Trident Capital Blog

Second Annual SaaS Portfolio CEO Meeting

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About a week ago I hosted the second annual meeting of our SaaS portfolio companies’ CEOs.  Like last year, we met in our office in Palo Alto to share relevant experiences from the past twelve months, and exchange ideas relating to sales, marketing and product development initiatives.  In addition to our CEOs, I also invited David Spitz, MD at Pacific Crest to provide us with his perspective on the public markets.  Below are the major points made during the meeting:

Sales

• More of the companies have established separate sales teams to acquire new customers and to cultivate/expand existing customers.  Our companies are starting to use of Success Managers for customer cultivation/expansion.  These individuals are part of the inside sales team and become involved after a customer has been acquired and onboarded.  Typically each Success Manager is assigned 30-40 customers. The first goal of a Success Manager is to ensure each customer uses the product correctly and gets the maximum benefit from the product.  In the process, the Success Manager at the minimum assures that the customer will be willing to renew the contract at the right time.  More importantly, however, the Success Manager cultivates the customer for an upgrade/upsell.
• There is a more concerted effort by our portfolio companies to further develop the self-service channel in order to reduce sales costs.  But, as SaaS is being aggressively adopted by the Global 2000, our companies find it necessary to also establish field sales teams.  However, they require the field sales people to engage only if a minimum deal size is established (typically $100K).
• One of our CEOs eliminated his entire field sales effort but now regrets letting the best of his field sales people go because he thinks that based on the opportunities his company is pursuing, they would have been able to perform very well even working as inside sales capacity.
• The sales process is becoming more complicated, particularly with larger companies.  Now our sales people need to “sell” to more executives from different organizations within each such prospective customer.
• Quickly and frequently experimenting with different pricing and terms and conditions is viewed as important by all CEOs.  They believe that only through such experimentation they can maximize the results of their sales efforts, particularly in today’s market environment.

Marketing

• SEO is more effective than SEM for lead generation.  In addition, emails combined with inside sales outreach efforts are very effective for lead generation.  Quick and frequent experimentation of various approaches to lead generation is very important.
• The companies are not adequately leveraging social media in their lead generation efforts.  We have urged them to start doing so.  We pointed to the fact that User Generated Content (UGC) is ranked higher by search engines.  For this reason companies such be using more UGC in their marketing efforts.  The companies should also try to not only use the communities they have started building but also partner communities.
• The comprehension of the SaaS model and market by the industry analysts is improving by the month.  The CEOs mentioned the analyst firms they think “get” SaaS and the ones that remain skeptical about the model.  Interestingly, none of the participants considered any of the analyst firms to be thought leaders today in SaaS.  They believe the SaaS thought leaders are independents.

Market conditions (David Spitz’s comments with additional commentary from our CEOs)

• SaaS companies are benefiting disproportionately from the recovery, though not all SaaS are performing in the same way.  The public SaaS companies tracked by Pacific Crest demonstrated strong growth over the past two quarters with companies either meeting or exceeding their 1Q10 targets (as I had also written here).
• Company growth is very important even if the company doesn’t generate much free cashflow (FCF).  But in general the markets are looking at growth rate, revenue, and FCF. Investment analysts are also starting to pay close attention to the bookings of SaaS companies and to the additional net new subscribers per reporting period.  Investors are becoming savvier about SaaS and are now able to analyze the relationship between Customer Acquisition Cost (CAC) and customer Lifetime Value (LTV).  However, it is unclear whether these metrics really matter to corporate development executives looking into acquisitions of SaaS companies in addition to the three metrics mentioned above.  Financial buyers, e.g., private equity firms, are also becoming interested in SaaS because of the recurring revenue model.
• More private company financings are getting done, more acquisitions are being contemplated, including some larger deals, and companies are more open to filing to go public (with the strong encouragement of investment bankers).  SaaS companies with at least 15-20% YoY growth and at least $15M in Annual Recurring Revenue (ARR) are of particular interest since they show that they can achieve scale.

Trident Capital Internet Portfolio Company Summit

On Friday my partners and I hosted in our office in Palo Alto a meeting with the executives of our online advertising and ecommerce companies.  Executives from Syndero, HomeAway, Zeo, AccountNow, Advanced Payment Solutions, Turn, Sojern and Tellapal participated in the meeting.  The purpose of the daylong meeting was to enable the participants to exchange information and best practices for customer acquisition and improving lifetime value (LTV).  Below are some of the major points that were made during the day:

