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

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

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

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

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

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

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



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

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

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

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

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

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

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


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


Sales& Marketing

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

G&A

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

R&D

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

Operations

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

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

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

Bessemer 5 Cs of SaaS Finance

View more presentations from Philippe Botteri.

Hard times...

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

The Bessemer 10 laws of SaaS - Fall 2008 Release

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

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


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


3. Tune before you scale: the Sales Learning Curve is even more critical for SaaS and it takes at least $300k MRR to climb it. Stop at three sales reps until at least two of them are making $100K MRR quotas


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


5. SaaS is a whole new ecosystem where traditional IT channels don’t work – Focus your business development efforts on business services channels, but you will need to sell directly for a long time as these new set of partners are not easy to ramp-up


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


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


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


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


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

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

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

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

Death Sentence for SaaS...or for Lawson?

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

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

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


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

"People are stupid"

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

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

Cocaine addict!! Nice one!

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

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

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

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

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

Made to Stick!

Can you believe this?




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

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

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

PRINCIPLE 1: SIMPLICITY

PRINCIPLE 2: UNEXPECTEDNESS

PRINCIPLE 3: CONCRETENESS

PRINCIPLE 4: CREDIBILITY

PRINCIPLE 5: EMOTIONS

PRINCIPLE 6: STORIES

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

Churchill Club 2008 Top 10 Tech Trends

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

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

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

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

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

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

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

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

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

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

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

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

Measuring sales and marketing effectiveness of SaaS companies

The CAC Ratio

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

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

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

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

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

The implications for a private saas companies are straightforward:

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


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


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

Refining the CAC Ratio

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

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

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

CAC Ratio benchmarking for public SaaS companies

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

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

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

One order a day...

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

Launch of the SaaS 13 Index!

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

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

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

The 10 laws of SaaS unveiled at Bessemer CEO Summit

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

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

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

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

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

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

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

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

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

Happy New Year 2008!

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

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


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

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



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

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

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

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