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February 25th 2009, Palo Alto Hills
Bessemer CEO Summit on SaaS
David Cowan
Philippe Botteri
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•Present Bessemer perspective on key SaaS financial metrics
•Assess how these metrics impact cash consumption
•Understand the profitability of the SaaS business model at scale and how it compares to Enterprise Software
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SaaS 13 average growth rate
Percent
55%
46%
32%
24%20%
06/07 07/08 Oct. 08 Dec. 08 Feb. 09
08/09 growth projection
SaaS 13 2008/09
growth rate:
20%
less than half of the 07/08
growth
-53%
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2008/2009 Revenue growth rate
6.4%7.5%
9.3%
20.3%
-0.2%
1B + rev. Average
SW
$100m-
$1B rev.
<$100m
rev.
SaaS
Percent
SaaS companies are still growing 2-3x faster than the Enterprise
Software average
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0
20
40
60
80
100
12/31/2007
2/29/2008
4/30/2008
6/30/2008
8/31/2008
10/31/2008
12/31/2008
SaaS 13 Index
SaaS companies valuation have been more impacted by the downturn than the software and
technology sector
Base 100 = Jan 1st 2008
Since 1/1/08
-62%
2008 Performance of key US Indexes
Percent decline in 2008
-38%-41%
-44%
-53%
-34%
Dow Jones
GS
Software
Index Nasdaq
GS Tech
Composite
SaaS 13
Index
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EV/2009 Revenue multiple
Multiple
1.7x
1.1x
Enterprise Software SaaS
1.1-1.7xIs the SaaS
fundamentally more valuable
than Enterprise Software?
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• Conventional GAAP metrics for valuing software companies do not work for recurring revenue businesses
• The 5 metrics that matter to SaaS Companies:
1.CMRR: Committed Monthly Recurring Revenue
2.Cash
3.Churn
4.CAC: Customer Acquisition Cost
5.CLTV: Customer LifeTime Value
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… to CMRR and
transparency!
CMRRExisting Contracts
Renewals
EXPENSES
Cash burn rate
CMRR
New Accounts
Upsell &
Expansion
Existing
Contracts
Renewals
EXPENSES• CMRR is the best
measure of value accretion
• CEO Performance:»50% CMRR»30% Cash Balance»20% Renewal Rate
• Sales performance: $1 CMRR = $1 Bonus
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CMRR growth is directly correlated to burn rate…
Cash flow over 5 years for a $2m CMRR SaaS company
60% CAGR 15% CAGR
-$10m +$20m
Cash flow on year 6 @ 15% growth rate
60% CAGR 15% CAGR
+$9m+$46m
…and value creation!
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0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
-40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0%
Growth vs. Free Cash Flows
% of GAAP Revenues Private companies
Public companies0
7/
08
Grow
th r
ate
2008 FCF
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Impact of payment terms on 5-year cash flows
Cash flows for a SaaS company growing at 60% p.a.
• A change in payment mix can have a drastic impact on cash flows
• Sales incentive needs to be heavily biased towards annual upfront cash payment in the high growth phase
• Annual: 50%
• Semi-Annual: 25%
• Quarterly: 25%
-$10m
• Annual: 0%
• Semi-Annual: 50%
• Quarterly: 50%
-$48m
• Annual: 0%
• Semi-Annual: 0%
• Quarterly: 100%
-$62m
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0%
20%
40%
60%
80%
100%
Private 1 Private 2 Private 3 Private 4 Private 5
Annual Payment Mix
% of total sales
Semi Annual
Annual
Quarterly
Monthly
Other
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Impact of Churn over 5 years
Resulting cash flows for company growing at 60% p.a.
• Target: churn < 12% of BoY CMRR
• Major impact on value: 8pt of churn = $2.4m/year in additional cash burn
• Put systems in place to:
» Measure churn accurately
» Identify root cause
Churn
(% CMRR)
12% 20%
Cash flows
-$10m -$22m
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CAC RatioMagic Number
Magic
Number=
Δ Revenue
S&M costs
CAC
Ratio=
Δ Gross Margin
S&M costs
Golden rule:
CAC >1 = payback in less than
1 year for new CMRR
• SaaS companies can have different gross margin (from 50-85%)
• Revenue does not cover costs, Gross Margin does
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CAC = 1 for new CMRR
Resulting P&L for company growing at 60% p.a.
