Here is a quick summary of my discussion on the sharing economy and wider changes in the European technology scene.
Tuesday, June 17, 2014
Here is a quick summary of my discussion on the sharing economy and wider changes in the European technology scene.
Tuesday, April 15, 2014
I remember when the first ecommerce sites launched in the late 90’s with poor dial up connectivity and everyone thinking that a few years down the road everything would be bought online. Fifteen years later, ecommerce has gone a long way and changed our way of life, representing a $1.3T market globally. However, ecommerce represents only 8-12% of total retail sales and there is still a lot of room to grow from here. The fact that companies like Amazon or eBay are still growing at 20-30% annually despite their massive scale illustrates this untapped potential. Looking forward, we are seeing 6 trends that will fuel this growth and shape the future of online commerce:
Mobile supremacy: coming as no surprise, the main trend that is changing ecommerce today is the relentless growth of mobile. Mobile represents 15% of internet traffic, growing at 150% per year but users spend 87% of their time on mobile on applications (vs. mobile internet), so this underestimates the actual penetration. In addition, consumers are spending a lot of time searching for information that they use to buy in retail stores and mobile is a very powerful tool for this use case. The level of engagement on mobile is changing the game of online commerce and already on the path to becoming the dominant channel: Etsy is seeing close to half of traffic and 30% of GMV on mobile. Showroomprive is experiencing similar numbers. Supercell reached 10m mobile users in less than 4 months (it took 27 months for Facebook). HotelTonight is selling last minute hotel rooms exclusively on mobile with more than 6.5m users, growing 300% year over year and the list goes on…
One click services: have you tried to find a cleaner for your home or a sitter for your dog? Today, the process is cumbersome, including multiple phone calls, quotes, sometimes onsite visits…Tomorrow, you will be able to go online and book the service at a convenient time in just one click. Companies like Homejoy, Handybook, Dogvacay or Rover.com are already making this future a reality in the US and we should expect to see these services developing in Europe soon.
The rise of the sharing economy: when Rachel Botsman published “Collaborative consumption” in 2011, many peer to peer services were emerging but eventually many of them did not reach scale as the friction to deliver the service or product often offset the value received. However, peer to peer had proven to work and is getting massive scale in several areas: home sharing with Airbnb (10m “guest stays” since launch) and Housetrip, ride sharing with Blablacar (close to 7m members in 10 countries), fashion with Vinted (14m listings) and lending with Lending Club and Funding Circle. Peer to peer marketplaces are here to stay and redefining several areas of online commerce.
Personalize or die: the day of a “one size fits all” for ecommerce are counted. The development of new business intelligence platforms is now making the analysis of large amount of data possible in real time and this intelligence can be used effectively to personalize user experience. Criteo pioneered this field with ad retargeting and we are now seeing a new breed of companies like Monetate or Sailthru pushing personalization further to content, search and email.
Instant delivery: ecommerce has reduced delivery time from a week to next day but to continue eating into retail sales, the limit needs to be pushed further down while keeping shipping price low. Tough challenge that is hard to overcome with traditional courier services but technology is here to help and new services are emerging even though it is very early days. Companies like Uber are floating the idea of using their car fleet to deliver goods, Amazon is experimenting with drones and Netflix is making fun
of it (this may not happen in the near future!) and online/ mobile delivery services like Postmates are starting to grow in the US. Who knows what the future holds but there is a lot of investments and creativity working on this problem.
Asian Tigers turning digital: In 2014, for the first time, consumers in Asia-Pacific will spend more on ecommerce purchases than those in North America, making it the largest regional ecommerce market in the world. China represents 60% of this market with companies like JD.com (212m orders and $14B GMV in the first 9 months of 2013), Alibaba ($160B sales in 2012) and IQiyi ($2.6B revenues in 2014) expected to go public in the US in 2014. India is following with companies like Flipkart which grew its revenues 5x last year. The e-gold rush is happening in Far East!
