Bessemer 5 Cs of SaaS Finance

Bessemer’s 5Cs of SaaS Finance Winter 2009

Agenda
Overview of Bessemer
Things have changed
Hard Times require better visibility: the 5Cs of SaaS Finance
Tips to Survive in a downturn

NO, NO, I WAS QUOTED OUT OF CONTEXT. WHAT I REALLY SAID WAS “I DON’T BELIEVE IN SAAS-QUATCH!” A Prediction….

Bessemer Venture Partners Snapshot
Founded 1911
The longest standing track record in the Venture Capital Industry with 150+ M&A and IPOs
Strong Global Platform with over $2 billion under management and six offices worldwide
One of the most successful software and SaaS investors in history
Close partnership with Salesforce.com for SaaS investing

BVP Software and SaaS Practice
BVP Software and SaaS Portfolio
Software and SaaS is the largest investment area for Bessemer New SaaS/Software investments 2008 exits

Agenda
Things have changed

2007: Life was fun…
Healthy SaaS Valuation Multiples
EV/2007 Revenue Multiple for SaaS 13 Index* High growth rate Distribution of 07/08 growth rate for the SaaS 13 index * Excluding NetSuite and SuccessFactors, not public at that time
Strong Growth rate
+
High Valuation
Easy access to capital and debt
2.5-3.0 48% Avg.

Lehman Bank employees stage a protest by blockading the entrance to the Bank's Headquarters

Things have changed: SaaS valuation plummeted… The SaaS 13 Index Base 100 = Jan 1st 2008 -60%

Growth and Cash Flows are not enough to support valuation… Revenue Growth USD million LTM Cash Flows from operations: $60m Omniture Inc. (Nasdaq: OMTR) YTD stock performance: -69% (vs. -38% for NASDAQ) Trading at 2.2x EV/2008 Rev. Base 100 = Jan 1st 2008

…and no one has been spared! 60% < Loss 40% < Loss < 59% Loss <39% -51% -71% -69% -40% -35% -61% -60% -35% -56% -78% -54% -47% -80%

Root Causes Over aggressive marketing and securitization of mortgages Foreclosures Home Prices fall Consumer spend falls Bank assets write off and bankruptcy Access to credit vanishes Business spend decreases Lay offs Recession? Depression? Home Equity Lines decrease

How long will it last? Dow Jones evolution since 1929 Linear scale 1929 Crisis: 25 years to recover Dow fell from 350pts in 1929 to 40pts in 1932 (-89%). Recovers 1929 level in 1954 1987 Crisis: 2 years to recover Dow fell from 2,600pts to 1940 pts (-25%). Recovers 1987 level in 1989 2000 Crisis: 6 years to recover Dow fell from 11,500pts to 7,600 pts (-34%). Recovers 2000 level in 2006 2008 Crisis: Plan for multi-year recovery Dow fell from 14,000pts to 8,175 pts (-41%). How bad is it really? 1973 Crisis: 9 years to recover Dow fell from 1,050pts to 580 pts (-45%) in 1974. Recovers 1973 level in 1982

Brace for a tough 2009
SAP Tells Employees: 'Do Not Order Any New IT Equipment at This Time'
SAP's co-CEOs, Henning Kagermann and Leo Apotheker
We believe demand for application software is deteriorating rapidly and "in real time"-and do not anticipate it will "bounce right back“ A 14% 2009 growth rate keeps Omniture solidly as one of the highest growers among the companies in our coverage universe Goldman Sachs Global Investment Research […] the recent slump in raw-material prices and the decline in shipping costs indicate just how far-reaching the consequences of the global financial crisis will be for the real economy […] a recession is occurring, and that many companies could struggle over the next few quarters Wedbush Securities

Agenda
Things have changed

The 5 Cs of SaaS Finance
CMRR: Committed Monthly Recurring Revenue
Churn
Cash
CAC: Customer Acquisition Cost
CLTV: Customer LifeTime Value

CMRR – Committed Monthly Recurring Revenue remains the key metric for growth From bookings and opacity… EXPENSES BOOKINGS
Difficult to make decisions:
Multi-year bookings
Non-recurring revenues
Impact of churn and renewal?
… to CMRR and transparency!
Full transparency :
Employee assessment
Operational planning
Financing
Valuation
CMRR New Accounts Upsell & Expansion less churn Existing Contracts Renewals EXPENSES Cash burn rate

