David Skok. Serial Entrepreneur turned VC (Matrix Partners) Author of ForEntrepreneurs Blog

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1 David Skok Serial Entrepreneur turned VC (Matrix Partners) Author of ForEntrepreneurs Blog

2 The Key Drivers for SaaS Success

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4 What Outputs do we want to optimize?

5 Growth Profitability Cash

6 What s so different about SaaS? $1,000 Cash Flow for a Single Deal $- $(1,000) Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 $(2,000) $(3,000) $(4,000) $(5,000) $(6,000) $(7,000) CAC (Cost to acquire the customer) Subscription payments * GM%

7 Cash Impact of a typical deal $3,000 $2,000 $1,000 $- $(1,000) Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 $(2,000) $(3,000) $(4,000) Negative Cash Flow $(5,000) $(6,000) $(7,000)

8 If cash flow is bad for one customer what happens when we grow, and add many more customers?

9 Model: slow increase in the no of customers added every month $1,500,000 Cash Flows $1,000,000 $500,000 Subscription Payments * GM% $- $(500,000) Month 1 Month 3 Month 5 Month 7 Month 9 Month 11 Month 13 Month 15 Month 17 Month 19 Month 21 Month 23 Month 25 Month 27 Month 29 Month 31 Month 33 Month 35 Month 37 Month 39 Month 41 Month 43 Month 45 Month 47 Month 49 Month 51 Month 53 Month 55 Month 57 Month 59 CAC $(1,000,000)

10 Cumulative Cash Flow $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- $(1,000,000) $(2,000,000) $(3,000,000)

11 The SaaS Cash Flow Trough $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- $(1,000,000) $(2,000,000) $(3,000,000)

12 The thing that surprises many investors & boards of directors about the SaaS model is that, even with perfect execution, an acceleration of growth will often be accompanied by a squeeze on profitability and cash flow. Ron Gill, CFO at Netsuite

13 What s the impact of faster growth? $25,000,000 $20,000, more Customers/Month $15,000,000 $10,000,000 Cash Flow Trough gets deeper 5 more Customers/Month $5,000,000 2 more Customers/Month $- $(5,000,000) $(10,000,000)

14 When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?

15 Unit Economics A Powerful Tool

16 Unit Economics Can I make more profit from my customers than it costs me to acquire them?

17 Unit Economics CAC LTV Cost to Acquire a Customer Lifetime Value of a Customer

18 A Viable Business Model CAC < LTV But surprising how many Entrepreneurs underestimate CAC

19 First Guideline for SaaS Success LTV > 3x CAC

20 A Deeper Look at LTV

21 Computing LTV Conceptual formula: LTV = Avg Monthly Profit per customer Customer Lifetime

22 Computing the Customer Lifetime Customer Lifetime = 1 Churn

23 So CHURN is an important driver

24 Customer Churn vs $ Dollar Churn

25 Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 2 $5k MRR Starting period

26 Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 1 $1k MRR Customer 2 Churned 50% Customer Churn 83% $ Dollar Churn Customer 2 $5k MRR Starting period A year later

27 Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 1 Churned 50% Customer Churn 17% $ Dollar Churn Customer 2 $5k MRR Customer 2 $5k MRR Starting period A year later

28 Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 1 Churned 50% Customer Churn Customer 2-16% $ Dollar Churn $7k MRR Customer 2 $5k MRR Starting period A year later

29 Negative Churn Expansion Revenue from Existing Customers > Revenue Lost from Churning Customers

30 Implies another part of the Sales Funnel Top of Funnel Middle of Funnel Sales Expand, Upsell, Cross Sell

31 How do we get Expansion Revenue? If we only have one SaaS product, what more can we sell the customer?

32 Variable Pricing Axes A critical factor for expansion revenue

33 Driving SaaS Success Features Basic Edition Using Key Metrics

34 Users Driving SaaS Success Features Basic Edition Using Key Metrics

35 Users Driving SaaS Success Features Basic Edition Using Key Metrics Depth of Usage Examples: Mailing list size Database size Amount of storage used

36 Another Important Variable: CASH

37 Cash Consumed Hugely impacted by Months to recover CAC

38 Impact of Months to Recover CAC $25,000,000 Cumulative Profit / Cash Flow $20,000, months to recover CAC $15,000,000 $10,000,000 $5,000, months to recover CAC $- $(5,000,000) Month 1 Month 7 Month 13 Month 19 Month 25 Month 31 Month months to recover CAC Months to recover CAC: 6.3 Months to recover CAC: 12.5 Months to recover CAC: 18.8

