Building the Billion Dollar SaaS Unicorn PDF

Building the Billion Dollar SaaS Unicorn The CEO Guide of Key Insights and Metrics for B2B Software as a Service Companies By Kelly Schwedland  Rising Table Stakes Christopher Janz, SaaS Investor...

Building the Billion Dollar SaaS Unicorn The CEO Guide of Key Insights and Metrics for B2B Software as a Service Companies By Kelly Schwedland  Rising Table Stakes Christopher Janz, SaaS Investor Note: Tom Tunguz noted Blogger and VC With firm Redpoint noted in a recent vLog that copying a business model is typically not a good idea, since they have diminishing value over time as more folks copy. That said, it is increasingly important to understand what the business models of successful companies look like as a sanity check for the numbers that you are seeing and http://tomtunguz.com/table-stakes-saas/ projecting Why a $Billion? – It’s Investable Typical Investor Interests: $1B+ Market Scalable Solution Recurring Revenue Past Successes Full team Traction Note: One of the top questions asked by Investors. What problem do you solve and how big an opportunity (market) is that? * Each investor has their own Generally investors are interested in opportunities investment thesis, certain that have a $B+ market potential and growing. products, markets or business Since SaaS companies are recurring revenue idealy models that they prefer. Look with high operating margins, a Billion Dollar valuation requires roughly $100M+ in annual for a good match to your recurring revenues product offering and market validation (Whether your product and team can get there are the other two other biggies.) https://www.saastr.com/tam-is-great-but-what-really-matters-is-that-you-believe-you-can-hit-100m-in-7-years/ Growth Stage Key Points I. Terms & Metrics II. Roadmap III. Sustaining Growth IV. Benchmarks  I. Key Terms & Metrics for SaaS 1. Cash Flow 6. NPS Leading Indicator 2. MRR/ARR 7. Churn 3. CAC & LTV 8. LVR Leading Indicator 4. SEI 9. TtV 5. ACV 10. Cohort analysis 11. Revenue per Employee If you only read one article on SaaS metrics this is it: http://www.forentrepreneurs.com/saas-metrics-2/ For an alternate look at metrics: https://updata.com/insights/saas-metrics-framework/ Note: For those that are on their first time building a SaaS business with institutional investor backing, For Developing a KPI dashboard for a SaaS company: here are some of the key terms you are going to http://christophjanz.blogspot.de/2013/04/a-kpi-dashboard-for-early-stage-saas.html need to learn and track. 1. Cash Flow - Don’t run out of money Ron Gill, NetSuite: If plans go well, you may decide it is time to hit the accelerator (increasing spending on lead generation, hiring additional sales reps, adding data center capacity, etc.) in order to pick-up the pace of customer acquisition. The thing that surprises many investors and boards of directors about the SaaS model is that, even with perfect execution, an acceleration of growth will often be accompanied by a squeeze on profitability and cash flow. Note: While this seems the most obvious. Running out of cash is the end of any startup or scale up. So needless to say, this is the the most import number to keep track of. Understanding the rate of your growth and being able to predict the cash burn effectively is of paramount importance while scaling.  2. MRR & ARR There are two kinds of SaaS business: Those with primarily monthly contracts, with some longer term contracts. In this business, the primary focus will be on MRR (Monthly Recurring Revenue) Those with primarily annual contracts, Tip: with some contracts for multiple Reverse Engineering MRR Growth The First $1M ARR Goal – 6 months years. Here the primary focus is on Simple Math: $1M ARR = $83K MRR $83K/ $1000/mo. ACV = 83 customers ARR (Annual Recurring Revenue) 83/6 mo. = ~ 14 new customers per month (or one new customer every 2 days, simple!) http://sixteenventures.com/saas-secret-to-one- (In practice MRR and ARR often are used with both types of businesses interchangeably to million-dollars describe current monthly revenue recognized or