Wednesday, April 02, 2014
Tuesday, January 14, 2014
Simple CAC ratio
As many companies are finalizing their 2014 financial plan (feel free to use the Accel template), I thought it could be a good time to write a short post on the CAC ratio - a simple metric that I defined in a blog post in 2008 (time flies!) to measure the sales ramp; marketing productivity of Cloud businesses. This metric measures the ratio of the annualized additional recurring revenue generated by your sales and marketing investments. The simple formula is based on traditional GAAP financials, available for public companies. The target for this ratio should be close to 1 (1 year payback) but for companies with low churn (5 year+ lifetime) and growing fast, anything above 0.5 (2 year payback) warrants further investments.
CAC ratio = [GM (Q4 13)- GM(Q3 13)] x 4/ S&M costs (Q3 13)
(GM: Gross Margin; S&M: sales and marketing)
CAC ratio based on CMRR
While very easy to calculate and benchmark, this formula can be refined at different levels. Firstly, this formula assumes that the revenue recognition time starts one quarter after the actual sale (time to implement the solution and go live) - hence the allocation of Q3 and not Q4 S&M costs in the formula. This is a rough approximation. Secondly, the total revenue also includes, most of the time, non recurring revenue like implementation services or training which are independent of the sales productivity. To have a first level of refinement, it is best to include only the net new contracted recurring revenue in the given quarter or CMRR (see blog post on SaaS metrics). The resulting CAC ratio becomes:
CAC ratio = [Net New CMRR (Q4 13) x GM (%)] x 12/ S&M quarterly costs (Q4 13)
CAC and Renewal ratio separating New Sales and Renewals
The ratio can now compare accurately the new recurring business generated in Q4 2013 with the relevant sales and marketing costs incurred. This is the most standard CAC ratio for early stage SaaS businesses. However, as companies mature, the sales organization usually is broken down between the Hunters (new sales) and the Farmers (account management for renewals and upsells). Each team can be measured separately. While the CAC ratio will measure the effectiveness of the Hunting team, the Renewal ratio will measure the effectiveness of the renewal and upsells team. The challenge is to allocate the marketing spent towards one team vs. the other. I usually assumes that everything regarding lead generation goes to the hunters, while general marketing and branding is split 2/3 for Hunters and 1/3 for Farmers (one short cut is to assign 100% of marketing costs to the Hunters). The two metrics become:
CAC ratio = [Gross New CMRR generated by the Hunters x GM] x 12/ S&M quarterly costs for the Hunters
Renewal ratio = [Net CMRR (renewals + upsells) from the Farmers x GM] x 12/ S&M quarterly costs for the Farmers
For the CAC ratio, the benchmark needs now to be closer to 1 (or more!) as the noise of the renewals and churn is now eliminated. For the renewal ratio, the benchmark that I use typically is around 5, meaning that it costs 20 cents to renew 1 dollar of recurring GM equivalent to a steady state (flat revenue) where the S&M costs represents around 20% of the recurring gross margin
CAC ratio taking into account sales force quota ramp-up
Finally, for fast growing companies that are hiring many new sales people every quarter, the CAC ratio can be further refined to take into account the sales ramp-up. Let's take an example: if you have 10 sales people active in a quarter with only 6 fully ramped up (100% quota) and 4 of them just starting with a quota of 25% of the full quota, your are only getting an effective team of 7 people (6x100% + 4x25%) = 7 but you will be paying for 10 people. To take into account this ramp-up effect, you can adjust your S&M costs in the formula accordingly and multiply them by 7/10 = 0.7 or 70%. In this case, your effective S&M costs = S&M costs x 70%. The adjusted CAC ratio becomes:
CAC ratio = [Gross New CMRR generated by the hunters x GM] x 12/ [S&M quarterly costs for the hunters x avg. quota ramp-up (%)]
When using the ramp-up formula, the benchmark should now be 1.0 (1 year payback) given that all the noise has been removed. The same ramp-up factor could be calculated to refine the renewal ratio
So which number to pick? I think it depends on the stage of the company. The simple ratio based on GAAP revenue should be used primarily for benchmarking public companies as it is fairly inaccurate. For most early stage companies (up to $10m annual revenue), the CAC ratio based on CMRR should be the most important one, with the option of refining it with the quota ramp-up. Above $10-15m in annual revenues, it probably make sense to separate new sales from renewal, as both teams have different leaders which would benefit from being measured with different metrics
