Top 10 Laws for Being SaaS-y

By Byron Deeter, Partner, Bessemer Venture Partners

Running an on-demand company means abandoning many of the long-held tenets
of software management and adhering to these new principles.
In the emerging sector of Software as a Service, one of the biggest challenges for
many of the top CEOs is the lack of successful role-model businesses. There are still
only a handful of public pure-play SaaS businesses, and thus the body of best
practices is very limited. Ironically, on top of this, one of the hardest things veteran
software CEOs have to do when they start to run a SaaS company is to forget much
of what they know about running a software company.
As we worked with our SaaS portfolio companies, it became apparent that savvy
SaaS companies were following a new set of rules most of which didnt apply in
the traditional software world, and many of which they were making up in
real-time. We then set out to capture the new best practices of the on-demand
model.
To pull these insights together, Bessemer studied over a hundred SaaS companies
both pure-plays and hybrids and recently hosted an invitation-only SaaS CEO
Summit to compare perspectives and discuss the findings. Many of the insights
gained during this research and these discussions are condensed into the following
list of ten new laws, which help govern the success of SaaS companies.
1. Your Key Business Metrics Are: CMRR (Contracted Monthly Recurring
Revenue) and Cash Bookings Are for Suckers.
2. All insightful, experienced software executives know that there is a single
critical metric by which the health of a growth-software business can be
judged: Bookings. However, in the SaaS world, bookings is ambiguous at
best and often very misleading. A simple example would be if Customer A
signs a one-year deal at $10,000 per month, and Customer B signs a
three-year deal at $5,000 per month. The traditional metric of Bookings
would value Customer A at $120,000 and Customer B at $180,000, despite
the fact that any good SaaS CEO knows that Customer A is much more
valuable to the business as they will likely generate $360,000 of revenue for
the business with renewals over that same three year period.
3.
4. To achieve better business visibility, top-performing SaaS companies have
begun to focus on Monthly Recurring Revenue instead of bookings. We
recommend companies actually take this a step further and keep a forward
view of contracted monthly recurring revenue net of the expected churn.
This metric, Contracted Monthly Recurring Revenue (CMRR), is the single
most important metric for a SaaS business to monitor as the change in CMRR
provides the clearest visibility into the health of any SaaS business.
5.

6. Visibility into the current cash position and the change in the cash position
has always been important for software executives, but is even more critical
for SaaS businesses because the working capital requirements are higher and
the payment terms are much longer. Given the high cost of capital for private
SaaS companies, wise executives will often offer slight MRR discounts to
customers in exchange for quarterly or annual pre-payment terms.
7.
8. A third metric to watch is customer churn, which is embedded into our CMRR
metric at the top level but should also be tracked in deep detail by the
management team. SaaS companies have to remember the Service in
Software-as-a-Service. Its very difficult and expensive to grow subscription
businesses if you have moderate customer churn, and prohibitive, if your
churn is high. The top performing SaaS companies typically achieve annual
renewals on a customer count basis above 90% (much of which is often due
to bankruptcies, acquisitions, and other events beyond the companys
control), and over 100% renewals on a dollar value basis due to up-sells into
this installed base.
9.
10.We believe in these metrics as SaaS value drivers so strongly, that like to see
executive teams tie their annual bonuses directly these metrics almost
exclusively.
11.It Takes At Least $300K of CMRR to Climb the Sales Learning Curve
Stop at Three Sales Reps until At Least Two of Them Are Making
$100K MRR Quotas.
12.Years ago, Bessemer was fortunate to invest behind Mark Leslie at Veritas
and as a result our firm became big believers in a concept Mark helped
pioneer around the Sales Learning Curve (SLC). The core concept is that
software organizations often fail because they staff up their sales efforts too
quickly and make them too large before the sales model has been refined.
13.
14.The SLC worked well in the traditional enterprise software business and
works well for the SaaS model with a few key modifications. To understand
when the business has started to climb the sales learning curve and is in a
position to hire more reps profitably, you have to think in terms of CMRR
instead of bookings. You know you can profitably scale sales when a couple
of sales reps are at an annualized run rate to sign annual contract values
(MRR x 12 months) equal to twice their fully-burdened cost of sales. For a
direct, enterprise sales business model, this is likely to be $80,000 100,000
MRR (approx. $1 1.2M annualized), and for tele-sales models, this may
scale down to $60,000 $75,000 MRR ($720,000 $900,000 annualized). It
is usually time to accelerate sales hiring when at least two out of three sales
reps are hitting quotas at these numbers, and the business has at least
$300,000 of CMRR.
15.Separate Your Hunters and Farmers As Soon As Youve Climbed
the Sales Learning Curve, Begin Ramping Your Sales Force by Hiring
Renewal-Oriented Account Managers. Keep the Hunters Moving, and
Let Farmers Tend to the Crops.