monthly revenue annualized)  3. CAC & LTV: Viability Test LTV > 3x CAC Months to recover CAC < 12 Months Business model viability, in the majority of startups, will come down to balancing two variables: CAC: Cost to Acquire Customers (Sales, Marketing & Customer onboarding) LTV: Lifetime Value of a Customer or The ability to monetize those customers http://www.forentrepreneurs.com/startup-killer/ 4. GEI – Growth Efficiency Index Answers the Question: “How much new recurring revenue can we get out of a given investment?” Lets say you spend $1 on Growth (sales, marketing, onboarding.) How many new recurring revenue dollars does that buy you? GEI then is how long it takes before new customers start being additive to Revenue (A GEI of.5 = half a year, 1 = 1year, 2 = 2years, etc.) Growth Expense = Marketing, Sales, Customer Success onboarding https://www.zuora.com/guides/subscription-finance-basics/ 9  5. Matching CAC, LTV & ACV Product Pricing, Sales Strategy and Product are all interconnected. VS. Well marketed, easy to use Average SaaS Companies and easy to implement ACV= Average Contract Value http://vcwithme.co/2015/03/30/optimizing-the-ltvcac-ratio/ http://pando.com/2013/06/15/what-the-data-reveals-about-how-to-make-SaaS-secret-sauce/ 6. NPS – Net Promoter Score Leading Indicator * As a leading indicator this will likely tell you what churn will look like in the months ahead Bain analysis showed that sustained value creators— companies that achieve long-term profitable growth—have Net Promoter Scores (NPS) two times higher than the average company. And Net Promoter leaders on average grow at more than twice the rate of competitors. http://www.netpromotersystem.com/about/why-net-promoter.aspx 11  7. Churn = Customer Health Churn at a per customer basis is always going to happen with closings and turnover. But on a dollar level this isn’t Big impact on value over time necessarily true. Note: A handy quick guide: Churn Quick Ratio = new $MRR this month / $MRR lost Target upselling and cross-selling to What’s good, what’s bad What you want effect negative dollar Churn Get to $1M ARR ~12 months after launch Net New MRR keeps increasing quarter over quarter Maintain a Churn Ratio > 4 http://www.forentrepreneurs.com/why-churn-is-critical-in-saas/ What to watch out for A Churn Ratio < 2 churn is too high /new sales aren’t working Net New MRR is flat or down quarter over quarter Takes 18+ months to get to $1M ARR Churn = loss of ARR (MRR) to total ARR (MRR). http://www.slideshare.net/03133938319/saastr  8. Cohort Analysis The only way to truly know net MRR growth A simple way to understand Customer Retention/ Churn through multiple product iterations. http://andrewchen.co/the-easiest-spreadsheet-for-churn-mrr-and-cohort-analysis-guest-post/ 9. LVR - Lead Velocity Rate Qualified Lead Velocity Rate (LVR), your growth in qualified leads, measured month- Leading Indicator over-month, every month. * As a leading indicator this will likely tell Grow your LVR about 10-20% greater than you what Sales will look like in the months ahead. your desired MRR growth — you’ll hit your revenue goals. You’ll see the future of your business 12-18 months out, clear as can be. http://www.saastr.com/why-lead-velocity-rate-lvr-is-the-most-important-metric-in-saas/ 10. TtV- Time to Value How fast can a customer derive value from your product? Ways to Improve: Simplicity wins… be feature-complete, not feature-rich Hack the onboarding flow Document, Document, Document Quantify, Set goals and Benchmark http://www.rre.com/blog/89  11. Revenue per Employee Two development tracks one goal Product Value and Internal Efficiency always seem to be competing for internal talent, but they are flip sides to the same productivity coin. Median revenue per Employee by year since founding Use Rev/Emp as a priority decision guide. Note: Best in class companies like Salesforce and FinancialEngines are able to achieve more than $300k in revenue per employee per year http://tomtunguz.com/employee-productivity-patterns-saas/ II. Roadmap  5 ways to build a $B business In SaaS to get a Billion Dollar valuation