bought a $4 measuring spoon with an expected return of 1,000 times in the coming year. This spoon saved the in-house restaurant and Lira 70m (I never said it was USD!)

Happy ending? Yes, for a couple of years, after which the new plant manager decided to outsourced the whole thing. I guessed the measuring spoon was not used diligently...

Zune vs. Ipod

Is the Zune going to dent Apple's disproportionate share of the online music market?

Cracking the SMB code

Small and Medium businesses have been the holy grail of High tech and software companies for quite some time now, but the quest is far from ending.

"If you would ask me what part of the market is most underserved by technology companies today, I'd tell you it's small and medium sized business. . . and so I think it's a very, very big bet“ - Steve Ballmer, CEO, Microsoft

Indeed, the opportunity is large: with 11m+ SMBs in the US only spending more than $300B in IT...but so far nobody managed to "crack the code" and current sales model are facing diminishing returns:
(1) HT companies have little insights in their SMB customers (e.g., potential, share of wallet) and therefore have difficulty to segment them and serve them effectively
(2) The existing direct (tele)sales model coverage is failing to provide adequate returns as companies face increased pressure to lower cost of sales. There are several reasons supporting this trend:
- Sales rep. do not have the time (up to 100 companies per rep.) and the skills to sell high value solutions. The time they spend with customers is usually limited to transactional core products sales, generating lower margins
– The resource allocation is not always matching the opportunity (geography, customer segment, vertical...)
– The rules of engagement for technical resources (solution or product specialists) are not clear. These resources tend to be involved on ad hoc projects rather than on the highest opportunities
–Sales reps tend to operate independently from the channel, leading to inefficient leverage of resources
(3) On the channel side, the traditional transactional sales model does not provide enough margins to partners

This last point is the premise of a radical change. Today, VARs are the key to the SMB segment and their business model is collapsing, opening new opportunities for them and for technology providers.

To survive, VARs need to change their business model and move from product sales to services. This can be done in two ways: selling solutions or providing managed services.

This is a fundamental change for the VARs, requiring them to evolve their skills and organization. In particular, partners will need to:
- develop integration capabilities to be able to deliver solutions with good economics
- adapt their sales process to be able to articulate a clear business value to line of business managers (instead of IT managers)
- Adapt the marketing materials (webminars, events...) to focus on specific business issues, not technical issues)

In addition, success will require the VARs to develop privileged relationships with a limited number of high tech vendors (to gain visibility and support) and to create dedicated practices to build specific areas of expertise

The transformation has started - and any vendor providing technology helping VARs to develop their services offering (i.e., software packages for SMBs requiring 15-20 of integration services, platform to provide managed services) will reap a significant portion of the profit pool.