Wednesday, October 24, 2012
- 400m+ people in the region
- GDP of $3T+ with most countries growing 2-5%+
- “Runet” (Russia Internet) is the largest market in Europe with 53m internet users and given its under-penetration (37%) it is still growing at double digits, increasing the gap with Germany which is currently number two and growing at 2% per annum. Out of these 53m internet users, 15m are shopping online, creating a fast growing $11B ecommerce market in Russia alone (expected to reach $19B by 2015)
- The mobile penetration is among the highest in the world with 1.7 mobile phone per person for the Top 4 EE countries (vs. 1.2 in GE, 1.3 in Brazil and 0.8 in India and China)
- The region has an exceptional talent pool: Eastern Europe was the first country to send a man into space in 1961 and has a very strong network of universities. It is not by chance than a Moscow team won the 2012 FB Hackathon with Boostmate, a tool to analyze social interactions and rank your closest friends.
- 247B emails are sent every day (and the scary bit is that 80% is spam!)
- It costs $600 to buy a disk drive that can store all of the world’s music
- 30B pieces of content are shared on Facebook every month
- Projected growth in global data generated annually is 40%. By 2020, the production of data will be 44 times what we produced in 2009
- 15 out of 17 sectors in the United States have more data stored per company than the US Library of Congress
- Volume: the first V is easy to grasp as it is about quantity. The proliferation of mobile phones, social media, machine data, web logs has led to large amounts of data being generated, stored and processed and this volume is increasing exponentially with the growth of new computing platforms and the shift of activities from offline to online
- Variety: this is where big data starts to differ from “a lot of data”. Big Data is not only about volume but also about the type of data. Large volume of structured data can stored in relational databases and accessed quickly by queries. Big Data contains structured data but mostly unstructured data (which is the key driver of growth as shown in the graph above). And this unstructured data contains valuable information that can now be extracted if the right infrastructure is in place (e.g., sentiment, preference, mood, purchasing intent)
- Velocity: Time is of the essence with Big Data. Business users need faster and faster response rate to derive the most value from information. Sometimes it needs to be in real time. The more data to analyze and the more challenging this becomes as all the pieces of the infrastructure needs to be perfectly tuned
- Value: This last V’s characterize the underlying purpose of storing Big Data – to derive business value. This means that on top of the technical aspect of storing and managing Big Data, there is a need for a strong BI and visualization engine to drive insights beyond data scientists
Looking at these four V’s helps define the underlying opportunities around Big Data: there is a need for larger and cheaper storage, fast access, data management tools, platforms (like Hadoop), BI and visualisation engines and new business applications that can help businesses capture, organize and derive the most value from Big Data.
Friday, October 12, 2012
Amendments proposed to the 2013 Tax law are insufficient and threaten to destabilize the ecosystem
Why not take advantage of this law to make France the champion of Entrepreneurship in Europe?
Friday, October 05, 2012
- Strong macroeconomic trends with a 2011 GDP growth of 8.1% and a GDP per capita which grew from $6k in 2001 to $14k in 2011
- Good infrastructure with 38m internet users (5th European country), mobile penetration above 90% and a very strong logistics and payment networks (45m+ credit cards)
- Very attractive demographics with half of the population below 30 year-old and very active online (5th country on Facebook, 8th on Twitter)
Being invited to speak at the conference, I decided to present some of the things that Accel learned after speaking to dozens of internet and ecommerce companies in the region. I summarized these learnings into 5 “Mantras” that are developed in the presentation embedded below:
- “Me too” is not enough: don’t be the 50th private shopping club or Groupon clone. There is no room for you in the market. Think “differentiation”
- eCommerce is not a cheap journey: be prepared! Most successful ecommerce companies raise more than $50m during their lifetime, so watch every penny you spend and pay specific attention to (1) Inventory and working capital and (2) marketing costs (in particular a repeat basket is not free!)