you need somewhere over $100M in Annual Revenue. You essentially need: ~ 1,000 enterprise customers at $100k+ /Yr or ~ 10,000 medium-sized at $10k+ /yr or ~ 100,000 small businesses at $1k/yr or ~ 1 million consumers at $100+ /yr each or ~ 10 million active consumers who you monetize at $10+ per year each by selling ads Examples: 2014 Rev Valuation* HUBS $115M $1.3B ZEN $127M $1.9B Note: Understanding which segment of the market you are going after is vital MKTO $149M $1.1B in determining your strategy for building the company *Also dependent on growth rate and Cost of Revenue. Avg 5-10 x Rev multiples (I.e. if you are going after a Million consumers at $100/yr then you probably can’t afford a direct sales approach. In fact, You probably can’t even afford an advertising approach, as Dropbox found in tests, advertising cost them $287 per paid $100 user. http://christophjanz.blogspot.com/2014/10/five-ways-to-build-100-million-business.html So the incentivized/ viral strategy became necessary.) http://tomtunguz.com/2015-saas-multiples/ “T2D3” Growth Phases* Note: Neeraj Agrawal at Battery Ventures was nice enough to share some insights from several of their SaaS investments. Starting from the $2M ARR several seemed to follow a very similar path. While it is possible to arrive at $100M ARR from a variety of paths, having guideposts to shoot for is a very helpful tool. *T2D3 = Triple twice, Double three times https://www.linkedin.com/pulse/saas-adventure- triple-double-1b-neeraj-agrawal/ T2D3 Cont’d Phase 1: Establish a great product-market fit Phase 2: Get to $2 million in ARR (annual recurring revenue) Phase 3: Triple to $6 million in ARR Phase 4: Triple to $18 million Phase 5: Double to $36 million in ARR Phase 6: Double to $72 million Phase 7: Double to $144 million http://techcrunch.com/2015/02/01/the-saas-travel-adventure/ Phase 0: Lean Startup Process Note: Without taking up too much time, use a lean Note: If you are still starting out, then you need this presentation: Startup approach combined with Agile development to get to viable product http://www.slideshare.net/KellySchwedland/lean-startup-basics-evidence-based-entrepreneurship ( There is an entire other deck on that process) Also: The 20 Interview rule At a minimum use the 20 interview Rule before http://www.saastr.com/planning-to-do-a-saas-start-up-dont-forget-the-20-interview-rule/ writing the first line of code. Phase 1: Product/Market/ (Team) Fit The Simple definition – When your problems shift to keeping up with demand rather than finding more customers. The only thing that matters: Market http://pmarchive.com/guide_to_startups_part4.html Note: Product market fit is the hardest thing to capture since there doesn’t seem to be any consensus on what it will truly mean for your company. From my experience, in hindsight, it was probably when our focus shifted to internal scaling issues rather than the question of how how do we find customers. Warning signs you aren’t there: Mark Andreesen has a very simple approach that the only thing that matters is the Market. In a great market -- a market with lots of real potential customers -- the market pulls product out of the http://vcwithme.co/2014/11/10/five-signs-your-product-market-fit-isnt-real/ startup. ~Rachleff’s Corollary of Startup Success (named after Andy Rachleff formerly of Benchmark Capital) And you can always feel product/market fit when it's happening. The customers are buying the product just as fast as you can make it -- or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You're hiring sales and customer support Product Market Fit Myths staff as fast as you can…. Warning signs you aren’t there: http://www.feld.com/archives/2015/01/illusion-product-market-fit-saas-companies.html You have ten to twenty customers… …and have for a while Founders sold the product but the sales people you’ve hired can’t figure it out Services are > 25% of your revenue You can’t get access to senior deciders Your first round of renewals goes horribly wrong Myth’s on Product Market Fit Myth #1: Product market fit is always a discrete, big bang event Myth #2: