Building a SaaS BusinessUCI – August 11th, 2017

Fernando Okumura

1All rights reserved. This material may not be reproduced or distributed, in whole or in part, without prior written permission of the author

Information sources:

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forentrepreneurs.com (David Skok)

saastr.com (Jason Lemkin)

others

Agenda

1. Stages of a SaaS business

2. SaaS economics

3. Key metrics for a SaaS business

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There are 3 stages in a young SaaS business life- Know where the company is and focus 100% on its milestone -

Conserve Cash Invest Aggressively

Search for Scalable Sales Model

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Scaling the Business

13• Common mistake: hiring a lot of sales people or a very experienced VP of Sales too early > compromise the founder’s ability to fine tune the product/model.

• Sell directly to the customer. Then hire 2 reps (or test self-service). Do the math, make sure you can be profitable, and then, only then, scale.

Common mistake: can’t shift the mindset to aggressive investing. Specially critical in a land grab situation. Hire proven VP of sales here.

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Search for Product-Market fit

Common mistake:Getting investors who do not understand this can take 1 month or 4+ years

3 tips that can help you in the Product-Market Fit stage- This is easiest stage to get wrong -

Search for Product-Market Fit11

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“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins…” (Andy Rachleff)

Tip 1: if you want to swing for the fence, pick a great market (and timing)

Tip 2: work through the customer development process

• “Myth #1: Product market fit is always a discrete, big bang event

• Myth #2: It’s patently obvious when you have product/market fit …”

(Ben Horowitz)

“Serendipity plays a role in finding product/market fit but the process to get to serendipity is incredibly consistent…” (Andy Rachleff)

Use Steve Blank’s (or similar) process: start with a hypothesis, test it in the real world, prove it, move on or iterate

Tip 3: remember Product-Market fit is not enough

Message Audience

PricingDistribution

Channels

Product

Revenue per client determines the channel you can afford- If you cannot afford the channel you need, you are in trouble -

Search for Scalable Sales Model12

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Sales complexity

Self-service Inside sales External sales

Dis

trib

uti

on

Co

st

What channel will you needed and how much will it cost?

Internal sales force illustrative example

• 3 demos/day = 60 demos/month = 720 demos/year

100 new clients / year

14% closing rate

• Sales Rep compensation = $100k / year

$300k / year

3x to make ends meet

• $3k/year = $250/month > churn > $300/month

Scaling the Business

Sales leadership is key to scale the business- Wrong sales director can set you back a year or more -

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When to hire a sales director?

• Until $1-2M, it must be you. Start selling yourself, then hire 2-5 reps. Look for passion for sales, curiosity and entrepreneurial spirit.

• The main point here is accelerate you to Product-Market fit and create a repeatable process (more so than simply sell)

• Before $1-2M: hard to afford good sales director

What is the sales director’s job at this stage? 1. Recruit. You need 8-12 great reps to triple your

revenues in the next 12 months2. Improve team’s performance (deal size, closing

rates and so on)3. Sell him/herself (note this is the last one)

How to select a sales director? Do not hire if: • Has not successfully hired and ramped reps selling an

average contract value (ACV) similar to yours • Cannot immediately bring 2-4 great sales reps in first 2

weeks (ask who he/she would bring in the interview). Great VPs always have hardcore followers.

If you hire the wrong sales director, fix it FAST:• A VPS costs ~$300k. If he/she is good, increases

revenue/lead by 20% in first 3 months, and you are at $1-2M, he/she pays for himself quickly. $300k is a lot.

• Costs key team morale and future upgrades and referrals• Red flags when new VPS:

does not hire, fire and promote in first few days does not increase revenue/lead in 1st sales cycles “we need to build pipeline”, “sales cycles getting

longer”, “leads are bad”. Do not believe in excuses, do not wait 6 months to fix it!

