Over 12,000 participants from 96 countries flocked to San Jose at the southern tip of Silicon Valley to take the pulse of the cloud, to network and make deals at the mega-conference SaaStr 2019, the biggest event in the world for the SaaS industry. Standout Capital was on location so please join us in this blog for a roundup of trends, stats and insights from some of the industry’s most successful people and companies.
SaaS is software as a service, or in other words – cloud-based software that users can access through any browser without the need for installing it on your computer, paid with a subscription for as long as you want to use it. It’s simple, efficient and a fast growing enterprise software industry. At SaaStr, “Where The Clouds Meet”, the industry’s own annual conference, you will find both established SaaS companies like Hubspot, Zendesk, Dropbox, Zoom and Slack as well as fast-growing new startups. Most of the valley’s VC investors are here, and so are the tech giants such as Amazon, Google and Microsoft. Standout Capital’s investment team and our portfolio company Miradore also went to SaaStr and here’s our five key highlights:
- SaaS is a fast growing industry approaching a market value of 1 trillion dollar
- As SaaS has matured as a sector, there is also set of standard benchmarks and KPIs
- SaaS companies are aiming higher today, $1 billion in ARR is the new black
- SaaS companies and public clouds like AWS and Google drive innovation together
- It’s not only technology, but also how to create successful and agile SaaS cultures
To set the stage, the SaaS industry is getting big. Byron Deeter and Kristina Shen from Bessemer Venture Partners provided some insight into the key data points of this relatively new market. There are currently over 55 private cloud companies with a valuation of over $1 billion. 2018 alone saw over $90 billion worth of M&A deals in the cloud and SaaS space and there was $44 billion in added market cap through IPOs. The demand for cloud shares has hit record highs. The total market cap of cloud and SaaS companies is now approaching $1 trillion (it currently stands at $690 billion).
The Annual Recurring Revenue (ARR), is at the core of any SaaS business, and it’s different from “revenue” which is backward looking and usually based on the previous calendar year or the Last Twelve Months (LTM), while the magic ARR metric is forward looking and estimates future “secured” or recurring annual revenue based on the subscription revenue in the last recorded month x 12. The beauty of the SaaS subscription model is that revenues are highly predictable, as long as you can fuel and forecast the growth, while keeping customer retention high (and correspondingly churn low). In this respect, SaaS, or any business with recurring models, is like the rent in real estate, but without the physical constraints of buildings and land. All you need is a sticky product with market-fit, great user value, low customer acquisition cost, a sales machine and the digital, global infrastructures for marketing and delivery.
As experienced SaaS investors, Bessemer Venture Partners are interested in building resilient companies with sustainable growth and profitability. Their assessment model is based on a formula of: Year-on-Year % growth in ARR + customer retention + capital runway to take the company to the next stage + NetNew ARR compared to Net Burn (spending efficiency). By analyzing how good SaaS companies are at these four disciplines, they can attach a score. For example, the best SaaS companies today have growth of up to 200% Y-on-Y growth, 150% customer retention (meaning that the customers are growing faster than the churn), 2-3 years capital runway before next financing, while having high spending efficiency, adding up to 1.5 times more ARR than they spend (meaning that $50 million invested will generate $75 million new ARR). The average time to reach $100 million ARR for the top 25% listed SaaS companies were 5 years. The fastest of them, Slack, reached $100 million in just 3 years. The average valuation multiple is 10x revenue.
Jason Lemkin, the CEO and founder of SaaStr, offered what is the new milestone to reach for the new breed of SaaS companies, or “Generational Companies” (the SaaS companies belonging to the current generation of cloud-based software companies). The rule of thumb used to be reaching Annual Recurring Revenues of $100 million before you could go public. The new number to aim for is $1 billion ARR, and it doesn’t even mean that you are going for an IPO at that stage but keep on fuelling growth with private capital. Having said that, most of the major SaaS companies are now public.