It’s patently obvious when you have product market fit Myth #3: Once you achieve product market fit, you can’t lose it. Myth #4: Once you have product-market fit, you don’t have to sweat the competition. Building a replicable model* Note: Working with growing companies I’ve found that the first inhibiter to growth was that the founder/ owners had everything in their head. *Documenting the systems Replication requires that it be transferable to other individuals. throughout the business so The diagram is designed to be a thought exercise that they can be replicated in thinking through the processes inside the company and then documenting and releasing to by the next hire. others to use and then build on/ modify. I’ve found that focusing on the key results/ metrics of the process helps allow for Example of a system strategy flow chart improvements to the process. http://www.slideshare.net/KellySchwedland/generic-system-strategy-flow-chart Focus: Marketing, Sales, Revenue Note: While having an overall system strategy is important, In order to scale, sales and customer success becomes one of the critical processes. Fortunately Bessemer was nice enough to give us 30 key questions that we need to be able to “30 Answers that Every SaaS Revenue Leader Needs to Know” answer to own growth. http://www.bvp.com/blog/new-whitepaper-released-%E2%80%9C30-qa-every-saas-revenue-leader-needs-know%E2%80%9D III. Sustaining Growth Note: I’ve rarely ever seen a company with one product and one go to market channel sustain growth. Eventually you run out of ads to buy or emails to send. http://chaotic-flow.com/media/saas-growth-strategy.pdf How fast should we grow? Rule of thumb – Growth Rate + Profit should equal 40% Starting from around $1m ARR growth should be higher but should still best the rule of 40 (100% growth + -60% profit = 40% GP) If not, retool sales and operations before growing. Median GP Ratio by year for Public SaaS companies http://tomtunguz.com/rule-of-40 https://feld.com/archives/2015/02/rule-40-healthy-saas-company.html Accelerating Customer Acquisition and Retention Remove Buyer Roadblocks: Increase Awareness Facilitate Evaluation Streamline Purchase Simplify Onboarding Improve Retention Remind Customers of Value they are getting Triggered up-selling and cross-selling that expanded usage of your service (and revenue) http://chaotic-flow.com/SaaS-marketing-accelerating-customer-acquisition/ http://sixteenventures.com/customer-retention-profitability  Improving Lead to Conversion Ratio Measure and optimize each conversion channel. B2B Sales Benchmark Research by Implisit using Salesforce data http://blogs.salesforce.com/company/2014/11/b2b-sales-benchmark-research-finds-some-pipeline-surprises-infographic-gp.html  Overcoming the Growth Challenge Polynomial Growth: The Additive Value of new Sales Channels Note: Investors aren’t at all excited about linear growth companies and everyone want to see the exponential hockey stick growth. In reality very few B2B companies scale exponentially. Which is why it’s important to understand that during the growth process there are several levers that may need to be added to sustain growth. Alex Moore, CEO of Baydin, lays out the case that most true scaling companies that are investor darlings actually have a series of additive elements that as they are applied create a Pseudo Polynomial Growth By Alex Moor, CEO of Baydin exponential growth curve that he calls Polynomial. http://www.slideshare.net/500startups/alex-moore-25097027 IV. Benchmarking How Does your SaaS business stack up? Growth https://benchmarks.openviewpartners.com/ Pacific Crest SaaS survey data (2017) http://www.forentrepreneurs.com/2017-saas-survey-part-1/ Sales Reps https://blog.bridgegroupinc.com/2017-saas-ae-metrics-report Conversion rates https://blog.capterra.com/average-b2b-conversion-rate/ Customer success http://customer-success-resources.totango.com/h/i/266476515-2016-customer-success-salary-survey-state-of- the-profession-report  INSIGHT’S PERIODIC TABLE BUS DEV REPS (BDR) OF SAAS SALES METRICS RETENTION 2 2% NEW BUSINESS Median renewals Months