1326
46
76
119
180
1425
40
62
92
133
(8) (7) (5) (3)
0 5
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
1326
46
76
119
180
14
44
71
106
158
226
(8)(25)
(35)(47)
(64)
(86)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
CAC = 0.5 for new CMRR
Resulting P&L for company growing at 60% p.a.
GAAP Revenue
S&M Costs
Cash Flows
Total cash burn: $10m
Total cash burn: $257m
Critical metric
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CAC ratio
Q3/Q4 2008 Private companies
Public companies
0.00
0.50
1.00
1.50
2.00
2.50
Privat
e 1
Taleo
Ultim
ate Softw
are
Privat
e 2
Con
stan
t Con
tact
Privat
e 3
Succe
ssFac
tors
Privat
e 4
Privat
e 5
Salar
y.co
m
Sales
force
Net
Suite
Dem
andT
ec
Live
Perso
n
Om
niture
Vocus
Privat
e 6
Con
cur
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• 10pt in renewal costs = $33m additional burn over 5 years
• As the company matures and growth declines, renewal costs will define the cash flow margins of the business
Impact of Renewal costs over 5 years
Resulting P&L for company growing at 60% p.a.
Renewal cost
(% renewal GM)
30% 40%
Cash flows
-$10m -$43m
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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, and
R&D costs
Assumptions• Customer lifetime: 5 years• WACC: 15%
CLTV example
Salesforce.com CLTV estimates (based on public data)
Quarter
ending Jan. 03 Apr. 04 Apr. 05 Apr. 06 Jan. 07 Jan. 08
MRR Run
Rate (usd, m)5 10 20 30 45 65
CLTV Analysis for $1 of Annual Recurring Revenue
ARR (usd) 1.0 1.0 1.0 1.0 1.0 1.0
Cost to
maintain (usd)0.5 0.4 0.4 0.5 0.5 0.5
Cost to
acquire (usd)1.3 0.9 0.7 0.8 1.1 1.1
CLTV (usd) 0.2 1.0 1.1 0.8 0.5 0.6
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CMRR
Metric Measurement
• Growth rate
• Upsell vs. new customers
Target
• 50%+
• Upsells >= churn
Cash • FCF
• Payment terms
• Pro. Serv. GM
• breakeven @ 50% growth rate
• 1-year upfront mix > 50%
• >0 on project basis
Churn • Churn rate • Churn < 12%
CAC • CAC ratio (new CMRR)
• CMRR renewal cost
• CAC > 1
• < 30% of annualized GM
CLTV • CLTV
• G&A as % of sales
• R&D as % of sales
• CLTV>0
• G&A ~15% at scale
• R&D ~10% at scale
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-76.8
-23.7
11.825.4 15.6 14.9
14.9
20.0
10.0 10.010.0
95.0
70.551.4
45.3
36.3
27.7
20.4 18.0
3.3
SaaS company growing from 0 to $1.4B in 20 years
• Cash low point reached in year 7 at ~ -$40m
• Cash flow > 0: year 8
• GAAP profitable: Year 13
• FCF margin at scale: ~20%
Year 5 Year 10 Year 15 Year 20
COGS
S&M
R&D
G&A
EBIT
FCF -28% +6% +18% +20%
Rev. $26m $260m $850m $1.4B
Growth 100% 50% 15% 10%
20
18% 16%
45%
35%
10%
16%
15%
8%
12%
25%
SaaS SW
COGS
S&M
R&D
G&A
EBIT
P&L Structure for ~$1B company
100% = $1B $1B
FCF ~20% ~16%
• Better GAAP financials for Enterprise Software…
• …but slightly better FCF characteristics for SaaS
• SaaS EV/Sales multiple should be higher :
» Slightly better FCF margin
» Better predictability of future cash flows
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• 5 C’s matter
• Small changes (positive and negative) can have massive impact on your cash consumption
• Sales productivity (CAC and renewal costs) is the most important lever that will define your cash burn: climbing the sales learning curve is critical before scaling
• Keep the faith: at scale, there is a pot of gold at the end of this rainbow!
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