- Run your business with numbers: eCommerce is all about numbers and doing a 100 small things right
- Build your brand by focusing on user experience: a strong brand is necessary to reduce your CAC and increase your profitability and the best way to build it is to focus on providing a great user experience (product, service and payments)
- Mobile will be bigger than you think: mobile will represent 20%+ of you sales before you realize it!
Thursday, July 19, 2012
Who is not tired of having to sign a document on paper and then send a copy by fax or scanner? Or even worse, have to travel for a signture: last month, I had to sign a notarised document for a family matter and the only way to make this happen was to travel to Paris and show up at the notary's office to sign one single document. Very expensive signature both in terms of time and travel costs....Isn't this crazy XXIst century?
Hopefully, this will be over soon as Docusign expands its network of 20m users, who have already signed more than 150m documents in 188 countries. Venture is all about investing in disrupting technology and Docusign is disrupting a very basic process: signing a document. It sounds very simple but the complexity is to make this service as easy and simple as is a signature on paper, while being able to manage the flow of the document and provide the required security to make signatures reliables.
This technology is impacting nearly all the areas of a company: from human resouces employment contracts and onboarding documents, to procurement, sales, legal and finance. Signatures are everywhere and with a digitized workflow, documents can travel across department, subsidiaries and countries within seconds, shortening the execution cycles from days to minutes. In addition, the rise of tablets and mobile devices will accelerate the growth by making the signature process ubiquitous.
Facebook is your social network, LinkedIn your professional network and Docusign will be your identity network.
As several sites announced last week, Docusign raised a large $50m round to fuel its growth, in particular in Europe and Accel participated alongside Kleiner Perkins and existing investors. I look forward to work with Keith Krach, Mike Dinsdale, Tom Gonser and the rest of the Docusign team on this great adventure!
Wednesday, July 18, 2012
400m card accounts linked to iTunes (this is now more than any other store on the planet, larger than the US population and close to 6% of the worldwide population!)
There are over 650,000 apps on the iOS app store, of which 225,000 are iPad only apps (this is an amazing stat show developers are now just focusing on iPad instead of iPhone)
Over 30B apps have been downloaded – with consumers downloading more than 50M apps a day. This represents more than 4 app per person on the planet
Over its lifetime, Apple has paid $5B to iOS developers compared to $12B to music labels – Apple now pays more to developers than music labels and will generate $5B in gross income this year.
By Q1’2012, there were 365M iOS devices in the market
Amazingly, apps are sending 7B notifications a day! Close to 20 per device...
SMS businesses are hurting – of the 365M devices, 140M use iMessage (Apple free messaging platform), sending 1B messages a day or close to 3 per device
130M devices now connect to GameCenter (which is basically Apple’s attempt to harmonize leader boards/stats across games
So, does this justifie a $560B market cap?
Monday, January 16, 2012
Wednesday, August 03, 2011
Wednesday, February 23, 2011
What happened? It would have been easy to explain the difference by changes in the 2010/2011 revenue growth projections but unfortunately that is not the case. SaaS companies projected to grow 18% over this period in January 2010 and this projection moved up only to 20% today. In comparison, the overall technology sector growth was projected at 9-10% in early 2010 and this forecast did not change significantly today.
So if the difference cannot be explained by short term projections, we need to look over an extended period. To justify a 60pts difference, we have to believe that the current growth rates of 10% for technology and 20% for SaaS will continue to hold for the next 9 years before converging. So the question becomes: "Can SaaS outperform technology growth by 2x over the next decade?" Not unreasonable.
