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.
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:
- SaaS Metrics 2.0 – (Rewritten Jan 2013) A Guide to Measuring and Improving What Matters
- SaaS Economics: The SaaS Cash Flow Trough
- Designing startup metrics to drive successful behavior
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.)
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.)
Next up, SaaS metrics business KissMetrics reinforces the Bessemer position with a (self referential!?) post: The 5 “Must Have” Metrics for Your SaaS Business.
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.