BlablaCar - Travel Revolution

Some countries in Europe may have lost their AAA ratings, but they have not lost their appetite to innovate and create new online services. Blablacar is one such example of innovation: with a fast growing community of 1.6m members in France (www.covoiturage.fr), the UK (www.blablacar.com) and Spain (www.comuto.es), this company is changing the way people travel on the old continent, becoming a very compelling alternative to trains and planes.

The website connects drivers and passengers who are willing to share a journey in their car. While the site addresses all kind of trips, from short commuting to long distance, most of the activity is around trips of 150+ miles. The passengers compensate the driver for the gas and toll costs, making it a fair trade. For example, a trip from Paris to Lyon (290 miles) would cost €25-30 compared to €100+ for the train. On top of being cheaper (cost is of course an important driver), people are also using the service because it is more social (a lot of people don't like to drive alone), more granular (with the scale, you can find a driver closer than the nearest train station!), and of course more environmentally friendly.

Blablacar is to cars what Airbnb is to houses: a way for people to monetise their unused assets on one hand and to consume differently on the other hand. This trend, described by Rachel Botsman in her book "The Rise of Collaborative Consumption" is growing as people becomes more and more inclined to use things rather than to own things. This explains the success of companies like Netflix or Zipcar, but like Airbnb, Blablacar is pushing the concept further with the assets being owned by the consumer instead of the company.

It is interesting to note that this model has been invented in Europe (Blablacar started in 2006) and while there have been some similar and more recent initiatives in the US (e.g., Zimride, Ridejoy), they have not yet seen the explosive growth that the service has observed in Europe with more than 1 Billion miles shared by the community and more than 8m passengers transported!

As Techcrunch announced earlier today, Accel led a $10m round in the company to help them develop their service across all Europe. We are happy to jump on board this rocket ship and help the company change the lives of millions more people!

In search of Europe's next tech stars...

A short interview on Bloomberg about where I see venture opportunities in Europe.

SaaS Multiples: Recovery or Bubble?

With companies like Saleforce and SuccessFactors trading north of 8 times 2011 revenues, SaaS valuations are just back to the 2007 peak, but what is remarkable however, is that, after a period of strong correlation in 2008/2009, SaaS companies (represented by the SaaS 13 Index) have massively outperformed the overall technology sector (Nasdaq) in the past 12 months, creating a gap of more than 60%!

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.


Scale matters

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!

A Quick & Funny Summary of AdTech

I love this video: everything you need to know about online advertising!

"10 Things Every CEO Needs to Know About Product Design" unveiled at the Bessemer Annual Cloud CEO Conference

For the third year in a row, Bessemer hosted its Cloud CEO Conference, assembling roughly 100 CEOs/CxOs of our cloud and rich internet applications portfolio companies (Yelp, LinkedIn, Playdom, Zoosk, Smule, Wix, Eloqua, Teamviewer, Cornerstone OnDemand, Intacct, Criteo, Bizo and many others) as well as a few leading public cloud executives (Josh James from Omniture, Jeff Jordan from OpenTable, Adam Selipsky from Amazon Web Services, Grieg Coppe, CSO of Intuit, Michael Simon from LogMeIn...). The event was very well received by the group with our survey showing a rating of 4.4 out of 5! The full agenda of the event can be seen at the following link

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.

Unveiling of the "10 Things Every CEO Needs to Know About Product Design"

The best rated session of the day was the presentation by Jason Putorti on product design. Jason is the design Czar who designed the Mint user experience and we are incredibly lucky to have him as our first Designer In Residence!

Jason's presentation was focused on the "10 Things Every CEO Needs to Know About Product Design and User Experience". The full presentation is available at the bottom of the post but here are the key highlights:

1. 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%!
2. Design is more than pretty picture: it is all about the user experience and the brand you are trying to build
3. 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 :+)
4. Think in flows, not screens
5. Do not make the user think: Make obvious what is clickable, minimize noise, omit needless words
6. Start with a great story: Make the value obvious and present it first in the user flow
7. User design as a lever: The best marketing tool you can have is a well designed application
8. Get out of the office: Watch people experience your product or service
9. Have your bible: Synthesize your design guidelines in a company style guide
10. Repeat & refine: Allot product cycles to improvement

10 Things CEOs Need to Know About Design

View more presentations from Jason Putorti.

