SaaS Portfolio Sales Performance Analysis

With the end of the second quarter we again took the pulse of our portfolio companies to see how they are progressing in these difficult economic times.  Of particular interest were the SaaS companies because, as I’ve written in the past, they had demonstrated impressive resilience to the deteriorating market conditions between 3Q08 and 1Q09 and were even exploiting the economic environment to make inroads with Global 2000 customers.  The bottom line is that 2Q09 was tougher for all our software companies including the ones with SaaS solutions.  This situation is not unlike what we hear from public SaaS companies about their performance during 2Q09.

The backdrop for 2Q09’’s purchasing environment was the state of the IT budgets.  Through our own informal CIO and business unit executive interactions as well as from analyst reports we determined that during 2Q09 companies of all sizes continued to cut their IT budgets.  Fortunately, very recent data shows that the IT budget-cutting bottomed out during 2Q09 and budgets are expected to remain stable for the remainder of the year.  I believe that this stability will make corporate executives more comfortable spending around IT solutions during the 2H09.

But let’s return to the 2Q09 performance.  We measure the performance of our SaaS portfolio companies using a variety of Key Performance Indicators, e.g., MRR.  However, for the purpose of sales performance analysis we look at the following metrics:

1. Renewal rates, i.e., what percent of the customers that were supposed to renew during the quarter actually did so.
2. Upsells to existing customers, in the form of expanding the use of an existing solution (for example, adding seats), buying additional modules of a solution, or buying a new solution.
3. Sales to brand new customers.
4. Contract terms, including payment terms since they impact cash flow.   We monitor whether the customer accepts the vendor’s contract terms or whether custom contracts are created.  For example, is the customer signing a one-year or a multi-year contract?  Is the customer willing to pay for the term in one installment, two, or more?
5. Sales and marketing costs, and sales cycle.  What was the cost/lead?  What did it take to convert a lead to an opportunity and how much did it cost?  What did it take to convert the opportunity into a sale?  Did it require custom demos, lengthy and costly evaluation periods, on-site visits?
6. Sales forecast accuracy.  Was the sales force able to close the accounts it projected every month of the quarter? Were the wins as large as had been anticipated?
7. Pipeline coverage needed to achieve the monthly and quarterly targets. 

 Our observations were:

1. Renewal rates were achieved but more customers waited until the end of the quarter to sign.  This may be because they were waiting for quarterly application usage statistics so that they can decide if they may be able to renew with fewer seats (and therefore for a lesser amount), or because they were trying to delay as much as possible having to pay for the renewal, i.e.., cash management.
2. Upsells became a larger piece of the new quarterly sales than sales to brand new customers.  First, this trend caused sales forecasts to become inaccurate.  Second, prospects remained engaged but dragged out their decisions.  Some delays were just to the end of the quarter (literally the last day of the quarter, bringing back memories from on-premise enterprise software sales cycles).  Other delays were to later in the year.  During the quarter our companies also saw more involvement from IT organizations during the sales cycle even if the solution was targeting a business unit.  Some of that involvement may have been expected since, increasingly, more Global 2000 companies are interested in on-demand software and IT tends to provide a necessary input to these purchasing decisions.
3. Along with the lengthening sales cycles we also saw the need for more interactions between sales team and prospect, which of course added to the cost of sales.
4. We heard from several sales executives that even with strong qualification criteria after what they encountered during 2Q09 they now feel more comfortable with 4x pipeline coverage (i.e., the pipeline must contain qualified opportunities that are valued at 4x the quarterly sales target) compared to the 2.5x coverage they were using during the 1H08.
5. Particularly the smaller customers opted for annual contracts with monthly billing rather than bi-annual or even quarterly billing, as was the norm before particularly for the larger vendors.  This will make cash management for the vendors even more challenging.  Fewer customers chose multi-year contracts even after being offered discounts.
6. While lead generation is improving as the awareness and interest for on-demand software are increasing, conversion rates (leads to opportunities, opportunities to sales) deteriorated during 2Q09.

Our SaaS companies continue to weather the storm relatively well.  Customers with “pants on fire” problems continue to buy software solutions that can address them and they appear to opt for on-demand software over on-premise solutions because of all the benefits SaaS offers.  However, during 2Q09 we saw the negative impact of the economy being felt by the SaaS companies in earnest.  We don’t know yet whether the 2H09 offers any reasons for optimism so we continue to manage each company very conservatively.

I'd be interested in feedback from SaaS companies on what sales performance they saw during 1H09 in general and 2Q09 in particular.