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”
Thursday, May 15, 2008
Churchill Club 2008 Top 10 Tech Trends
Monday, March 10, 2008
Measuring sales and marketing effectiveness of SaaS companies
... or why you should short SuccessFactors.
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:
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.
I leave it up to you to design you short and long strategies on the 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.
.bmp)
Monday, February 25, 2008
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, Taleo and Kenexa. The Index reference point starts on January 1st 2008 at 16358.8 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).
Monday, February 04, 2008
The 10 laws of SaaS unveiled at Bessemer CEO Summit
.JPG)
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!
Monday, January 28, 2008
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
Friday, July 06, 2007
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.
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
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 Contracted 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
Blogged with Flock
Monday, June 18, 2007
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.
Wednesday, April 18, 2007
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
Friday, April 13, 2007
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...
Friday, March 30, 2007
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!
Friday, March 23, 2007
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.
Monday, February 12, 2007
Getting the most of your online marketing: the In & Out of SEM/SEO
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.
- SEO best practices and case studies - Andreas Mueller, President and Founder of Bloofusion
- The future of online marketing - GeoffreyArone, founder of Flock and EIR at Bessemer
- Roundtable - moderated by Rob Stavis
- Know when your customers buy: the conversion rate varies tremendously within the day, between days and by geography (even within the US)
- Eventhough the "relevance" criteria of search engines are kept secret, respecting a few rules can make a great difference:
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!
Wednesday, January 10, 2007
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
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).
Friday, January 05, 2007
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!
Thursday, December 28, 2006
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!
Saturday, December 16, 2006
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...
Saturday, December 09, 2006
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...