For example, RealPage (property management SaaS), and Veeva (SaaS for life sciences), are now at an ARR of $1.1 billion, Shopify (e-commerce SaaS that recently acquired Swedish TicTail), has reached $1.6 billion ARR, Dropbox (file hosting), now enjoys $1.8 billion ARR while Workday (HR software), has an ARR of a whooping $3.8 billion. Significant and fast growing SaaS companies that are now approaching the $1 billion ARR threshold include Hubspot (marketing & CRM), Zendesk (helpdesk tool), Okta (identity management), New Relic (software analytics), Twilio (communication APIs), Zoom (video conferencing), and Box (file storage). These are all the new nobility of the tech industry and Silicon Valley.
So-called unicorns are companies with $1 billion valuation, but the good news is that there is a new generation of software companies that have or are on their way of reaching $1 billion dollar in revenues. This means that there is a real and fundamentally strong tech sector with substantial and growing software companies solving real needs for real users. And that is also one reason why there is currently not much talk of a tech bubble in Silicon Valley.
Ryan Smith is the founder and CEO of Qualtrics, a SaaS for real-time customer insights. He sold his company to SAP for $8 billion in 2018. How could that valuation be justified? Usually it’s the rare combination of a scalable tech business that is growing fast with profitability, with predictable revenues at already high levels, and a large customer base with high retention in a big market, set for further growth. In Qualtrics case, at the point of the purchase by SAP, they had 9000+ customers, with revenues growing 40% year-on-year with positive cashflow at some $300 million in Annual Recurring Revenue.
Most SaaS products are enterprise software, i.e. products and tools for use in businesses, which is also the focus at the SaaStr conference. But these business products are learning a lot from their consumer product colleagues, especially in terms if user experience. This focus on customer experience is essential as confirmed by Ciara Peter, Invision, Bela Stepanova from Box, Craig Villamor from Google Maps and Shanee Ben-Zur from Crunchbase in a discussion about how to build “consumer grade” enterprise software. It’s basically about “building products that don’t suck” and create the same great user experience in enterprise software as in consumer product, by thinking about the actual end user (which is not always the same thing as the customer, which might be a C-level manager making software purchases). That’s why a modern enterprise SaaS company should spend facetime with users, not only customers. However, although the “consumerization” of software is a buzz, the value finally comes down to usability and actual results in enterprises. And here a word of caution is needed. Consumer software is usually simplified to reduce friction and promote usage and create addiction. This is sometimes not always desirable in enterprise products.
Mark Roberge is the former CRO (Chief Revenue Officer) at Hubspot and a lecturer at Harvard Business School. He too underlines the importance to focus on the users and their product usage, not only revenue. You have to look at both the Annual Revenue Retention (the ARR at start of year – ARR churn) and Annual Customer Retention (number of Customers – customer churn). Churn is a silent killer. This is the key question; How do you identify and measure the customer success that makes the customer to stay? If the user value and experience is low, it will soon lead to churn in borth revenue and number of customers. That’s why identifying a leading indicator to customer success (and potential churn) is critical. So, how do you define your customer success leading indicator? It should be observable over a time period, preferable in weeks or months, not quarters or years. Ideally the measurement is automated and correlated to the product CVP (Customer Value Proposition). Look at metrics like repeat purchase, referrals, setup and usage. Just tracking revenue is usually a mistake. Here are a few examples of Customer Success Leading Indicators at three top SaaS companies:
- Slack: 2,000 team messages sent
- Dropbox: 1 file added to 1 folder on 1 device
- Hubspot: Using 5 of 20 features within 60 days
“Sales is first and foremost about creating customer value. Revenue and profits are an outcome of customer value creation”, says Mark Roberge.
