Please note that I am switching the Kellblog RSS feed to http://feeds.feedburner.com/Kellblog.
While I will leave the old feed turned on for some long time (so as to not abandon subscribers), I would greatly prefer if all readers could quickly subscribe to the new feed address http://feeds.feedburner.com/Kellblog.
Thank you!
Posted in Uncategorized
During my time at Business Objects, we did some work with Forbes Magazine and its publisher, Rich Karlgaard. As it turns out, we live in the same town and about once a year I have pleasure of bumping into him in the local grocery store.
Because of this and because he never lacks, shall we say, “point of view,” I always keep a special eye out for his column/blog, Innovation Rules, when reading Forbes. In a recent issue, Rich offers his (judging by the reader comments, controversial) 12-Step Program for fixing America. While I don’t want to jump into the fray on his other 11 points, I must say that I largely agree with point 9.
Dump Sarbanes-Oxley. Enacted in 2002 to prevent the next Enron scandal, Sarbox has thrown sand into the gears of entrepreneurship. It has severely slowed the U.S. market for IPOs, since companies earning less than $200 million in revenue can’t afford the legal and accounting costs of being a public company today. Deprived of capital, young companies not named Facebook or Twitter prematurely stagnate or sell out. Investors are deprived of opportunity, and the nation is deprived of independent companies that surpass the $1-billion-in-revenue mark.
My estimate is that Sarbanes Oxley (Sox) compliance costs a startup about $3M to $5M/year and, more importantly, is a huge distraction for a growth company that should be focused on market share capture. I’ve worked in and around Silicon Valley for about 25 years. Before Sox, every company I worked at went public and did so in the $30M to $50M revenue range. Today, that IPO bar is closer to $100M to $200M. The average time to take a company public pre-Sox was about 5 years. Today, it’s about 10 years.
The result:
So before Sox, if you wanted to be stupid you could buy shares in Beyond.com with full knowledge that they had no business and lots of disclosures to prove that. After Sox you can buy Facebook — but only if you’re already rich/accredited — and without any information or disclosures whatsoever.
This is progress?
Posted in Uncategorized
I stumbled into this press release during my morning reading (ParAccel Triples Revenue, Doubles Customers and Appoints New Executive Team in 2010) and felt an overwhelming and immediate need to use it as an educational example in public relations (PR).
CAMPBELL, Calif.–(BUSINESS WIRE)–ParAccel, Inc., provider of the world’s fastest analytic database, today announced that it achieved record financial performance in 2010 with 300 percent revenue growth over 2009. The company doubled its customer base with key enterprise wins, launched ParAccel Analytic Database (PADB) 3.0, and continued to expand partnerships with leading platform, storage and analytics vendors. To keep pace with its growth, the company hired key new executives and moved its corporate headquarters to a larger facility located in Campbell – the heart of Silicon Valley.
Here are my comments on this release:
Make supportable claims. The “world’s fastest analytic database” claim strikes me as both unsupported and unsupportable. Different databases are good at different things and there are many analytic database competitors in the market. It is not credible that any one DBMS could be fastest at all of them. But this is supposed to be a PR , not a product marketing, post so I won’t drill further.
If you’re going to talk growth, then provide real numbers. Tripling revenue sounds very nice, but from what to what? Many private companies now make these number-free growth claims, but they’re hard to take seriously. Either release real numbers or avoid talking about growth.
If you’re going to talk about growth, do the math correctly. Tripling revenue does not equal 300% growth. Think about it: 100% growth = doubling revenue, 200% growth = tripling revenue, so 300% growth = quadrupling revenue. This is a serious credibility blunder and sadly it’s not uncommon. Get a finance person to review press releases with numbers in them.
If you’re doubling customers and tripling revenues, then you’ve got me asking questions. People will cross-check your numbers, particularly when you’re providing only pieces of the puzzle and have already made one math blunder. I think they mean to say that they tripled annual revenues and doubled the cumulative size of the installed base (i.e., number of customers). Since I’m not sure what to make of that, I made a little model in Excel. I think what the model tells me is that, ceteris paribus, when you are on a strong growth trajectory doubling the installed base is not enough to triple revenues. I’m sure there are better ways to analyze this, but that’s not my point. My point is, as a marketer, when you are providing only pieces of the puzzle you are hanging yourself out to dry if those pieces are inconsistent or provide a clue to a less rosy bigger picture.