new BDR ramp time BOOKINGS (NBB) commission rate 60% 3 80% 40% 91% Co’s give quota Co’s offer Median Months new relief on 1st add’l team annual gross Cold calls ISR Ramp Time year ACV only bonuses $ retention 40% 60% 36% 93% 50% INSIDE SALES FIELD Co’s pay Churn in VSBs is MQL Promoted Avg. quota uncontrollable follow up from BDR REPS (ISR) REPS (FSR) ~ nothing for 2+ yrs on contract achievement on avg. 10 $130k $2.2-2.5k 6 6 40% $5.5-7k 3-4 30:70 8.5% 90% = 81% Avg. Retention Target # of OTE: MRR Closed Months new Promoted MRR Closed Ratio vertical mkt commission on equiv. in SQL’s/wk 50/50 B/V per deal deals per Q FSR ramp time from ISR per deal deals per Q territories: geo NBB ARR quota SMB vs. VSB $70k 20% $150-180k $630-720k 3x $220k $200-330k $800k-1.3M 66% 6% 87% Co’s offer trials Avg. OTE: 60/40 of BDR teams ARR ARR annual Beg. Q pipeline OTE: ARR quota ARR annual commission on NBB from (try-before- Base/Variable report to mktg quota per Q quota coverage 50/50 B/V per Q quota upsell ARR new logos you-buy) 1:2 70 1:7 1:5 4-5x 5x 3-5x 1:3 4:1 55% 13% Co’s pay full Ratio Calls/contacts Ratio Ratio Ratio Beg. Q Pipeline Ratio Ratio Ratio commission NBB from BDR : FSR per day Manager : ISR SEs : ISR ISR quota:salary Coverage FSR quota:salary SE: ISR ISR:FSR for upsells net upsells Legend: MQL = Marketing Qualified Lead 50% 35 30% $80-100k 60% 1:75 15% Time spent Co’s give bonus Conversion SQL = Sales Qualified Lead Co’s compensate Avg. Ratio Avg. acct on customer OTE: for cust. case rate: SQL to Net Upsells = Upsells less customer downgrades on renewal ARR renewals per Q support 70/30 B/V study/press AMs : customers opportunity OTE = On-Target Earnings SMB = Small-Medium business < 1000 employees VSB = Very Small Business < 50 Employees 50% 60% 30-50% 25% 54% 25% 30% MRR = Monthly Recurring Revenue Co’s compensate AMs Co's give quota Co's offer Avg. PS Rev Conversion rate: ARR = Annual Recurring Revenue Avg. on Cust. Sat responsible relief for PS but PS along w/ as % 1st Opportunity ACV = Annual Contract Value, equ. to ARR Quota NPS score SE = Sales Engineer/Solution Architect (e.g. NPS) for upsell ARR no commissions Subscriptions Year ACV to closed deal B/V = Base Salary/Variable Salary ACCOUNT MANAGERS PROF. SERVICES https://www.insightpartners.com/ideas/metrics/ “Make no small plans for they have no power to stir the soul.” ~ Niccolò Machiavelli. Have questions? See something I missed? Let me know. Kelly Schwedland 219-405-5723 [email protected] ElevateVentures.com 33  SaaS Resources Rules of thumb in SaaS More Periodic tables metrics Extras Standard Conversion metric tracking 34 More SaaS Resources http://www.saastr.com/ http://tomtunguz.com/categories/saas/ http://www.forentrepreneurs.com/saas/ http://sixteenventures.com/page/?s=B2B+SaaS Pitching a VC http://www.bothsidesofthetable.com/pitching-a-vc https://www.linkedin.com/pulse/target-investment-pitch-kelly- schwedland/ SaaS Metrics -Rules of Thumb http://chaotic-flow.com/saas-metrics-guide-to-saas-financial-performance/ http://chaotic-flow.com/saas-metrics-guide-to-saas-financial-performance/ SaaS Financial & Operating Metrics https://www.insightpartners.com/ideas/metrics/insights-periodic-table-of-saas-financial-operating-metrics/ 38 INSIGHT’S PERIODIC TABLE OF B2B DIGITAL MARKETING METRICS Software Development Metrics https://www.insightpartners.com/ideas/metrics/insights-periodic-table-of-software-development-metrics/ 40 Sample Conversion Metrics Stage Conversion Status Conv. Est. Value % (*not* cost) Acquisition Visitors -> Site/Widget/Landing Page 60% $.05 (2+ pages, 10+ sec, 1+ clicks = don’t abandon) Activation “Happy” 1st Visit; Usage/Signup 15% $.25 (clicks/time/pages, email/profile reg, feature usage) Retention Users Come Back; Multiple Visits 5% $1 (1-3x visits/mo; email/feed open rate / CTR) Referral Users Refer Others 1% $5 (cust sat >=8; viral K factor > 1; ) Revenue Users Pay / Generate $$$ 2% $50 (first txn, break-even, target profitability) Source: David McClure, 500Hats  Step 1: Acquisition Users come to the site/app from various channels: Affiliate Develop affiliate program, create