I was on the road for almost two weeks. During the early part of last week I was in Vail to attend Pacific Crest’s annual technology conference. I’ll consolidate my notes around three topics of personal and investment interest that were covered in the conference: SaaS, online advertising and future technology trends. This week I’ll cover SaaS and next week online advertising and future technology trends.
The SaaS workshop had 60 attendees (private company executives and venture investors). The discussion was motivated by two surveys that Pacific Crest conducted. The first was a survey of 80 CIOs and IT executives that Pacific Crest conducts annually for the past 3 years. The second was a survey of 80 private SaaS companies which they conducted for the first time this year.
- Corporations are increasing their use of SaaS applications. The biggest reason for the use of SaaS is ease of deployment and integration. Security is becoming less of a concern. According to the Pacific Crest's CIO survey, during 2010 and 2011 60% of the budgets for new software acquisitions will be allocated to SaaS and cloud computing, with over 50% going specifically towards applications. These are similar trends to what was reported on a Goldman Sachs research note that was published on 8/17 by Sarah Friar. CRM, HCM and collaboration are the top three SaaS applications in terms of new licenses and renewals. CRM, excluding sales force automation, has been the top application choice, 3 years running in the surveys conducted by Pacific Crest. The optimism of the CIO survey was also reflected in the SaaS company survey where it was reported the median YoY revenue growth during 2010 will be over 40%. However, the survey also showed that the majority of the SaaS pureplay vendors still don’t make it to the CIOs’ radar screen. While this realization may not be of great concern to SaaS vendors, since they tend to sell to LOB executives rather than IT executives, we are seeing IT playing an increasingly prominent role in SaaS licensing decisions, particularly in F1000 companies.
- Increasingly SaaS companies are being asked by their customers to use all the data in their disposal to provide benchmarking services allowing each customer to compare to its peers. It appears that companies are switching from being concerned about their data being stored in the cloud and, moreover, in the same database with data from other companies (some of which may be their direct competitors) to trying to gain insights about their business through the analysis of all the data managed by the SaaS vendor.
- Most of the surveyed SaaS companies whose applications command ACV that is higher than $25K are adopting hybrid sales models (inside and field sales). Few such companies appear to use a self service-only sales strategy effectively. According to the survey results, the self-service sales model is more effective with products that have ACV of $5-10K. These results are consistent with what we see in our relevant portfolio companies. However, for the stage of companies that were surveyed, the reported CAC ($0.75 in CAC for every $1 of first year license) is too low, compared to what we are seeing in our portfolio companies, as well as in SaaS companies that are asking for investments.
- In terms of operational metrics, most surveyed companies expect to realize 70% gross margin and 12% operating margin by the time they have reached $50M in annual recurring revenue. The companies sign one year contracts with more regularity and most are now able to get paid for the entire subscription upfront.
- By the time companies reach expansion stage, i.e., revenues of $15-20M, they will most likely need another $10-20M in investment to achieve breakeven, implying $35-45M in total investment from inception to breakeven. Those of the surveyed companies with revenues that are below $40M expect to be acquired by either a SaaS or an on-premise software company rather than go public.
The results of these surveys have four implications for Trident:
- Our firm’s overall SaaS investment thesis should remain intact. In fact the results of these surveys, (combined with the solid quarterly performance of our SaaS portfolio companies, which I have been reporting on this blog, and the performance of the public SaaS companies) further strengthen our SaaS investment thesis.
- Our SaaS portfolio companies must continue to aggressively educate IT organizations about SaaS and cloud computing.
- We must continue to encourage our SaaS companies to make better use of the data they capture to provide business insights to their customers and help them constantly improve their businesses.
need to pay more attention to amount of funding SaaS companies will
ultimately require as a result of the higher costs and smaller margins
associated with the use of hybrid sales models, compared to self service
or inside sales-only models.
The discussions on online advertising and ad tech were very interesting and will write about them in my next post, along with my comments from the panel on future technology trends.