[premoney 2014] institutional venture partners>> jules maltz, "saas money metrics: why...

SaaS Money Metrics: Why VCs Should Focus More on Retention Than Growth

June 2014

2

SaaS Money Metrics

1. About IVP

2. SaaS Market Overview

3. Measuring SaaS Efficiency

4. Retention is King

3

IVP History

4

IVP Summary

Current Fund: IVP XIV, a $1 billion later-stage venture capital fund

Target Sectors: Tech only (Consumer and Enterprise)

Investment Focus: Growth companies, generally with over $10 million in revenue

Geography: Primarily United States

Team: 6 General Partners with over 100 years of combined experience

Portfolio: Over 300 companies, 99 of which have gone public

5

IVP SaaS Investments

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SaaS Money Metrics

1. About IVP

2. SaaS Market Overview

3. Measuring SaaS Efficiency

4. Retention is King

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The World Has Changed

44% Decline

8

Growth No Longer Rewarded as Highly

Source: Bank of America Merrill Lynch

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Red is the New Black: LTM EBITDA %: 2012-2014 Software IPOs

(110.0%)

(90.0%)

(70.0%)

(50.0%)

(30.0%)

(10.0%)

10.0%

30.0%

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SaaS Money Metrics

1. About IVP

2. SaaS Market Overview

3. Measuring SaaS Efficiency

4. Retention is King

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ThrustSSC

760 MPH.04 MPG

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Chevy Spark EV

89 MPH128 MPG

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Two Measures of SaaS Efficiency

1. Magic Number

2. LTV / CAC

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Magic Number

Magic Number =(Q1 GP$ - Q4 GP$) *4

Q4 S&M$

A Magic Number of 1 means you break even on

your sales and marketing spend after 1 year

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Magic Number Example

Q4 2013 Q1 2014Revenue 22,501 25,092

Gross Profit 14,848 16,097

Operating ExpensesR&D 4,551 5,178S&M 11,404 14,287G&A 4,693 6,384

Operating Loss (5,800) (9,752)

Magic Number 0.44xTime to Breakeven 2.3 years

Magic Number = = 0.44x or 2.3 yrs to breakeven($16.1 – $14.8) *4

$11.4

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LTV / CAC

LTV / CAC =GP$ Per Customer * Avg. Customer Life

Customer Acquisition Cost

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LTV / CAC Example

LTV / CAC = = 7x$700 * 5

$500

• You sell your product for $1,000 per year at 70% GP

• Customers churn 20% per year (5 year average life)

• It costs $500 to acquire each customer

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-100%

0%

100%

200%

300%

400%

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97

LTV / CAC Over Time

Magic Number

LTV / CAC

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SaaS Efficiency Goals

1. Magic Number = Above 0.5x (Less than 2 years)

2. LTV / CAC = Above 5x

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SaaS Money Metrics

1. About IVP

2. SaaS Market Overview

3. Measuring SaaS Efficiency

4. Retention is King

21

Retention Trumps Growth

Company A

$200K New Revenue Per Month

90% Monthly Retention

3 Years Later = $2.0M Run-Rate

Company B

$100K New Revenue Per Month

99% Monthly Retention

3 Years Later = $3.1M Run-Rate

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 360

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

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Retention vs. Growth

High Growth Hare Unicorn

Low Growth Sloth Tortoise

Low Retention High Retention

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Case Study: Hare (AVG Technologies)

Source: Company filings. Analyst reports.

$0

$100

$200

$300

$400

$500

2007 2008 2009 2010 2011 2012 2013 2014E 2015E

47% CAGR6% CAGR

Consumer Software Churn = 30-40% Per Year

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Case Study: Tortoise (Concur)

$0

$200

$400

$600

$800

$1,000

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

E

2015

E

28% CAGR

Customer Churn = 2% Per Year

Source: Company filings. Analyst reports.

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Case Study: Unicorn (Workday)

$0

$200

$400

$600

$800

$1,000

$1,200

2008 2009 2010 2011 2012 2013 2014E 2015E

109% CAGR

Low/Negative Churn – 3 to 5 Year Contracts

Source: Company filings. Analyst reports.

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Retention vs. Growth

High Growth Hare Unicorn

Low Growth Sloth Tortoise

Low Retention High Retention

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Retention vs. Growth

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Measuring Cohort Revenue

Source: David Skok. SaaS Metrics.

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Tortoise or Hare?

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13

Revenue

Revenue

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Cohort Revenue (Negative Churn)

Source: Model adapted from Startup Calculus (Joe Floyd)

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13

Revenue Growth by Cohort

Mar 13

Feb 13

Jan 13

Dec 12

Nov 12

Oct 12

Sep 12

Aug 12

Jul 12

Jun 12

May 12

Apr 12

Mar 12

Feb 12

Jan 12

31

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13

Revenue Growth by Cohort

Mar 13

Feb 13

Jan 13

Dec 12

Nov 12

Oct 12

Sep 12

Aug 12

Jul 12

Jun 12

May 12

Apr 12

Mar 12

Feb 12

Jan 12

Source: Model adapted from Startup Calculus (Joe Floyd)

Cohort Revenue (8% Churn)

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QuestionsJules Maltz

General Partner, IVP

jmaltz@ivp.com

@julesmaltz

Thank You!