1. Being best in class on customer acquisition implies combining the right people, an efficient process, and best in class tools.  The process typically being used involves: creating a control group, hypothesizing a particular behavior of this group that will be capitalized during the marketing campaign, testing the hypothesis on the desired customer touch points (email, search, display, affiliates, etc.), analyzing the test results, learning from the analysis and optimizing, forming a new hypothesis, repeating.  As one of the participating CEOs mentioned “every minute, some aspect of a customer acquisition campaign is being optimized.”
2. Social media is becoming an increasingly important channel for generating interest in a category but once a company starts promoting their particular brand through the social channel, user engagement appears to drop.  Word of mouth is important but it has not yet been integrated effectively with social media.  This is an area that holds great promise and where the participating companies will be investing over the next 12 months.
3. Test and measure every parameter that goes into customer acquisition.  Best in class companies can manage very complex test matrices.  It is important to be able to quickly hypothesize and test offers, creative, etc.
4. The right analytics around the data being collected define best in class companies with the lowest customer acquisition and retention numbers.  Our portfolio companies, by constantly sharing best practices, have moved beyond measuring the effectiveness of customer acquisition campaigns in terms of clicks, and impressions, i.e., website analytics.  Instead they are now measuring the impact of each customer interaction on a particular outcome. 
5. While companies are investing heavily on improving the quality and the uses of the data they capture through their customer interactions, they were less definitive about the impact of data they purchase from data exchanges.
6. A good off-the-shelf software platform for direct response/branded response doesn’t exist (investment opportunity?).  The portfolio companies have created such platforms by manually integrating stand-alone applications.  As a result, the operational complexity of working with multiple applications rather than a single platform presents a big challenge for marketers.  Good direct response software platforms can be used not only to improve the effectiveness of customer acquisition and customer retention of existing products, but they can also be used to effectively test the likely success of new products before introducing them to the market. 
7. Success with online channels is leading our ecommerce companies to start experimenting with offline channels such as Direct Response TV.  Every test associated with an online customer acquisition campaign can become a leading indicating for the effectiveness of a corresponding offline campaign.
8. The companies are being proactive about data privacy issues.  They are using services, including legal services, on how to best safeguard and use the data they collect and what to include in the creative they test for customer acquisition.
9. Metrics on how to calculate lifetime value per customer are still evolving.

Not only were the executives able to share best practices and share ideas about how to improve the operations of their respective companies, but after the meeting ended several stayed behind working on business deals between their companies.  A great way to end the week!

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.

Developing the Channel for SaaS Companies

In previous posts I have written about various aspects of sales in SaaS models including the importance of the collaboration between sales and marketing, the role of inside sales operations, controlling customer acquisition costs, and the role of self-service processes in sales and support.  Today I briefly wanted to touch upon business development.  The management teams of young SaaS companies that come to present to our firm often mention that upon raising their round they will hire a business development executive to help them grow channel sales.  These companies tend to have 20-50 direct customers and have raised either one institutional round of funding or are bootstrapped.  It always strikes me as odd that after acquiring only 20 or so customers, management feels that they thoroughly understand their solution’s direct sales process and the costs associated with this process to the point where they feel ready starting on channel sales.

I would have thought, and continue to hope, that the management of such early stage companies would want to devote more resources in better understanding the direct sales process associated with their solution so that they can optimize it and reduce the costs associated with it, before embarking on creating and optimizing the corresponding channel sales process.  By the way, we typically respond to such statements with a healthy dose of skepticism and never make an investment decision in an early stage company whose primary success must come from direct sales, based on the promised success of channel sales.  Our skepticism regarding channel sales is almost always validated once we invest in such early stage companies.  We usually find enough immediate opportunities for improvement around the direct sales process that we invariably delay the management team’s immediate plans to expand into channel sales.  I’ve recently read this post which summarizes so crisply the issues we have with attempts by early companies to expand in channel sales that I thought of sharing it along with my commentary.

The Magic Number provides an additional way to evaluate whether the direct sales model is working and the startup is ready to invest in the development of the channel. Will Price in his blog posted the graph below which comes courtesy of Josh James, CEO of Omniture. The graph correlates the magic number score to a company's growth stage. Don't try to overanalyze it. Just another perspective around the type of attention that needs to be paid around getting one sales model right before adding another model.

Trident Branded Response Companies Show Significant Growth in 2009

While the overall consumer economy continues to struggle, we have found resilient performance in branded response marketing. Revenues for Syndero , AccountNow , Advanced Payment Solutions and Zeo , four branded response Trident portfolio companies, are in aggregate up almost 60% year over year for the first half of 2009 and are expected to continue their aggressive growth in the second half.

Branded response (for some additional discussion see here) is an evolution in the concept of direct response marketing . Similar to direct response, branded response focuses on marketing efforts that drive specific, and quantifiable actions from the target customer.  In this way the marketer is able to evaluate the effectiveness of the marketing dollars spent. In addition, through branded response the marketer can simultaneously formulate and execute a brand strategy. If executed well, a branded response campaign can quickly create a large, loyal base of customers that generate recurring revenues and brand equity. 

AccountNow, a Trident portfolio company since 2007, has successfully built its business leveraging branded response. The Company offers consumers a prepaid debit card that effectively acts as a virtual bank account, allowing consumers to deposit checks and get access to cash without using expensive check cashing services. While the company builds its customer base primarily through online channels, it is important that it is viewed as a strong financial institution that its members can trust. This trust is centered around the AccountNow brand.  The customer’s positive association with this brand increases usage of the product, which, in turn, drives revenues and profitability.