39 Impact of Months to Recover CAC $25,000,000 Cumulative Profit / Cash Flow $20,000, months to recover CAC $15,000,000 2x Deeper P&L trough 2x longer to reach breakeven $10,000,000 3x Deeper P&L trough 3x longer to reach breakeven $5,000, months to recover CAC $- $(5,000,000) Month 1 Month 7 Month 13 Month 19 Month 25 Month 31 Month months to recover CAC Months to recover CAC: 6.3 Months to recover CAC: 12.5 Months to recover CAC: 18.8

40 Second Guideline for SaaS Success Months to recover CAC < 12 months Required for Capital Efficiency

41 More On CAC The impact of sales complexity

42 Sales Complexity Freemium No Touch Self- Service Light Touch Inside Sales High Touch Inside Sales Field Sales Field Sales with SE s

43 How I assumed the two would relate

44 A rough estimate of CAC versus Sales Complexity Freemium No Touch Self- Service Light Touch Inside Sales High Touch Inside Sales Field Sales Field Sales with SE s Rough Estimates of Cost of Customer Acquisition (CAC) $0- $40 $30 $200 $300 - $800 $3,000 - $8,000 $25,000 $75,000 $75,000 $200,000

45 The relationship is roughly exponential

46 CAC (logarithmic) Sales Complexity

47 The Primary Unit of Growth Adding a Salesperson

48 Revenue vs Expense Expense Losses MRR Month 1 Month 4 Month 7 Month 10

49 The SaaS Cash Flow Trough $400,000 Cumulative Net Profit - New Sales Hire $300,000 $200,000 $100,000 $- $(100,000) $(200,000) Total amount invested: $110k 23 Months to get back the investment But a great return on investment

50 What happens if we hire 2 sales people every month?

51 What happens at the company level when we add 2 new sales hires every month? $4,000,000 Cumulative Net Profit $3,000,000 $2,000,000 $1,000,000 $- $(1,000,000) $(2,000,000) $(3,000,000) Total amount invested: $2.6m 32 Months to get back the investment

52 Comparison: hiring one versus two sales people per month $4,000,000 Cumulative Net Profit $3,000,000 $2,000,000 $1,000,000 $- $(1,000,000) $(2,000,000) Month 1 Month 3 Month 5 Month 7 Month 9 Month 11 Month 13 Month 15 Month 17 Month 19 Month 21 Month 23 Month 25 Month 27 Month 29 Month 31 Month 33 Month 35 $(3,000,000) 1 sales hire a month 2 sales hires a month The cash flow trough is halved Not adequately shown, but the acceleration after breakeven is also halved

53 Salesperson Unit Economics CA OTE C 5x < Quota LTV On Target Earnings A typical good ratio is around 6x in SaaS

54 CASH IN ADVANCE

55 Annual up-front payment Instead of Monthly

56 What happens if we collect a year s payment in advance? Looking at the whole company picture when hiring 2 salespeople per month $2,500,000 Cashflow comparison - monthly payments vs year in advance Cumulative Cashflow comparision - monthly payments vs year in advance $2,000,000 $1,500,000 $40,000,000 $35,000,000 $30,000,000 $25,000,000 $20,000,000 Eliminates the cash flow trough, and means $35m more cash in this scenario $1,000,000 $15,000,000 $10,000,000 $500,000 $5,000,000 $- $- $(500,000) Month 1 Month 4 Month 7 Month 10 Month 13 Month 16 Month 19 Month 22 Month 25 Month 28 Month 31 Month 34 $(5,000,000) Month 1 Month 3 Month 5 Month 7 Month 9 Month 11 Month 13 Month 15 Month 17 Month 19 Month 21 Month 23 Month 25 Month 27 Month 29 Month 31 Month 33 Month 35 Cumulative Net Profit Net profit Net Cash Flows Cumulative Net Cash Flows

57 Summary

58 Summary Key Drivers of SaaS Success: Months to recover CAC LTV:CAC Ratio

59 Reduce CAC Lower costs per lead Increase Funnel conversion rates Increase PPR (Productivity per Sales Rep) Simplify your product Reduce human touch

60 Increase LTV Achieve Negative $ churn Improve product stickiness Sell to the right customers Nail On-boarding and Customer Success Use variable pricing axes Nail expansion sales Increase Gross Margin % Increase average deal size

61 For more information Visit my blog: Full slide deck is available here: