Trident Capital Blog

Panel Discussion on SaaS Sales

Last Thursday I moderated a panel discussion on sales process and metrics for SaaS application software.  The discussion, part of Dealmaker Media’s Strategy Series, was held at our office in Palo Alto.  We had 35 guests and 3 great panelists: Tom Dibble, chief revenue officer at Aria Systems, Jon Miller, VP marketing at Marketo, and David Vonk, SVP of sales and business development at Pivotlink.  My goal for the panel was to explore the sales models that are getting the most traction in SaaS application companies and to better understand the costs associated with the sale of SaaS applications.  Some of major points that were made during the conversation:

• Sales organization. The panelists indicated that they employ a two-tier sales organization: an inside sales group that is responsible for opportunities with ACV of up $100K, and a field sales group that is responsible for larger opportunities.  In addition, all 3 companies have established a lead qualification group, working between the sales and marketing groups, whose goal is to qualify the leads generated by the marketing group.  We couldn't get a good indication if and when it is necessary to split the sales into "hunters," i.e., sales people that are responsible for the acquisition of new customers, and "farmers," i.e., sales people that are responsible for renewals and upsells.

• Lead generation channels.  The sales teams are responsible for generating 40-50% of the new leads with the rest of the leads generated by the marketing group.  The panelists identified the following lead generation channels in order of efficiency: virtual trade shows because participants have the opportunity to interact with peers and simultaneously compare several vendors, online advertising, (SEM/SEO and PPC) since the inbound inquiries the result in are better than the leads generated through outbound calling, and social media outreach since word of mouth is becoming very important for customer acquisition.  The panelists also acknowledged the importance of educating prospects by providing a variety of relevant and frequently updated content on their companies’ web sites.  Prospects must feel that they are receiving value from the vendor even before they license the application.  As one panelist put it “the prospect must feel they are getting more value from your company’s web site than they feel they get through Google search.”

• The importance of acquiring branded customers.  Even though SaaS companies tend to focus on the SMB market, the panelists admitted that they try hard to acquire enterprise clients for two reasons.  First, because they typically sign contracts of higher ACV thus providing higher return on the vendor’s sales investment (cost per lead, pre-sales personnel costs, partner referral costs, etc).  Second, because of their brand recognition which aids overall sales and often results in the reduction of the costs associated with the acquisition of smaller customers.  As one panelist said “while it’s important to have hundreds of SMB clients, it’s even more important to have logos such as Nike, Coke and P&G in your customer list.”

• Key Sales Performance metrics. Constantly measure Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), Lifetime Value (LTV), churn rate, and pipeline conversion rates.
  

• Measure the amount that each sale adds to the MRR.
• Shorten the time to cash.  Self provisioning may work well in some cases but in general the panelists found that it doesn’t shorten the time to cash.  For this reason they found it important to use post-sales services to expedite the customer on-boarding and optimize the value the customer is receiving from the SaaS application.  They advocate productizing (or templetizing) the service delivery.
• Close SMB prospects within 30 days.  Prospects that are not willing to sign a contract within this period typically are not ready to buy.
• Minimum license price of $1K/month and minimum contract term of 1 year.  Other pricing and term models the panelists tried (e.g., freemium, pay as you go subscription with no minimum contract, etc) have not worked as well for the applications their companies are selling.  Presumably they have also determined that the minimum license price and contract term allows them to recover the CAC.  Make sure that the LTV can become larger than the CAC and adjust accordingly.  These testimonials show why it is very important to align the expected Customer Acquisition Costs with the monetization strategy.

• Little (less than 10% on 1-year contracts) or no discounting.  It is easy to quickly demonstrate the value of SaaS applications, often even during the pre-sales process.  As a result, it is not necessary to offer discounts in order to close a deal.  By contrast, on-premise software vendors typically have to discount heavily because the value associated with their applications often comes several months (or even years) after the initial installation.

• The role of partners.  The companies are now investing aggressively around partners in order to grow faster than the overall market and continue to reduce the customer acquisition and customer support costs.  Marketo gets 20% of the business today through partners.  The panelists advised the participants to create a compelling integration strategy between the vendor and its ISV and OEM partners, as well as to try not to compete with the services channel partners.

We had a lot of fun hosting the event and were glad to see the level of interaction between the panelists and the participants.  We want the thank Dealmaker Media for their efforts in making this event successful and look forward to hosting additional such Strategy Series events.

The Talks at the Brandeis Business School

Last week I spent a few days at the Brandeis International School of Business at the invitation of Professor Charles Reed.  While on campus I gave three talks (in addition to embedding them here I have also made them available through Slideshare on my blog’s home page) about venture capital and entrepreneurship; two that were lectures in classes taught by Professor Reed and one that was part of the business school’s invited speaker series.

Because of its international orientation, the Brandeis business school provides a rather unique environment for talking about venture capital and entrepreneurship.  The majority of its students come from foreign countries with little or no exposure to venture capital, but strong entrepreneurial roots.  During its 10 years of operation the business school has produced 15 startups, several of which are doing quite well.  One has to remember that Brandeis is a small school (it has a little over 2000 students) with no engineering or medical schools.