By the way, my guess, based on playing with the model below, is that the company had a weak trajectory in 2006-2009 and then had a nice 2010.
“The data warehouse market, and specifically the market for high-performance analytic databases, is growing and evolving at an exponential rate;
Don’t say “exponential growth” if you don’t know what it means. I love the data warehousing market. It is large, growing, and healthy — but it is not growing exponentially. Exponential growth has a precise meaning. The data warehouse market is growing at a 12% (linear) rate and will $13.2B by 2013. That’s huge and wonderful already. Saying the growth is exponential just damages credibility and undermines an otherwise very strong message.
Say “Appoints New Executives,” not “Appoints New Executive Team.” The new CEO joined in August, so that’s not news. The company has appointed a new COO, CMO, and VP of International. Those are important roles and should be announced. But the headline makes it sound like the board blew out the entire executive staff and replaced them in one shot. This is not only a non sequitur (i.e., “we’re doing so well we fired everyone”), it’s also inaccurate.
“With this new, energized executive team in place, strategic partnerships with NetApp, … and leading business intelligence vendors, combined with … ParAccel is poised for an even more impressive 2011.”
Be careful in expectations management. While I just love the “energized” comment (i.e., were the old guys tired?) my real issue is that the company is saying that 2011 will be better than 2010. They shouldn’t say this unless they plan to more than triple revenues in 2011 and more than double the installed base. Logically, anything less would then be a disappointment.
To keep pace with its growth, the company hired key new executives and moved its corporate headquarters to a larger facility located in Campbell – the heart of Silicon Valley.
Be credible. Unless I somehow misplaced Bill and Dave’s Garage, Palo Alto is the heart of Silicon Valley. In 25 years in and around Silicon Valley, never before have I heard Campbell referred to as its heart. C’mon.
Reminder: see my FAQ for relevant disclaimers.
Posted in Marketing, Uncategorized
I had breakfast the other day with a software entrepreneur. When I asked if his company was on a subscription or perpetual model he said: “we should kill the guy who invented the perpetual license — I’m on the perpetual money model, subscription all the way.”
Having worked largely in perpetual license firms, I admit there are many downsides to the perpetual model. Companies on perpetual models typically:
That said, there are many ways to mitigate each of the above points and all of the world’s largest software companies, such as Oracle and SAP, still do most of their business on a perpetual license model.
Over the past decade companies like Salesforce, NetSuite, and SuccessFactors have pushed the software as a service (SaaS) model where the vendor both runs the software and bills on an annual subscription basis to use it. While the SaaS model cut its teeth in applications like sales force automation, vendors are increasingly selling platform as a service (PaaS) offerings as well, such as Amazon Web Services, Google AppEngine, or Force.com.
Clearly SaaS interest and hype remain strong. Salesforce is trading at 100x FY11 earnings. Bankers have told me that the IPO bar for SaaS companies is $75 to $100M in revenue, while for perpetual companies it might be 1.5 times higher than that. A recent Software Equity Group report pegs the median enterprise value (EV) of of SaaS companies at 4.9x revenues, almost double the 2.7x revenues for perpetual companies. On an EV/EBITDA basis, it’s even more dramatic with SaaS companies at 44x and perpetual ones at 13.6x.
Given all this, I thought it would be fun to make an Excel model that concretely demonstrates some of the differences between perpetual and SaaS software companies. To do so, I’ll first model a fictitious, red-hot software startup on a perpetual basis. Then I’ll remodel the same company on a SaaS basis. Then we’ll play around with the models and see what we find. (For Excel geeks, my model is here; you’ll need to download it.)
To make my model, I started with bookings for the perpetual company and hard coded $5M in the first year on a reasonable ramp. Then I made a set of reasonable assumptions (for a hot startup) that drove the rest of the model: 100% license bookings growth, a 20% maintenance rate, a 90% maintenance renewal rate, a 50% rate of professional services organization (PSO) services bookings relative to license, and a bookings-to-revenue conversion rate of 85% for PSO in the subsequent quarter. To keep things simple, I didn’t model months, I didn’t model cash, I assume all bookings happen on the last day of the quarter, and I assume all license revenue is immediately recognizable.
