Dave Kellogg presentation to a high-growth SaaS company's All Hands meeting / speaker series in February, 2019. Discusses the key elements of making a great SaaS company, but quantitative and qualitative.
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What makes a great SaaS company, r1.5
1. What Makes a
Great SaaS Company?
Dave Kellogg
2/28/2019, Revision 1.5
Presentation (and all Kellblog by Dave Kellogg materials) licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
2. What is this Deck?
⢠Revised version of a presentation I made a high-growth SaaS company
all hands meeting as part of their regular guest speaker series
⢠Since no oneâs paying me (other than some very nice schwag), I made
it pretty quickly, so itâs not âkeynote caliberâ in slide quality
⢠Nevertheless I thought itâd be worth sharing and of interest
⢠Certainly, itâs a great question ď what DOES make a great SaaS
company
Kellblog by Dave Kellogg is licensed under a Creative Commons
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3. Agenda
⢠Self introduction
⢠A brief history lesson on the dark ages of on-premises software
⢠What it takes to be a great SaaS company
⢠Q&A
Kellblog by Dave Kellogg is licensed under a Creative Commons
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4. Self-Introduction
⢠CMO of two startups
⢠Versant, Business Objects
⢠CEO of two startups
⢠MarkLogic, Host Analytics
⢠Board of four startups
⢠Aster Data, Granular, Nuxeo, Alation
⢠Advised/invested in many more
⢠MongoDB, Tableau, GainSight, FloQast, ClearedIn, TopOpps, Lecida
⢠Blogger
⢠Love learning and teaching about our amazing Silicon Valley system
⢠Best way to learn a topic is to write an essay about it
Fairly unique perspective
- 10 years looking up at CE0
- 10 years being looked at as CEO
- 10 years looking across at CEO
Good markets and tough ones
Fair weather and foul
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5. Author of Kellblog -- Itâs More than SaaS Metrics!
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6. Single Most
Popular
Kellblog Post of
All Time
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7. We Sold Host Analytics in December
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8. So Iâm Out âNetworkingâ
From Mrs. Kelloggâs perspective
⢠You have no job
⢠Yet you have 4-8 meetings per day
⢠(But wonât turn on Find My Friends so I donât know where)
⢠No one is paying you
⢠And when you really like someone you give them money
⢠You call yourself a businessperson?
⢠(At least youâre not in the house all day.)
Kellblog by Dave Kellogg is licensed under a Creative Commons
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9. What I Write About and Why, Examples
⢠I Donât Want to Talk To You Anymore
⢠Sales is From Mars, Engineering from
Venus
⢠CAC Payback Period: The Most
Misunderstood SaaS Metric
⢠Interest Misalignments in Silicon
Valley Startups
⢠Answer the Question: The Key to
Dealing with Senior Execs
⢠Simplifiers go Far; Complexifiers Get
Stuck
⢠A lesson on listening to your gut
⢠Seeing founders struggle with when to
reason with people and when not to
⢠After arguing with a junior PE guy about
what payback periods measure
⢠After leaving MarkLogic and looking back at
it from different POVs
⢠After watching too many people in
interactions with senior executives
⢠After watching too many, well intentioned
complexifiers die on a hill
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10. On Complexifiers
Kellblog by Dave Kellogg is licensed under a Creative Commons
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âWhen you ask some people the time,
they tell you how to build a watch.
There are others who will tell you how
to build a Swiss village.â
11. Agenda
⢠Self introduction
⢠A brief history lesson on the dark ages of on-premises software
⢠What it takes to be a great SaaS company
⢠Q&A
Kellblog by Dave Kellogg is licensed under a Creative Commons
Attribution-NonCommercial 4.0 International License.
12. Back in the Good Old Days (e.g., 1995)
Sales/Customer Side
⢠Orders immediately became revenue (perpetual license)
⢠License/maintenance split was heavily front-loaded (85/15)
⢠It took millions of dollars and busloads of consultants to deploy
⢠Nobody actually cared if customers used the software or were even successful
⢠The Salesperson of the Year sold a 30K employee company 40K seats!
Finance/Wall Street Side
⢠90% of orders came in last week (or day) of the quarter
⢠Gross margins were 99% (cost of the tape or download)
⢠Shipment required to recognize revenue (âshipping bricksâ)
⢠Many white-knuckle quarters and many big misses ď stock down 30-40%+ in a day
⢠Lumpy, low predictability -- financial analysts didnât really like software companies
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13. SaaS Movement Solved Two Problems
For customers
⢠Aligned vendor and customer
interests
⢠Made the vendor care about renewal
ď success ď adoption ď
deployment
⢠Potentially even ď qualification
(should we even sell these folks in the
first place?)