I gave the first talk (Download Lecutre 1) in the Entrepreneurship and Innovation undergraduate course.  I wanted to accomplish two goals with this talk.  First, I wanted to provide an introduction on how VCs work.  I covered how VCs raise a new fund, how they create a pipeline of deals to consider investing (the so called “deal flow”), how they conduct due diligence in prospective investment opportunities, and how they participate in corporate boards in order to manage the investments they make.  Second, as an ex-CEO of startups, I wanted to provide a framework around which to start thinking of the first 18 months of a startup’s life, a period which typically includes a couple of rounds of venture funding.

I gave the second talk (Download Lecture 2) in the Entrepreneurial Finance and Business Plans graduate course.  My goal for this talk was to talk about the conclusions my Trident partners and I reached based on our work with our portfolio companies during the past 12, very difficult months.  I spoke about how we managed our portfolio, including how we made difficult decisions when it became necessary.  I then switched gears and talked about how to create a business plan and how to present to a venture investor, taking into account the stage of a company seeking funding.  We went through a few real examples of business plans I have seen (and liked).

The final talk (Download Lecture 3 )was for a more general audience and provided my take on trends in the venture capital industry from both an investor’s perspective and an entrepreneur’s perspective.

All three talks generated lively discussion (and subsequent email interactions) with the students, something which I found very rewarding.  I hadn’t taught since 1992 and forgot how energizing the experience can be (but in moderation).  I look forward to returning to the Brandeis campus and work with these students in some of the business plans they are now in the process of writing.

SaaS Challenges to Address During 2010

The first month of the year is already out.  A couple of weeks ago I wrote about where I expect to see innovations in SaaS applications during this year.  Before we get too far into this new year I thought I’d write a few words about the challenges that SaaS applications must address during 2010.  We need to make headway towards these challenges to be addressed, not only for the adoption of SaaS applications to broaden but also in order for these applications to be considered for replacement of on-premise mission-critical applications.

In a recent Goldman Sachs survey, published on 1/10/10, CIOs listed the following concerns with SaaS and cloud computing (in priority order): security, solution maturity, Total Cost of Ownership (TCO), solution complexity, and solution reliability.  Interestingly the priority order of the concerns was identical in the similar survey that Goldman conducted at the end of 2008.  CIOs, however, perceive that that during 2009 SaaS vendors have made progress on all but the TCO area.  In particular, while 84% of the surveyed CIOs identified security as the top issue, the corresponding 2009 number was 52%.  While the difference between the 2008 and 2009 numbers for the TCO issue is not significant, statistically the number is the same, it is interesting to note that the in every other area there has been progress except in the area of addressing TCO.

Based on my conversations with executives of our SaaS portfolio companies and other SaaS companies we considered investing, as well as direct discussions with CIOs and business executives in companies that have licensed or are considering SaaS applications, my list of challenges includes:

1.       Security. The recent attacks on Google’s infrastructure and Gmail showcased the risks that SaaS users would want addressed before they feel comfortable migrating mission-critical on-premise applications and data to the cloud.  I feel that vendors are starting to make solid inroads in addressing regulatory and corporate governance standards but cyber security is another matter.

2.       Application reliability/uptime.  We are seeing requirements moving from 3-nines uptime (99.9%) to 4-nines uptime (99.99%).  Obviously the more mission-critical the application, the higher the necessary reliability.  Salesforce’s recent outages showcased the need for improved reliability.  Meeting this requirement will require more advanced data center architectures, an issue that smaller SaaS companies have not started to address yet by and large.

3.       Data integrity.  The data that leaves a company’s data center to move to the cloud must not be corrupted en route.  I would imagine that data integrity has to be at 5-nines. This issue is particularly important as customers are now asking for the integration of data from several applications, some of which reside behind their firewall and others reside in application vendor clouds.  Achieving this level of integrity will also require that SaaS vendors rely on each other to individually achieve this level of data integrity.

4.       Application performance.  The application’s performance should not degrade as more users access the application.  Also, as applications become more popular within organizations we find that users are no longer willing to tolerate slower applications.  They are now starting to expect identical response to the corresponding on-premise applications.  I expect that once this issue is addressed improving the application onboarding process will be the next user challenge.

5.       Data movement/throughput.  Customers are moving increasingly larger data quantities (now at the low-terabyte level) to the cloud.  This has been particularly evident in SaaS BI applications.  SaaS companies must address this issue whether they use their own infrastructures or IaaS like Amazon’s.

6.       TCO. Thus far SaaS application vendors have been able to demonstrate qualitatively the lower TCO of their solution over corresponding on-premise solutions.  This was due to the lack of detailed and extensive history operating SaaS applications.  However, now more data exists and SaaS vendors should be able to easily demonstrate the superior TCO of their application.

I look forward to creating a scorecard at the end of the year detailing whether and by how much these challenges were addressed.