To drill down further and better understand how public markets value SaaS companies, I split the SaaS 13 Index into two groups: companies above $1B in market cap (large cap) and below $1B (small cap) and compared the performance of both indices to the Nasdaq:
The result is very interesting: small caps are highly correlated to the Nasdaq but the large caps have taken off sharply, and on average, small caps are trading at 3.5x revenues while large caps are trading at 6.4x. The relative growth rates partially explain the difference as large caps are growing on average 3-5pts faster, but they do not seem to account for the entire gap.
The sales productivity ratio (measured with the Customer Acquisition Cost or CAC ratio) are also fairly similar for the two groups (except for a small cap dip in Q4 09) and therefore do not explain the difference
Why is scale so much rewarded by public markets? Scale is usually correlated with market leadership and large market size, and Wall Street is rewarding with a premium multiple these large SaaS companies because (1) their growth is supported by a secular trend (now it is clear that Cloud Computing is here to stay!) and (2) their leadership position in multi-billion dollar markets will likely make them dominant players in the software landscape, even though they are still small today (SuccessFactors $2.5B market cap or even Salesforce at $17.5B seem tiny compared to the $223B of Microsoft). Unreasonable? Time will tell!
Sunday, November 07, 2010
Tuesday, May 25, 2010
"10 Things Every CEO Needs to Know About Product Design" unveiled at the Bessemer Annual Cloud CEO Conference
The event started with an optional golf round on May 11th afternoon at the Palo Alto Golf and Country Club with a wonderful weather to welcome the participants. The golf was followed by cocktail, dinner and poker: a very fun start to prepare the full day of content and networking on May 12th at the Rosewood SandHill.
- Design can change businesses: little things can have a great impact. A simple example: the difference between "I am on Twitter" and "You should follow me on Twitter here" increased the registration rate by 173%!
- Design is more than pretty picture: it is all about the user experience and the brand you are trying to build
- Talk benefits not features: It is much better to write "Understand your money" than "20 colorful configurable charts and graphs". Another way to think about it is Microsoft vs. Apple packaging :+)
- Think in flows, not screens
- Do not make the user think: Make obvious what is clickable, minimize noise, omit needless words
- Start with a great story: Make the value obvious and present it first in the user flow
- User design as a lever: The best marketing tool you can have is a well designed application
- Get out of the office: Watch people experience your product or service
- Have your bible: Synthesize your design guidelines in a company style guide
- Repeat & refine: Allot product cycles to improvement
- Joe Payne, CEO of Eloqua moderated the panel on Revenue Performance Management. One of his secret: "Incentivize your marketing team on sales not leads"
- Jeff Jordan, CEO of OpenTable speaking about his IPO process: "Build relationships with key public investors 2-3 years before going public (Morgan Stanley, Fidelity and T. Rowe). It is enough to meet them 1-2 times a year and it helps a lot during the roadshow"..."don't expect the IPO to boost your consumer brand, it does not help a lot"
- From the panel on the "Consumerization of Software" that I was moderating: "integrate your user flow from landing page to payment and usage into one single flow", "test, test, and test: user feedback is key"..."Use the 1/60 rule: less than one minute to understand the value and less than 60mn to experience it"
- Sarah Friars, lead software analyst for Goldman Sachs on IPO timing: "Go when you can"
- Michael Simon, CEO of LogMeIn on the Exit/IPO panel: "Pick the bankers you really like as you will spend a LOT of time with them!"..."1 out 25 company going public is bought in the process, ...the likelihood is fairly low"
- Bob Goodman, Bessemer on the same panel: "Bankers are good negotiators, that's why you hire them: the only way to get something out of them is to adopt a 'take it or leave it' stance!"..."having a large VC on your board helps keep the bankers honest and they are less likely to walk on your toes"
Friday, March 12, 2010
2) Sales productivity is ramping up: bottom was hit in the first half of 2009
The past few months have also been marked by a few high profile equity and debt announcements - most notably SuccessFactors, Taleo and Saleforce.com. In total, the cumulative cash balance of the group increased by 64%, or more than $1B! As this cash will not be used to fund organic growth initiatives, we can expect several acquisitions in the coming 24 months. To date, Salesforce has been focused on small tuck-in technology acquisitions, so it is an interesting move for them. There aren't any companies at scale built on Force.com that would justify such a raise, so either Salesforce will have to buy a light technology at scale (email marketing?) that can easily be ported to Force or they will have to breach their platform credo.