16.When a SaaS company starts to hit the sales inflection point, it is important
to keep the new business reps (the hunters) busy with finding new deals,
while a team of account managers (the farmers) tends the established
customers. CMRR is a function of new sales net of churn from your existing
accounts, so you should have dedicated experts for each of these two
revenue groups as soon as is practically possible. Once a company has a few
sales reps achieving quota and a significant customer base, it is time to hire
dedicated account management experts who are compensated to focus
exclusively on customer service, renewals and upsells. These farmers should
be compensated on the net change in CMRR among their installed base
accounts.
17.Its a Whole New Ecosystem Channels Are Very Hard for SaaS
Companies to Build, So Dont Base Your Plan on SIs and Traditional
ISVs. You Will Need to Sell Directly for a Long Time.
18.SaaS products, by their nature, dont require massive amounts of systems
integration (SI) work to implement, so theyre not a great fit with the
traditional SI business model. They dont pull through large stacks of
hardware boxes and software licenses so theyre not very attractive to
traditional independent software vendor (ISV) partners either. Channel
relationships are very hard for any small company to establish, but even
more difficult for most SaaS companies given the restricted value proposition
to the SI and ISV community.
19.
20.Unfortunately, many software executives have spent years building deep
relationships with executives at the major software and integration
companies like IBM, Oracle, HP, and Accentureonly to find they arent much
help to SaaS businesses.
21.
22.Most SaaS businesses have to be comfortable with the fact that they will live
or die by their ability to sell directly, and only if they are successful alone will
they be able to build meaningful channel relationships with the new
generation of partners and resellers. In the interim, many SaaS businesses
focus on joint sales and marketing activities with the emerging SaaS
incumbents (Salesforce.com, Webex, etc.) and the new generation of
smaller, more nimble and SaaS-savvy SI firms.
23.Stay Local Prove Your Business in North America First. Only After
Reaching $1M in CMRR Should You Consider Hiring European Sales
and Services Execs behind Customer Demand. Save Asia for
Post-IPO.
24.Almost all businesses will look to go global at some point if they continue to
grow. But SaaS vendors face more barriers to globalization than traditional
software companies because you cant just localize the UI and ship a new CD
to some remote country. Given the different architecture and high
service-level expectations in the SaaS industry, companies are faced with
questions about latency, data access and security through replicated local
datacenters, in-country customer support personnel, packaged integration
with other regional software and SaaS products, and other similar issues.
25.

26.Simply put, North America is a massive market with a rising tide around
SaaS. There is no need to go global early and force this cost and complexity
upon your organization. A rough rule of thumb is that you should look to pass
$1M CMRR ($12M annualized) before even considering Europe, and even
then you should let customer deals pull you into the region as you
incrementally hire sales and services professionals. Unless you have some
extremely unfair advantage in Asia, wait until Europe is a clear home run
before even considering opening up a sales war on another front. Your
default position should be to consider Europe as your pre-IPO growth story,
and Asia only after youre a high-flying public company.
27.One Datacenter Invest Early in Backup and Disaster Recovery, but
Stick to One Data Center, At Least until Well After IPO.
28.SaaS companies have this debate all the time, and yet the recent data is
pretty clear: Most SaaS companies can get by with a single datacenter in
North America until well past their IPO. In fact, Salesforce.com is
approaching $1billion in revenue and just recently announced plans for
additional datacenters.
29.
30.Data centers are extremely expensive and create significant organizational
complexity on every level. Many of the historical issues around data backup,
disaster recovery, and global application latency that caused companies to
add a second datacenter can also now be better addressed in other ways.
31.Single Instance, Multi-Tenant Have Only One Version of the Code in
Production. Really. Just Say No to On-Premise Deployments.
32.This is a guiding architectural principle for best-of-breed SaaS companies.
The notion of multi-instance, single tenant situation only applies to legacy
software companies moving to a dedicated hosting model because they dont
have the luxury of an architectural re-design. It is possible to use
virtualization to provide multiple instances, but this hybrid strategy is very
inferior for the organization. If designing a SaaS product out of the gate, the
best situation is single instance, multi-tenant. It is a hard and fast law that
shouldnt be debated. Any CTO who thinks otherwise (for a conventional
use-case) should be fired.
33.By Definition, Your Sales Prospects Are Online Savvy Online
Marketing is a Core Competence (Sometimes the Only One) of Every
Successful SaaS Business.
34.You sell a product that requires an Internet connection and a web browser for
access, which means your prospects are online! Numerous studies show that
your customers are now doing most of their primary research online. You
should therefore be aggressive in marketing to them online.
35.
36.This is a clear example where business-to-business (B2B) marketers need to
learn from their business-to-consumer (B2C) counterparts. The most
innovative B2C companies are lead generation machines, leveraging search
engine optimization (SEO), viral marketing, and other technically advanced
methods. Yet many B2B companies dont have a clue.
37.