Zendesk is the Danish star in the SaaS industry, growing ARR 40% in the last quarter and set to turn over $800 million in 2019 (from $600 million in 2018). The market value on NYSE is $8.3 billion (Zendesk listed in 2014). The founder & CEO Mikkel Svane says it’s a “crazy amount of change and disruption” going on and a challenge to grow an already big organisation at that pace. They moved to Silicon Valley early from the origins in Copenhagen as a startup in 2008. He thinks that 10 years ago, you could hardly build a tech business in Europe, as there was no startup community and not much venture capital. Now it’s different, and the main challenge is rather to build products with great user experience given the extremely competitive environment and quest for customers’ time and attention when everything is available all the time on every device. Customers have new demands and businesses and enterprise software need to be as agile as consumer services. “The next generation of consumers is ruthless”, he says. Zendesk has learnt much by working with Uber and others, products that have set a new standard for how consumers expect software to work.
Mikkel Svane says that much has changed also in the way software companies are build today. Before, SaaS-companies had to build pretty much everything themselves. Now, you can buy the entire stack from AWS and other clouds. What used to take a startup 12 months can now be set up in a few days. The role of the public clouds is growing in importance, and it should really be the main choice for both startups and established businesses, he thinks. It’s a paradigm shift. He sees the public cloud infrastructure as their platform, enabling flexibility, speed, agility and the ability to run faster. The user experience is Zendesk’s top priority, in summary; the service must have super ease-of-use. That also translate to the need to scale the applications with use, which is where the public clouds play an important role as they can help a SaaS scale seamlessly.
The big public clouds are where the SaaS companies, or at least their products, naturally reside, as digital infrastructure like servers and networks are now offered as services too. As a consequence, the relationship between SaaS companies and the big cloud providers offering their IT platforms and various capabilities (for example AI, machine learning and analytics), is an important strategic cooperation and partnership. And the big clouds accordingly display an obsession to build their customers’ businesses.
Sandy Carter, Vice President, Amazon Web Services (AWS), explains how they work with customer projects. They always start with the customer and their business, not the technology, writing “press releases” and “FAQ” to formulate a vision for the success they want to achieve before even writing a single line of code. They have small customer focused teams with a start-up approach to customer projects, working “50/50” (i.e. spending half of their time with the customers, and the other half in internal meetings etc). They also try to deploy AWS capabilities whenever possible, for example helping their customer Redfin, a real-estate website, to set the right house prices on their website using AI. As constant innovation is the only way to stay competitive, AWS helps customers to innovate and create “growth flywheels”.
Eyal Manor, Vice President, Google Cloud, outlines a number of trends in the cloud infrastructure and how it helps customers to stay competitive. The choice of partners is very strategic, it can accelerate your business. Also at Google projects start with the customers and development according to business objectives, maintaining the “voice of the customer”. There are so much more cloud services and capabilities than two years ago, for example emergence of new AI and ML services, and Google wants to be a platform that allows companies to focus on business logic. Meanwhile, the customers also demand much more technical discussions. One such technical concern is the rise of containers that enable customers to move between clouds, as they don’t want to be locked in. It’s thus a strategic consideration. Other questions involve security, local compliance (like GDPR in Europe) and how to make partner integrations. The two main themes are speed and data. Speed concerns maximizing development velocity and development team productivity for faster go to market, automated DevOps, using ready made models (for example AI and ML), aligning sales, marketing and product development.
Integrating engineering and marketing is a special issue, as new developments and product features need to be communicated to customers in a timely manner. But companies should be aware of bombarding customers with changes and new features, while still making sure they get the features they need and want.
Being able to use data for rich insights is getting crucial for businesses, especially for data-driven SaaS companies, while still protecting user data and integrity. Application Data Management (ADM) is important to help users govern and manage data in business applications, and make deep integrations from day one of the data pipeline.
However, a fast-growing SaaS is not only about creating amazing technology and products with great user experience, but just as much winning teams and sales organizations. Given the rapid pace in the SaaS industry with demands on speed, scalability and performance, how to build a strong culture is essential.
