Byron Deeter of Bessemer Venture Partners has a great post on SandHill.com with the Ten Laws for Being Saas-y. Required reading for anyone running a hosted software company or debating whether to jump on the software-as-a-service bandwagon. His ten laws (details on his post) are:
1. Your key business metrics are: CMRR (Contracted Monthly Recurring Revenue) and Cash – “Bookings” is for suckers.
2. 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.
3. Separate your “hunters” and “farmers” – As soon as you’ve 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.
4. It’s a whole new ecosystem – Channels are very hard for SaaS companies to build, so don’t base your plan on SIs and traditional ISVs. You will need to sell directly for a long time.
5. 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.
6. One datacenter – Invest early in backup and disaster recovery, but stick to one data center, at least until well after IPO.
7. Single instance, multi-tenant – Have only one version of the code in production. Really. “Just say no” to on-premise deployments.
8. By definition, your sales prospects are online – Savvy online marketing is a core competence (sometimes the only one) of every successful SaaS business.
9. 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.
10. 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!
hey ben,
the powerpoint can be found here:
http://www.adventurista.com/2008/02/bessemer-venture-partners-saasy.html
A couple of points more which normally all SaaS advocates overlook.
It’s a fact that, at least as it stands now, SaaS works best with SME segment and as such the SaaS service provider will have to grow client base to drive volumes. This calls for large helpdesk support for online sales if not bulky salesforce on-field.
So the two or three sales people achieving a 300 k $$ in monthly revenues is a far cry because SME demands significant hand-holding initially since SaaS offerings are not often customizable. Your sales guy should double up as SI for configuring client’s legacy database/systems to conform to SaaS formats. Unlike licensed on-premise software where you can pre-suppose hiring of consultants or SI’s by clients at their own expense, SaaS service provider does not have that bandwidth because it sells on economics.
So what will you do if you want to build scale? Simple. SaaS has to support large company demands.
The point where On-Premise enterprise software scores against On-Demand SaaS is its suitablity for large companies with 500+ users. The issues of security, compliance overshadow economics in large companies where CIOs prefer on-premise software and the sense of security that comes with it.
So the moot question every SaaS provider will have to address is less of security v. economics as much as it is about liberty v. control. The day SaaS gets to address that aspect and builds out enough versions to support all verticals which swear by licensed software, we can think of singing requiem for on-premise licensed software.
It also means the burden of capex is subtly shifting from the client budget to service provider’s by way of need for large data centers, virtualization, bandwidth cost, back up resource and remote infrastructure. SaaS offeror should do well to beef up his capital budget and still deliver on SME economics.
Hi Ben! I’m a brazilian college student and I really like your blog! I’ve been coming here for a while now, but never posted a comment before. I just created a blog of my own, but it’s in portuguese. Just thought I could add you to my favorites, is that ok? Cheers!
I always love people that make these lists. Unfortunately, they almost never work for all situations.
As a veteran SaaS guy (I have been a part of three SaaS companies in the last 15 years that have either been acquired or went public), none of them would have grown at the pace required if I followed these rules. While CMRR is important the $300K number is not always applicable.
Generally, I agree with his 10 principles, but I think the sales numbers may be off for some SaaS solutions.