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) :

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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.