rewards scheme Identify target affiliates Apps & Widgets Create widget to embed in other websites, facebook, outlook, email Build API for others to build on top of, encourage open development, create revenue sharing model Free tool Biz Dev Identify and calling/networking with target industries e.g. Jones Lang Channel partnerships Blog Create original blog content Share useful content relevant to target users e.g. Hubspot Create videos and podcasts Share features e.g. Producthunt, Facebook like, twitter tweet, LinkedIn share, stumble upon, Campaigns & Contests Running online contests, giving away gifts Sponsor Hackathons and local events Industry events ( raffle off free subscription to capture interested individuals) Advertising TV, Radio, Print Online paid adverting e.g. Google Adwords, Facebook Ads, industry, online publications Software review sites: (G2 Crowd, Capterra)  Step 1: Acquisition Contd… Users come to the site/app from various channels: Domains Registers multiple domains focused on specific elements Email Obtain targeted email lists, send out emails e.g. SalesLoft Pay email marketing firms e.g. constantcontact PR Press releases Placement on sites like Yahoo News, Google News Mentions on tech websites e.g. Techcrunch, mashable, Communication and relationship with journalists Communication and relationships with tech bloggers, magazine writers, Develop a PR package to download Paid PR SEM & SEO Find most relevant and popular terms and embed in website Get linked/mentioned on other websites Create backend tools e.g. web analytics, log file analyzing Social Networks Metrics to Track by source: Facebook, Twitter, LinkedIn pages - Quantity(#) Youtube, Pinterest, Instagram Startup blogs and networks e.g. - Cost ($) Tapping into IRL networks - Conversion (%)  Step 2: Activation Users enjoy 1st visit i.e. “happy” experience Homepage/Landing Page Conduct A/B testing of UI, impact of various of colors, placements and UI Track page views, clicks, time spent on site Keep page clean and simple Downloadable Whitepapers, Ebooks, Case studies Set activation goal e.g. get emails Product Features Test success of different product features Iterate fast Provide incentives and encourage call to action Metrics to Track by source: - Pages per visit - Time on site - Conversion (%)  Step 3: Retention Users comeback to visit site multiple times: Emails & Alerts Lifecycle emails e.g. 3 day, 1 week, 1 month Status emails e.g. best of week/month Event based emails “something happened” Easy to unsubscribe Easy to read emails (Important info in subject, small body) Blogs, News Feeds, Twitter Feeds Track Impressions Track commentary System Events & Time-based Features Release features with maturity /demand of customers Release features around events Metrics to Track: Cohort Analysis - Source Conduct cohort analysis - Quantity (dist. of visits over time, rate of delay, customer lifecycle) - Conversions - Visitor Loyalty - Session Length  Step 4: Referral Users like product enough to refer others: Viral Loops Create incentive for sharing e.g. rewards Create same-side networking effect so users benefit from inviting others Make sharing easy Track viral growth(Growth factor = X*Y*Z where X = % of users who invite others, y = avg number of people invited, Z = % users who accepted invitation). Track growth of different channels Emails, Widgets & Social Make it easy for users to invite others from app/web Penetrate a specific customer segment with widgets Build API for others to build on top of, encourage open development Affiliates, Contests Ads, Affiliates, Cross-promote app with other developers  Step 5: Revenues Users conduct some monetization behavior: Revenue Freemium/ Free Trial Model – figure out optimal model, price Subscription/Recurring Transactions Create API for other developments, profit sharing Track profitability: Lifetime value > Cost per acquisition + Cost of service (paying & free) Build profitability model Biz Dev Create channel partnerships Form alliances versus competing Target tech savvy users/early adopters initially Target industries and functions