After doing a lot of reading in recent days, I thought I’d take a few minutes to share what I think is one of the best resources I’ve discovered: Bessemer’s Top 10 Laws of Cloud Computing and SaaS (PDF), co-authored by about ten people from Bessemer including Byron Deeter.
Here is a quick summary of their top 10 laws:
1. Less is more! Use the cloud where you can in your own business. I think this is a great idea in the eat-your-own-dogfood (at a model level, at least) department. While MarkLogic was not a SaaS company, we were nevertheless big SaaS users (e.g., sales automation, marketing automation, finance, time tracking, expense reporting) because I’m a big believer in the model.
2. Trust the 6 C’s of cloud finance. Your new key metrics should be (1) committed monthly recurring revenue (CMRR), (2) cash flow, (3) CMRR pipeline, (4) churn, (5) customer acquisition cost (CAC), and (6) customer lifetime value. This is a different set of metrics from the traditional enterprise software business and one worth taking the time to understand.
3. Study the sales learning curve (SLC) and only invest behind success. The SLC is a creation of former Veritas CEO Mark Leslie and discussed in this HBR article (paid) or this presentation. A simpler version of the principle is to hire reps in groups of threes and only expand when 2 of 3 become profitable in the first group. This avoids prematurely scaling-up the sales force which, probably more than any other sinkhole, has wasted countless venture capital over the past few decades.
4. Forget everything you learned about software channels. Because cloud products, by their nature, are not services-intensive and this fundamentally changes the role, and reduces the importance, of service providers in the industry equation. Put more simply: SaaS businesses are generally direct, leverage the Internet as a direct channel, and are not indirect-channel friendly.
5. Build employee software. Employees are now powerful customers, not just their managers. We’re witnessing “the consumerization of software,” so ease up. This is a very clear trend, in fact, many SaaS/cloud businesses work their way into the enterprise by starting out with individual consumer managers at small and medium businesses. In the past, you could sell executive management “a better return on information” and condemn clerks to horrific user interfaces. Those days are gone.
6. Savvy online marketing is a core competence (sometimes the only one) of every successful cloud business. Among other things this foretells of the rise of analytical and quantitative marketing VPs, over the more traditionally product-strategy and/or communications-creative types.
7. The most important part of software-as-a-service isn’t “software,” it’s “service!” Support! Support! Support! Culturally, this runs dead opposite to the traditional enterprise software “drive-by sales” approach whereby, as one search-engine salesrep once told me: “we sold the customer a Ferrari – but then we dumped the pieces in his driveway.” This natural incentive alignment (which by the way was also a by-product of the vertical-focus strategy at MarkLogic) is one of my favorite features of the SaaS model.
8. Leverage and monetize the data asset. You can do this by leveraging your expertise to identify the metrics and dashboards of most analytic value and further by then selling industry benchmark data on them. This, to me, is one of the more obvious SaaS opportunities, yet nevertheless to-date, in my experience, one of the most unexploited. I expect to see much more progress in this area in the coming few years.
9. Mind the GAAP. Cloud accounting is all about matching revenue and costs to consumption … except when it’s not (i.e., professional services). Taleo’s struggles have been well publicized, Bessemer’s paper provides a great overview of the issues, and for those who want to know more, here is an excellent paper (SaaS is Different, An Accounting Primer for SaaS Companies by Jay Howell of BDO) that discusses SaaS accounting differences which are primarily related to (1) recognizing revenue over the term during which the service is live/delivered and (2) pro-rating professional services over the full duration of the software-service contract and potentially the lifetime of the customer relationship.
10. Cloudonomics requires that you plan your fuel stops very carefully. SaaS companies are capital intensive and typically require at least 4 years before they are cash-flow positive. NetSuite needed $126M before its IPO, DemandTec $66M, Salesforce $61M, and SuccessFactors $45M.