Then I remodeled the company on a SaaS basis. The most important assumption to make here is labeled “subscript as % of license” – i.e., if someone was ready to pay 100 units for a perpetual license to use something, presumably they want to pay some fraction of that for a one-year subscription to use it. (I’ll call this F for fraction.) For the initial model, I assumed F=50% which is arguably aggressive. I kept the renewal rate at 90%. I assumed that configuring a SaaS system requires less PSO than customizing a perpetual one, so I assumed a 50% PSO bookings rate relative to the subscription (or 25% of the total PSO required from the perpetual vendor). I assumed subscriptions were one year and revenue was recognized ratably over the year and that all orders were received the last day of the quarter.
When you make these two models, here is what you find:
In year 4,
Valuation and The Fallacy of Equivalence
Using the standard multiples above, let’s see what each of our companies is worth:
Simply put: the stock market works. With only a 20% difference in valuation between what ostensibly seem like two very different companies you can see that higher EV/R multiple for SaaS companies is almost completely offset by the increased difficulty of building a SaaS revenue stream. Wall Street “sees through” the differences in the models and values the companies roughly equivalently. Put differently, SaaS companies fetch 1.8x the revenue multiple of perpetual companies because they are worth 1.8x the revenue multiple of perpetual companies.
During the past few years I have spoken with several CEOs who transitioned their companies from perpetual to SaaS. The standard word is that it takes 3 years to make the transition and the transition must be a top-three company goal for that entire period. While there are many good reasons for perpetual companies to consider moving to SaaS models, valuation isn’t one of them. Yes, you get roughly twice the EV/R multiple, but building the R (revenue) stream is just about twice as hard.
Max Schireson calls this the fallacy of equivalence. If gold is worth twice silver and assume we have an equal amount of gold as we had silver then we are worth twice as much. The fallacy is that gold is twice as hard to come by as silver so you can’t assume equal amounts — see the huge revenue delta which is largely driven by the SaaS company’s need to spread revenue over 4 quarters.
Taking a Bad Quarter
Let’s look at how each company takes a bad quarter by assuming that we hit 70% of our bookings target in 3Q13 — doing only $4M in perpetual license bookings (cell P8) and only $2.25M in new subscriptions (cell P27).
Hitting The Flat Part of the Market
Now let’s examine both companies assuming that the market goes flat in 2014 (i.e., that 2014 license bookings / new subscriptions do not grow over 2013, cells S8-V8 and S27-V27).
What going on here is simple: volatility is being damped — for better and for worse — by the SaaS company’s need to spread revenue over the four quarters following the booking. That makes it harder to grow the revenue stream quickly. It also makes it harder to change once established.
Sales Compensation
One tricky issue in the SaaS model is sales compensation. In a typical perpetual company total sales commissions (at all levels) add up to around 10%. So, for 100 units of revenue, you pay 10 units in commissions. Sales reps are usually not paid on the 20 unit annuity stream of maintenance renewals.
In SaaS model, we have a conflict. If you assume the annual subscription fetches 50 units (i.e., if F=50%):
So what do you pay: 5, 15, or 30 units? I believe that most SaaS companies end up splitting the difference in the some way, perhaps paying on a declining scale over the first 3 years. If you have good examples here, please share them in the comments.
Cash
While I didn’t model cash in the spreadsheets, one huge issue is the timing of commission payments. For example, if a company were to adopt the 3-year 15-unit commission argument and foolishly pay those three years up front, it would have a big cash consumption issue because effective year 1 commission rates would be 15/50 = 30%, three times the industry norm of 10%.
I think the best answer is to pay commissions on an declining scale and timed close to the receipt of cash from the customer (e.g., on booking the annual renewal).
What if F>=1?
Recall earlier that we talked about the fraction, which I called F, that represented the fraction you would be willing to pay to use something for a year as opposed to license it forever. Because of the big difference between “forever” and “1 year,” I led you easily to the assumption that F should be less than 1.
But should it be? When you look at total cost of ownership, it’s not obvious. In the perpetual model you need to license the software, pay annual maintenance, pay typically 4x the license payment in total deployment costs, and buy the hardware on which the system will run.