Branded response marketing ensures that marketing dollars are spent efficiently and generate long term profitability. Advertisers who are evaluating how to allocate their dollars are increasingly turning to online advertising because of the ability to continually assess the ROI of their spend. This drive towards accountability has only been sharpened by the economic downturn. Corporations want to evaluate revenues generated from their marketing campaigns and optimize their marketing spend by marketing initiative and by media channel. While this level of detailed tracking is still in its infancy in much of the online advertising market, it is at the core of branded response.

Branded response represents a very attractive and unique investment opportunity.  It enables a company to quickly make significant sales with a relatively limited capital outlay and a moderate level of risk. Executing on this model, however, is not as simple as it sounds. According to Brad Klaus, the former CEO and cofounder of Trident portfolio company Syndero, “Branded response marketing requires a unique skill set – the ability to combine knowledge of online marketing, analytics, online commerce and consumer products.” These skill sets must be applied to the reams of data that drive the business model – and in order to do that, management teams must have best in class data collection and analysis tools. “Having the right tools to help in the decision making process is critical” says Tim Coltrell, CEO of AccountNow. “Trident has been invaluable in helping us deploy best in class tools to improve our sell through and customer retention rates as well as manage costs.”

Brad recently joined Trident as an entrepreneur in residence after helping to grow Syndero at a CAGR of over 200% during the first four years. He will be working with the Trident team to help discover and develop additional opportunities in the space. Brad’s expertise as a successful entrepreneur as well as his industry contacts as a board member of the Electronic Retailing Association will be invaluable in helping Trident continue its successful track record in the sector.

Branded response and, more generically the increased use of data analytics in online marketing will also drive opportunities in the ecosystem of online marketing and e-commerce. Trident’s online commerce companies such as Homeaway , Kayak , and HipDigital are adopting many of the same strategies for online customer acquisition that companies like Syndero and AccountNow utilize. Other Trident portfolio companies like Turn, Sojern and Merchant e-Solutions provide tools to online retailers to help them improve their customer acquisitions and online commerce.

Trident is leveraging its acquired expertise in this sector to help its relevant portfolio companies adopt and apply best practices and them to success faster.

E-Commerce Companies Can Prosper During this Downturn

As the recession proceeds, analysis of business-to-consumer e-commerce sales data shows that while the sector is not immune to the recession (2008 was the first year that e-commerce did not grow on a YoY basis since 2000), it is growing faster and is experiencing less margin pressure than physical retail.  Public companies like Amazon, Netflix, and GSI Commerce posted strong results for 2008 and took market share from their competition.  It has also been reported that 2008 sales for the 131 online retailers have grown by 21 % YoY.  Excluding the top five e-retailers in this group the rest still grew by about 10% during the same period.  Anecdotal evidence, including data from our own domestic and international ecommerce portfolio companies, suggests that many private e-retailers enjoyed similar strong results.  These results can be attributed to customer behavior, investments made by merchants, and decreasing customer acquisition costs.

During these recessionary times consumers are using the Internet extensively to search for deals (for example, Google, Yahoo and Microsoft report that searches around online coupons are skyrocketing; a recent survey by JP Morgan reported that price is today the most important factor when consumers choose an online retailer), for comparison shopping as they attempt to identify the best possible prices on the items they still buy, and for its overall convenience factor.  In addition, shopping sessions and amount sold per session are growing on a YoY basis.  Demographic data suggests that while younger buyers still dominate, the use of ecommerce by older consumer groups is rising.  Finally, while ecommerce’s penetration in product categories such as computer electronics, and media (books, music, and video) is over 25%, penetration in categories such as cosmetics, apparel, home furnishings is still less than 10%, implying that there is lots of room for growth.

Noting these trends, retailers are investing more heavily around their ecommerce infrastructure and merchandize choices (creating a virtuous cycle for the further growth of their ecommerce sites), while curtailing investments in other parts of their operations (including physical stores).  These investments in conjunction with continued broadband penetration, improving shipping infrastructure and e-payment methods are expected to continue benefiting e-retailers for years to come and further strengthen the consumer behaviors noted above.

Merchants are also benefiting from the drop of customer acquisition costs (online advertising and lead acquisition). This is due to the drop in CPM and CPC rates (in some categories more than others), as reported by Efficient Frontier, to the availability of more online advertising inventory, and to the decreased competition in keyword auctions.  I expect that these trends will continue during 2009 and possibly 2010.

A final reason for optimism on the short- and longer-term growth of ecommerce companies comes from the increasing use of analytics by e-retailers.  Until recently ecommerce analytics were being used consistently and effectively only by the leading e-retailers.  In most cases, these e-retailers had to develop proprietary analytic applications.  More recently, packaged software applications incorporating analytics to understand consumer behavior within a site and across sites, analytics that drive the optimization of a site’s content in order to improve consumer response rates and merchandise turnover, keyword optimization to improve online advertisement response rates to search queries, price optimization to maximize profit margins based on customer purchasing behavior, etc. are starting to be adopted by the broader group of e-retailers and are leading to significant improvements in the performance of these companies.