We enjoyed listening to Matt Schatz, the Global Head of Sales at WP Engine, a SaaS for managed WordPress hosting, as he shared his experience from building a sales organization for a SaaS business and scaling it globally. Everybody likes to work for a fast growing companies where they can get their own “first stories”; for example, “I was the first employee at the Paris office”. It’s an adventure and it looks good on your CV. In a strong sales culture where your core values is at work every day, everybody knows that it’s a hard job, but can also be the best job, with no politics or back-stabbing. A strong sales culture is also based on data where the A-players rely more on science than luck to win their deals. Maybe the hardest part in a scaling global sales organization is facetime, as the teams become geographically scattered. The solution is to spend increasing management time on visiting every office personally, a strategy that might be increasingly controversial in our age of “flying shame”. A SaaS offering like Zoom is a good alternative for meeting online instead, but just as often.
Keith Rabois at Khoshla Ventures, an investor in companies like PayPal, Linkedin and Square, offers more advice on building great teams. One challenge is the team set-up. You can raise the odds of success in a start-up with 50% just by changing the team composition, he thinks. So it’s a well invested effort to do matchmaking to add the missing team DNA. That’s why he also likes to get involved as early as possible to help with the team and get in before the “concrete solidifies”. Furthermore, it’s crucial to pay attention to individuals. Every person in a company has a growth curve – and the company itself has a growth curve. You can only promote people with a steeper growth curve than the company, he says.
Finally, Jennifer Lawrence (not that Jennifer Lawrence), Head of Sales at Duo Security (a SaaS for protecting sensitive data) shared her secrets for a great sales culture. First, get the whole company involved and create teams of hunters-helpers, not a bunch of “sales heroes”. Second, it’s not what you sell, but how. Here we’re talking data driven sales, and more specifically how you super-align sales with marketing, through analysing and selling to the right leads. Third, create a calm and positive culture, instead of increasing pressure, which might be a challenge given the extremely high pulse in the SaaS industry.
Building and running a SaaS company is an art in itself. Tomasz Tunguz from Redpoint Ventures is an experienced SaaS-investor and provided much insight into the nitty gritty of operating a SaaS business, and provided some of the the metrics and insights you should aim for based on their research and surveys.
- Annual contracts are better economics than monthly contracts
- Base your free trials on time or usage
- A long trial doesn’t make better conversions, shorten the trial instead
- Create strong lead generation, hire sales people to convert them (i.e. call leads)
- 4% is a good conversion number for unassisted conversions
- But shoot for 15% with assisted conversion (i.e. sales people)
- Require payment at the start of the funnel to increase conversion later
Finally some words on marketing, a key aspect of growing a SaaS business online. One of the leading figures in the SaaS landscape is Brian Halligan, the CEO and founder of Hubspot. One of his main ideas is that the traditional funnel in online marketing and sales is more or less dead. The funnel starts with marketing, that drives leads to a website or app where the leads are converted to actions like sales and sign-ups in an assisted (sales people) or unassisted (self-service) way. But what if the first part does not work? Brian Halligan thinks that trust today is at an all-time low, i.e. people don’t really believe in either news, politicians or advertising. Instead, people trust friends and colleagues.That’s why customers are your best marketers, and the best companies create products that can grow through their customers usage and network effects. Thus, as the funnel is not really working, the model is more like a flywheel with reinforcing dynamics that can drive growth. A great product will help create its own growth.
To sum up, the SaaS industry is growing fast and with increasing self confidence. You can even say that SaaS is eating software, at least the old kind that you buy and install on your server. And SaaS is eating the software market in two ways, by new SaaS companies that offer smarter solutions that were previously offered by traditional so called on-prem software (installed on premise instead of residing in the cloud), and by traditional software companies trying to transform their old products to SaaS. However, this was a story that we did not hear at SaaStr, most of the traditional software giants like SAP or Oracle were simply not there among this new generation of SaaS companies.