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Some useful resources for understanding and benchmarking SaaS metrics

In between watching Team New Zealand miss out on converting  four match points in a row in the Americas’ Cup I’ve recently been working with a few SaaS businesses to analyse their growth strategies and test how realistic growth projection options are. There are a bunch of interesting parameters to the models, in particular the mix of SaaS licensing to professional services and cost of customer acquisition (CAC). In each case, the question comes back to how much capital would be involved to achieve that growth, and just how available is capital with that risk profile in New Zealand. (Answer: Not Very).

As part of this work I’ve done a fair bit of reading about what the business models are and the key metrics which can be tracked and benchmarked against the sector. The pretext here is that if New Zealand is going to gain a few more Xeros and SLI Systems which successfully make the break out of NZ then we need to be able to prove that we are competitive against international competition. I think educated capital is the key ingredient here – Silicon Valley VCs have been walking this talk for some time now, but NZ investors are just waking up to the shape of subscription based business investments. Investing for growth rather than yield seems to have been an odd concept in the South Pacific until very recently…

So, there are a reasonably small number of free internet resources out there which can be used to rapidly upskill on SaaS business metrics, which I’ve collated here. Hopefully this goes towards helping entrepreneurs and investors to arrive into conversations with a common vocabulary which is used across the world.

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The most accessible resource is the eminently readable blog of Boston-based VC David Skok of Matrix Partners, For Entrepreneurs.  Skok has a rare writing talent to be able to express the concepts in such a way that you come away thinking “…ah of course…”. All the posts on his blog are worth reading, but the key entry points are:

[He’s also a VC who edits his own CSS stylesheets: Nice. 🙂  ]

Most recently David published a comprehensive list of SaaS business benchmarks as part of the 2013 Pacific Crest SaaS survey. There is a wealth of information in here and – although the sample set isn’t huge and mostly from US – there are some really interesting insights worth exploring. Most importantly, it gives new SaaS businesses a leg up on what to measure and how to design your business for success.  (Another option to get hold of a few more reference points:  it’s really easy to get hold of some “ballpark benchmarks” just by downloading NASDAQ annual filings of similar profile SaaS businesses and comparing their financial ratios of Revenue to Sales/Marketing, Admin and R&D.)

 

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Coming a close second in accessibility is the occasional report from VC firm Bessemer Venture Partners: 10 Laws of Cloud Computing (link to download 2012 version as PDF using BVP portolio company Box).

The whole of this paper is entertaining, candid, informative and clearly illustrates how investors and entrepreneurs can successfully partner to achieve great success in the SaaS business. In particular section 5 – Check the scoreboard with the 5 Cs of Cloud Finance: CMRR, Cashflow, CAC, CLTV and Churn – is highly instructive for new SaaS businesses assessing their growth strategy. Also a funny dig at Oracle boss Larry Ellison at the end. 🙂

(Incidentally, it would be great to see some Kiwi VC and Angel firms publish some content like this, shedding a bit of colour on the VC / entrepreneur relationship here in NZ.)

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Next up, SaaS metrics business KissMetrics reinforces the Bessemer position with a (self referential!?) post: The 5 “Must Have” Metrics for Your SaaS Business.

 

There’s a cautionary SlideShare from entrepreneur-turned-VC Christoph Janz: 9 Worst Practices in SaaS Metrics.   (Incidentally an early investor in NZ SaaS high flyer Vend).

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Finally, here’s a really interesting recent post from entrepreneur Jason Cohen of Smart Bear Software:

COC: A new metric for thinking about cancellations in SaaS business models

 

Would you recommend any other resources out there which help entrepreneurs and investors to understand the ideal shape of a SaaS business? Please leave a comment and I’ll work them into a future post.

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OPINION: Tech contributes 6% of Christchurch GDP, and that’s just the beginning

Just had an article published in Computerworld Magazine – see http://www.computerworld.co.nz/article/526898/opinion_tech_contributes_6_christchurch_gdp_just_beginning/

It is time again for Christchurch’s annual Canterbury Software Summit, the largest technology industry conference in the South Island. The October 3rd event is the perfect opportunity to reflect on the achievements of the local industry since the highly acclaimed 2012 Summit – and there have been many, from new NZX listings to the opening of the Enterprise Precinct and Innovation Campus (EPIC).

Two significant-sized Canterbury software companies launched successful IPOs in 2013: SLI Systems (SLI) and Wynyard Group (WYN). These innovative firms now have a combined capitalisation of over $240 million with revenues measured in the tens of millions and they are growing rapidly. Indeed, software is a significant driver in the local economy, contributing approximately $880 million – 6 per cent of Christchurch’s GDP – every year.

SLI Systems and Wynyard swell the ranks of other successful New Zealand software businesses like Xero, Diligent, Orion Health, Serko, Vista and Vend; Kiwi investors are now aware of software as an attractive investment. With good NZX outreach and increased capital availability (due in part to growing Kiwisaver funds), there are more listings in the pipeline.

The next generation of rapidly growing Christchurch companies are also proving that they have amazing technology, solid marketing strategies and experienced management teams – I can name firms like Telogis, Leapfrog (ARANZ Geo), Redseed, Skilitix, BIMStop, CerebralFix. It’s evidence that the challenges of building a global business from Christchurch are being overcome and there are plenty of examples of those who have made it and are happy to share their knowledge and experiences.

However, there is much more that can be done to accelerate local start-up activity. We need greater investment in seed-stage software entrepreneurs, such as the Hatchery Incubator at the University of Canterbury, to ensure they receive the right support and remain in Canterbury.

Thankfully, the local infrastructure is bouncing back stronger than ever. The opening of the Enterprise Precinct and Innovation Campus (EPIC) building last October was a major rebuild milestone for the region. EPIC has become a world class centre for innovation-based companies in Canterbury and is successfully doing what it set out to achieve: Facilitating commercial collaboration between technology businesses.

EPIC is now home to 19 innovation-led companies including SLI Systems and, with events hosted on site every week, is very much helping to nurture the growth stage sector here.

As the late Sir Paul Callaghan said, in order to have successful businesses we need to make New Zealand “a place where talent wants to live”. Three years on from the first earthquake, the audacious task of dismantling the old city centre and creating a brand new 21st century “city in a garden” is well underway.

Those involved in the Christchurch software industry can feel hugely confident that we live in a world class city which can attract the best and brightest talent from all around New Zealand and the world. With a strong tradition of successful and lasting collaboration and sharing ideas, the Canterbury Software Summit is our way of celebrating that.

Ben Reid is Chairman of the Canterbury Software Cluster, and founder and principal consultant at Memia Ltd, which provides strategic advisory services focused on helping high growth software and technology businesses be successful from New Zealand.