A few highlights from the different keynotes and speakers

On top of Jason, we also had the chance of having many great speakers at the event and here are a few quotes and notes that I have taken during the different keynotes and panels:

• 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"

Looking forward to the fourth edition next year!

State of the SaaS 13: Q1 2010 Sentiment

As we are entering a new year, I thought it would be interesting to publish every quarter an update on the state of the 13 public SaaS/Cloud companies in the Index. So, here is the first edition, including the recent Q4 2009 earnings and the updated 2010 forecast.

1) Slightly improved sentiment for 2010, but companies are still planning for a long recovery

The following chart compares the median growth rate for the SaaS 13 group both in November 2009 after the Q3 reporting season and in March 2010 after the Q4 reporting season. Given the predictability of SaaS GAAP revenues on a quarterly basis, the fact that the 08/09 projections were unchanged is not a surprise. However, despite healthy Q4 results (most companies were at or above plans) few have increased their 2010 guidance and the median moved only from 15% (same as 2009) to 17%. If we consider that 2009 was probably the worst year in the past 5 years, forecasting the same growth for 2010 is not very encouraging. You could argue that it takes some time to restart the SaaS flywheel after a slow year, but an acceleration in 2010 should at least translate into a stronger 2011 guidance, which is not really the case (10/11 growth median is 18%, so barely above 2010). The SaaS growth recovery does not seem to take a "V" shape

2) Sales productivity is ramping up: bottom was hit in the first half of 2009

However, the sales and productivity of the group, measured by the median "Customer Acquisition Cost ratio" or "CAC ratio", seems to be recovering more steeply. Given the lag in GAAP revenue recognition, the Q4 09 revenues are indicating an increased productivity in Q3 2009 (we have unfortunately to look backward due to the GAAP revenue recognition model), but the trend is very encouraging. Given that the revenues are not growing very fast, this means that most of the companies have reduced their sales force and focused on productivity improvement. Also, even if the productivity is increasing, it is still far from the 0.75-1.0 range where you would expect companies to start pumping more investment in sales and marketing to drive growth

3) Focus on profitability

It is interesting to see that the improving sales and marketing productivity is not pushing companies to be more optimistic on their top line but on their bottom line. While the group sentiment for 2010 did not improve significantly vs. November 2009, the projections for 2011 are now a lot more optimistic - 42% higher 2011 aggregated EBITDA announced in March 2010 vs. the November 09! This is a significant guidance revision, which shows the current focus and mindset of the management of these companies. A sign that the SaaS industry is already maturing or a reflection of the public investors expectations?

4) Cash balance increase indicates a focus on M&A to drive further growth

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.

All in all, an interesting start for the year!

A funny perspective on Google innovation...

Happy New Year 2010!

A bit of French humor... so much for Cleantech!

"Bloody ecologists!"

Cloudonomics and 2010 Planning for your SaaS and Cloud Computing business

As we get close to the end of the year, I thought it would be interesting to put together a post on how to approach the 2010 planning. I was fortunate to be invited to present at Dreamforce a few weeks ago to tackle this topic on stage, so if you want more color, fell free to watch the video below, but here is a quick summary:

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) :

Follow Cracking The Code on Twitter

New SaaS 13 Index: Welcome to LogMeIn (Nasdaq: LOGM)!

While poised with a limited number of transactions this year, the world of public Cloud Computing and SaaS companies has been marked by two events in the past few months: the acquisition of Omniture by Adobe and the high profile IPO of LogMeIn, a leading provider of PC remote access and support with a very interesting freemium model.

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.

As you can see on the graph below, the Index made a nice come back this year and we are just at 11% down since Jan. 2008 after flirting with the lows in March 09 at -65%.

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!