38.The incumbent technology leaders like IBM, Oracle, or SAP, have done very
little with regard to marketing automation, search engine optimization,
search engine marketing, email marketing or viral marketing. Private SaaS
companies have so many disadvantages against the larger incumbent
vendors that it is imperative for them to exploit this potential advantage.
Whether they use an automated product like Eloqua (as is the case with
almost a dozen of our companies) or a team of marketing analysts and
spreadsheets, online marketing is simply a must for SaaS companies.
39.Constantly trade off cash vs. Growth If You Must Replenish
Supplies While Still Crossing the Desert, Optimize Your Growth Rate
(Sales Rep Recruitment and Marketing Spending) So That You
Maximize Your Recurring Revenue Run Rate When You Need to
Fundraise Next.
40.Theres no denying that the cash flow characteristics of a SaaS business are
wonderful in the long term, but lousy in the short term. The traditional
software model with $1 million licensed software and net 60 payment terms
presents a far rosier cash flow picture than monthly subscription streams of
$5,000 $50,000. This means SaaS companies must have impeccable
financial stewardship.
41.
42.As a business, it is critical to weigh forward investments carefully. SaaS
businesses typically require multiple rounds of investment and a good
amount of capital.
43.
44.Top execs must optimize functions around CMRR metrics the basis for
subsequent valuations. If you are planning to raise more funds in nine
months, you need to invest in areas that will produce measurable CMRR
returns within that nine-month window and often hold back on longer-term
initiatives.
45.Be Prepared to Cross the Desert SaaS Requires R&D and Sales
Expense Up Front for a Multi-Year Stream of Revenue, So It Demands
Enough Investment Capital to Fund 4+ Years of Runway. Load Up for
the Long Trip and Pace Your Consumption of Calories!
46.SaaS businesses provide wonderful visibility and predictability at scale, but
take lots of time and capital to get to cash flow breakeven over several
rounds of fundraising. There are many good SaaS startups that stepped on
the gas too early and were wiped out as a result. Always model the business
with a comfortable cash cushion and recognize that most SaaS businesses
actually consume more short-term cash if you start growing faster.
Bonus Law: You Can Ignore One of These Rules, but Not More Great
Companies Innovate, but Pick Your Battles
You might be reading this and saying to yourself, Well, our sales model doesnt
match these laws, but Im sticking with it anyway. To which we would say, Go
for it! Nothing is absolute, and we certainly believe it is possible to ignore one of
these core tenets and still succeed. Maybe its about the ecosystem; maybe its the
datacenter. Whatever that one exception is great! We welcome it. Many of our
most successful companies historically were able to run against one
well-established business principle and exploit this difference successfully.

However, if you find yourself questioning several of these Ten Laws, then its
probably time to step back and take a hard look at your business. As a former SaaS
CEO myself and a current SaaS investor, I have learned the hard way that much of
the battle is just learning from the mistakes of those who went before you. In our
analysis of more than a hundred SaaS businesses, we encountered several
successful companies that were on the borderline with one or two of these laws
each, but none that challenged several of them. We hope that these laws can help
you run your SaaS business more effectively, and we always welcome new insights
in these or related areas.

Byron Deeter is Partner at Bessemer Venture Partners, a top-tier international

venture capital firm with 8 offices worldwide and over $2B of assets under
management. He was previously the founding CEO of a Software-as-a-Service
business (Trigo Technologies) that was acquired by IBM in 2004, and currently sits
on the board of a half-dozen companies, including three pure SaaS companies:
Eloqua, Cornerstone OnDemand, and Retail Solutions. For article feedback, contact
Byron at
[email protected]