Monday, February 04, 2008

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,, 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 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!