For Wall Street
⢠Smoothed out all the lumpiness
⢠Last-day orders have zero effect on
revenue
⢠Made software a predictable business
⢠Fewer surprises
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14. This Smoothing Hid Certain Realities of
Underlying Execution
⢠For example, new business sales stayed lumpy and back-loaded
⢠But it was impossible to see that looking just at revenue
⢠Of course, companies hit revenue target, but that was kind of locked
⢠How do I know if you hit your new business sales target?
⢠I want New ARR but youâre not publishing that
⢠Perversely generated new, ambiguous, proxy metrics like billings
⢠Billings = revenue + change in deferred revenue.
⢠Attempts to triangulate internal metrics that can fail â e.g., canât tell renewals
from new orders, payment terms can mislead
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15. VCs/PEs and Public Investors Ergo Use
Different Metrics
VC/PE Investors
⢠ARR and growth
⢠Upsell rate
⢠CAC ratio / CAC payback period
⢠Gross / net dollar retention
⢠Free cash flow
The real levers in the business
Public Investors
⢠Revenue and growth
⢠Billings and growth
⢠Implied ARR and growth
⢠Implied CAC
⢠Subscription gross margin
⢠Free cash flow
The best you can do from outside
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16. Agenda
⢠Self introduction
⢠A brief history lesson on the dark ages of on-premises software
⢠What it takes to be a great SaaS company
⢠Q&A
Kellblog by Dave Kellogg is licensed under a Creative Commons
Attribution-NonCommercial 4.0 International License.
17. What is a SaaS Company?
A leaky bucket full of annual recurring revenue (ARR)
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18. What is a SaaS Company?
A leaky bucket full of annual recurring revenue (ARR)
Sales
Customer
Success
Kellblog by Dave Kellogg is licensed under a Creative Commons
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19. This Begs Two Immediate Questions
⢠What does it cost to put new ARR in?
⢠Customer acquisition cost (CAC) ratio
⢠Dollars of S&M / dollars of new ARR
⢠Typical rate: $1.00 to $1.50
⢠How fast is it leaking out?
⢠Forgetting, for a minute, expansion within
customers
⢠At what gross rate is water leaking out of
your bucket?
⢠Typical range: 10 to 15%
See https://www.key.com/businesses-
institutions/industry-expertise/library-
saas-resources.jsp
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20. Gross vs. Net Dollar Retention
⢠Gross dollar retention, typical 80-90%
⢠Value of cohort today, excluding expansion / value of
cohort a year ago
⢠Net dollar retention, typical 100-120%
⢠Value of cohort today / value of cohort a year ago
ď Look at both because âone train can hide anotherâ
⢠Beware survivor bias in calculations (sad, but true)
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21. Why Do SaaS Companies Burn Cash?
⢠If you want $100M in ARR
⢠And every $1.00 costs you $1.50
⢠And you leak out 10% every year
⢠Youâll need $1.50 * $118M = $177M just for S&M
(Includes zero money for building product, running product, G&A, etc.)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total
Starting ARR - 1,000 2,409 4,446 7,438 11,880 18,519 28,478 43,455 66,008
New ARR 1,000 1,509 2,277 3,437 5,186 7,827 11,811 17,824 26,899 40,593 118,363
Churn ARR - 100 241 445 744 1,188 1,852 2,848 4,346 6,601 18,363
Ending ARR 1,000 2,409 4,446 7,438 11,880 18,519 28,478 43,455 66,008 100,000
Churn rate 10%
New ARR growth rate 51%
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22. The Genius of Tien Tzuo
⢠Conceptually break a SaaS company in two
⢠One part is about serving the customers (gross recurring margin)
ARR
- COGS (subscription and services)
- R&D
- G&A
⢠One, totally separate part, is about acquiring new customers
⢠CAC ratio
See
https://kellblog.com/2014/05/1
5/the-box-s-1-delayed-ipo-and-
the-genius-of-tien-zuo/Kellblog by Dave Kellogg is licensed under a Creative Commons
Attribution-NonCommercial 4.0 International License.
23. Why Does ARR Growth Matter?
(Caution: old chart)
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24. Rule of 40
⢠Attempts to balance and growth
and profitability
⢠R40 score = revenue growth +
FCF margin
⢠R^2 = 0.42
⢠Have heard but donât have data
that growth alone results in
higher R^2
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Attribution-NonCommercial 4.0 International License.
25. Does Professional Services (PS) Revenue and
Margin Matter?
⢠Generally looked-through on valuation
⢠Valuation = multiple * ARR
⢠Provided not heavily losing money
⢠Typically PS margins -10% to 10%
⢠Generally accepted to subsidize subscriptions through foregone margin on
professional services
⢠Not to be confused with âdo professional services matterâ
⢠Yes, but mission is to maximize ARR -- not maximize services margin
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26. What Makes a Great SaaS Company?
Efficient
Sales
Model
Customer
Centric
Culture
Product
Gets Job
Done
Vision
That Leaves
Competition
Behind
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27. Q&A
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