Cash – Time to get your cost and revenue line crossing Expense Plan MRR Expected breakeven point Actual Expenses Lines are still not crossing! Time to get the lines to cross – even at the expense of growth

Churn – Key lever in a tough economy
Key metrics
MRR churn ( target <12% per annum and < Upsell)
Customer Churn
Effect of 20 % churn on MRR base
Addressing Churn
Root causes
Pricing/ Value
UI and workflow complexity
Downtime
Monitoring
Overall application usage (login frequency and time)
Application usage (most frequent use case, function used…)
Acting
Competitive analysis/sales tools
Usage monitoring (e.g., True Login Percentage, API usage) and follow-up
GUI/ workflow redesign
Platform stability
Increased discount for early payment
Start of year 1 End of Year 1 End of Year 2 End of Year 3 50% MRR loss in 3 years

CAC – Target a 1-year payback on your Customer Acquisition Cost CAC ratio: defining your S&M spend
CAC < 1/3 (3 years payback or more): bad! Slam on the breaks and refine your sales model
CAC >1 (payback in less than 1 year): great! Invest more money immediately and step on the gas during the good times and tie growth to cash flows in downturn…
CAC benchmark Salesforce.com CAC ratio and refined CAC ratio since IPO (based on public data) Public Benchmark SaaS 13 Index, Q2 2008
Median: 0.57
High: 1.7 (Kenexa)
Low*: 0.2 (NetSuite)
* Excluding ULTI, SUMT, SLRY which had negative ratios (GM loss) during the period

CLTV – Adjust Your G&A and R&D Costs Towards a positive Customer LifeTime Value CLTV: defining your profitability CLTV > 0 = Profit! Example : 1 customer generating $1 of ARR Time for a >0 CLTV: use this analysis to adjust your G&A, account management and R&D costs
Assumptions
Customer lifetime: 5 years
WACC: 15%
Pro. Serv. Rev./COS included in CAC
CLTV example Salesforce.com CLTV estimates (based on public data)

Agenda
Things have changed

Some ideas for Year 2009 Planning (1/2)
Cash is King…and scarce – preserve it : if you are in a funding cycle, raise as soon as possible and as much as possible. If not - plan to cash flow breakeven with what you have left. Preserving cash is your #1 priority
It is time to fix your key SaaS metrics
P&L: MRR = MRE : you control your destiny when your monthly revenue equals your monthly expenses
Sales & Marketing: CAC>1 – You cannot afford to invest in growth. Keep only reps making quota and cut marketing activities with lower ROI
CLTV >0 – Adjust operations, R&D and G&A to make your business model profitable
Be realistic on valuation : the best public SaaS companies lost 55% of their value on average, so it is likely your valuation is down too!
Watch for cheap MRR (M&A, Other structure to avoid buying assets?) : you will soon be able to buy failing competitors. Volatility creates opportunities
Act fast : don’t wait for the slowdown to hit you, it will be too late
Strategic Manage Carefully Your Internal Communication!

Some ideas for Year 2009 Planning (2/2)
Sales& Marketing
Focus on your farmers: account management is critical to keep your churn low and improve “up-selling”. Monitor account activities and be proactive
Trade-off pre-payments for MRR by increasing pre-payment discount and sales bonus
Review sales comp structure: more commission less salary
Keep you voice up in the market: customer need to know you are still alive!
Rethink vertical segmentation: Healthcare? Is Government a good idea?
Review your marketing media allocation: offline media prices will go down and could generate attractive ROI, tradeshows might have less impact due to travel restrictions…
G&A
Manage your DSOs tightly – they will go up! And check for payment that can be deferred
Wisely manage debt: finance your A/R and leverage only when needed to extend runway
Implement “quick wins”: shut down all retained searches immediately, renegotiate services contracts and leases, limit travel…
R&D
Review product roadmap: what new features are absolutely necessary
Move more R&D offshore
Operations
Follow your customer growth, don’t grow data center and support capacity ahead
Tactical

Bonus Tip
Chaos creates opportunities – be ready to grasp them!
Business from failing competitors
Great hires
…

Thank You! More Info: www.bvp.com/saas

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Bessemer 5 Cs of SaaS Finance

by Philippe Botteri, Partner at Accel Partners on Nov 13, 2008

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Bessemer 5 Cs of SaaS Finance Presentation Transcript