Wednesday, February 24, 2010
Thursday, January 14, 2010
Tuesday, December 01, 2009
1) Be more than ever metrics driven: as we get into a period of recovery, but with still a lot of uncertainty, it is critical to base your plan around the 6 C's of Cloud Finance (CMRR, Cash, Churn, CAC ratio, CLTV and CMRR Pipeline):
- Make sure than your CMRR (Committed Monthly Recurring Revenue) line will cross your MRE (monthly recurring expenses)
- Calculate your CAC ratio in the past quarters to see if it is capital efficient to spend more in S&M in 2010
- Focus on customer retention and make sure you allocate enough resources to your account management and product team
- Measure you CMRR Pipeline carefully: this is the only metric giving you forward visibility onto the future performance of your business (see slide 18 for more details)
2) Manage your cash carefully but don't underinvest: capital is available but your metrics will tell you if you can raise outside capital or not in good terms
3) Watch for cheap revenue: you may be able to buy failing competitors for their customer base or interesting technology at a very interesting price. The recession created opportunities!
You can download the PDF by clicking here
To help you build and assess your plan, I thought you might also be interested in this recent benchmarking of public SaaS companies that Steve Klei, a veteran SaaS CFO put together (Click on the picture to see the full slide show) :
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Tuesday, November 10, 2009
The acquisition of Omniture by Adobe for $1.8B was a great outcome for the company (kudos to Josh James, their visionary founder & CEO!) and the second SaaS public transaction in history behind the acquisition of Webex by Cisco in 2007 for $3.2B. After Google buying Postini, the SaaS M&A market continues to be full of surprises. Who would have thought that Adobe would acquire Omniture? It is intriguing to see the M&A dynamics in the space, highlighting the interest of tech companies for recurring revenue streams - even SAP announced in their analyst call earlier this month that they were moving from perpertual licenses to five year term licences. Hopefully this trend will continue (and accelerate!) in 2010.
On the IPO front, LogMeIn made the news, being one of the few tech IPO on the NASDAAQ in 2009. The stock was very well received, jumping 25% on its first day of trading. Today, the stock is still up 22% and the company is trading at a very healthy 4.2 EV/09 rev. multiple, with 43% 08/09 growth rate and double digit free cash flow margin. Congrats to Jim Kelliher, CFO and Michael Simon, CEO, for a successful IPO!
These events led me to redesign the SaaS 13 Index. I have changed the composition of the Index with LogMeIn officially replacing Omniture and Dealer Trak and AthenaHealth replacing Salary.com and LivePerson. The Index has also been reset to start at 100.00 on January 1st 2008. All the multiples and CAC ratio have been adjusted to reflect this update.
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:
- Less is more! Leverage the cloud everywhere you practically can (more...)
- Get instrument rated, and trust the 6C's of Cloud Finance (more...)
- Study the Sales Learning Curve and Only Invest behind Success (more...)
- 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...)
- 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...)
- By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful Cloud business (more...)
- The most important part of Software-as-a-Service isn’t "Software" its "Service"! Support, support, support! (more...)
- Leverage and monetize the data asset (more...)
- Mind the GAAP! Cloud accounting is all about matching revenue and costs to consumption…well, except for professional services! (more...)
- 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...)