Agenda

1. Stages of a SaaS startup

2. SaaS economics

3. Key Metrics for a SaaS business

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SaaS does not become cash flow positive at moment of sale, which extends financing requirements

-$4,000

$500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500

0 1 2 3 4 5 6 7 8 9 10 11 12

Cash flow from a single client

month

Customer acquisition cost• Lead generation costs (e.g. SEM, content generation, other

marketing)• Sales force costs (e.g. recruiting, training, payroll)• Technology costs (e.g. CRM, telco)

Recurring revenue

ILLUSTRATIVE

-$6,000

-$4,000

-$2,000

$0

$2,000

$4,000

$6,000

$8,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Cumulative Cash flow from a single client

extended financing

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Entrepreneurs and investors need to understand SaaS economics to be able to scale the business with confidence

-$3,000,000

-$2,000,000

-$1,000,000

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Cumulative Net Profit of a SaaS Co. with sales force

Months

• What do you do when the product shows market traction?

• You increase investment and accelerate growth. What happens to profitability and cash flow?

• In SaaS with a sales force, the more you invest on growth, the more negative your profits and cash flow become in the short-mid-term.

ILLUSTRATIVE

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ILLUSTRATIVE

0

2

4

6

8

10

12

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

Number of active clients in a cohort

Months

Nu

mb

er o

f cl

ien

ts

MonthsBeginning Balance

New Clients

Churn(10%)

Ending Balance

1 0 50 0 50

2 50 50 5 95

3 95 50 10 136

4 136 50 14 172

Understanding client/revenue loss (churn) is a key success factor in SaaS

44 495 50 50 496

45 496 50 50 496

46 496 50 50 496

47 496 50 50 496

At some point your sales force may be only replacing churned clients, not growing your company. In addition, your cost/lead will tend to increase as the low hanging fruits become scarcer

You must be able to increase average revenue per client to compensate client churn and keep growing in the longer run

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Client B: $2.5k/month

Client A: $500/month

If we loose Client A, we have 50% client churn, but 17% revenue churn

If we loose Client B, we have 50% client churn, but 83% revenue churn

There is a difference between Client Churn and Revenue Churn. At the end of the day revenue is what really matters.

Client B: $2.5k/month

Client A: $500/month

Client B: $3,5k/month

Month 1 Month 2

Up/Cross selling can more than compensate for client churn

Happy clients buy more (up/cross sell), refer you to their colleagues, and take you with them when they move to another company (lower CAC)

You must have a great Client Success Team to sustain growth, but client success is everyone’s job

- CEO must instill client success throughout the company -

Client Success

Client Success Team•- Onboarding

•- Proactive Customer Service

•- Monitoring Red Flags

•- Up/Cross sell

Sales Team-Do not oversell

-Do not sell to wrong customers

-Make good first impression

Product Team- Product Reliability (bugs, downtime)

- Product Design/UX

- Response time

Marketing Team-Marketing to clients (retention marketing), not just prospects

-Client nurturing (e.g. best practice newsletters, client events, webinars, case studies, email tracks, product communications)

Client Happiness

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Agenda

1. Stages of a SaaS startup

2. SaaS economics

3. Key metrics for a SaaS business

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> 3xLTV CAC

< 12 monthsMonths to recover CAC

Life Time Value (LTV) vs. Customer Acquisition Cost (CAC) gauges profitability and Months to Recover CAC, capital requirements

Reference Metrics

• LTV = Average revenue per client x gross margin % x average client lifetime (1/churn)• CAC = Total Sales & Marketing Expenses / # of new customers

• Months to recover CAC = CAC / Gross Margin of a single monthly fee• Gross Margin = Revenues – Costs to create revenue (e.g. hosting, licensing, support & maintenance)

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-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$30

One of the key metrics you want to follow is Net Monthly Recurring Revenue (Net MRR) over time

MRR from new clients

Net MRR

Expansion MRR

Churned MRR

MRR Bookings

$ 0

00

s

MRR from new clients: self explanatory

Net New MRR: New MRR + Expansion MRR – Churned MRR

Expansion MRR: New MRR from existing clients (up/cross sell)

Churned MRR: MRR lost due to churn and downgrades

• MRR alone does not show the complete picture

• Break down of Net MRR shows• If bookings are growing• If we are being able to increase

revenue per client• How bad churn is

• If you want to know where you are heading, use this graph

Q&A

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End

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