In the SaaS model, you have the subscription cost each year and some modest year 1 costs to configure the application. See this simple model:
With F at 50% the SaaS TCO is $200K vs. $610K for the perpetual model. With F at 100% the SaaS TCO is $400K. Even with F at 150% the SaaS TCO is $600K — still less expensive than the perpetual TCO at $610K.
And this, by the way, isn’t theory. A friend who worked at Siebel told me that a typical Siebel sales perpetual license seat sold for about $1,500 back in the day. A friend’s company recently renewed Salesforce at roughly $100/seat/month, that is $1,200/seat/year — not quite F=1, but in the same order of magnitude.
Let’s finish the post by seeing what happens to our model when we assume that F=1, i.e., that the SaaS vendor can get an annual subscription equivalent to the license fee a perpetual vendor would have charged.
In year 4, our our SaaS company is now $55.8M or 90% of our perpetual company, but with all the added benefits of being on a SaaS model. In terms of valuation it is now worth $274M vs. $167M for the perpetual company. This is clearly SaaS panacea. The implicit assumption that an annual subscription to use a service should cost less than equivalent perpetual license is both invalid from a customer TCO viewpoint and suboptimal from a SaaS vendor viewpoint.
While this would seem to suggest that every software vendor should switch to a SaaS model, it is important to remember that many customers don’t want to buy — particularly development platforms — on a SaaS basis. Why? Some of it is about ownership and control. But much of it is because many customers think on time horizons much longer than a 3-year TCO. With F=100% in our TCO model (and ignoring TVM effects), the SaaS system becomes more expensive after year 6.
If you like playing with financial models, I encourage you to download the model spreadsheet that I built for this analysis, play with the assumptions, and share your own conclusions. My plan is to do some open source analysis by setting F=35% and the license fee to zero.
Posted in SaaS, Uncategorized
After six great years, I have resigned my position as CEO of MarkLogic Corp. I can say that the parting is amicable and the board and I have been working for several months to ensure a smooth transition because we have a shared interest in the company’s continued success going forward.
When I left my job running marketing at BusinessObjects, I wanted to see if I could be a general manager, run a P&L, and grow a company to a substantial size. I’ve accomplished what I set out to do and then some. What I do next is unclear: perhaps grow another startup or return to a large organization in a GM/CMO capacity. I’ll figure it out in the coming months.
I am proud of what we accomplished during my six years at the MarkLogic: acquiring over 200 enterprise customers, growing annual revenues at a 75% CAGR, raising $27.5M in venture capital, and growing the company from 40 to over 230 employees.
I am particularly happy to say that I will be leaving the company in a position of strength, having exceeded the 2010 revenue plan targets and with nearly $20M cash in the bank.
I believe that MarkLogic has great technology, great people, great customers, great partners, and great future potential.
I would like to say “thank you” to the large number of people who contributed to MarkLogic’s success during the past six years. In particular, I’d like to thank:
Since I seem to have a reputation for being a rather demanding manager, I’d like to offer a special thanks to the three people on the executive staff who were with the company the day I joined and who have thus shared (and/or endured) my entire MarkLogic tenure: Ron Avnur, Josh Narva, and Max Schireson. I can’t think of three finer people with whom to have worked.
Thank you to everyone.
Posted in Uncategorized
Just a quick post to share the slides I presented last week at the London Online Information 2010 show at Olympia. I spoke on a panel on mobile moderated by Ed Keating of the SIIA, with fellow panelists Alan Pelz-Sharpe of the Real Story Group and Robin Neidorf of Freepint.
My main argument was that publishers should not consider mobile strategy and value proposition independently, but jointly — as portrayed in the strategy quadrants slide that I came up with on slide 10.
Posted in Uncategorized
I must admit that I’ve become a huge fan of MIT’s Technology Review during the past year. For example, I think their recent cover story, The Web is Reborn, is a must-read for managers on Internet strategy (and is a good complement to Wired’s recent The Web is Dead.)
But in addition to having great content, I really liked the thoughts that Technology Review’s editor Jason Pontin wrote in the November/December 2010 editorial outlining his thoughts on their business model (bolding mine).
We wanted to publish the different kinds of journalism we create on as many platforms as made economic sense, but it was even more important that we should follow a consistent pricing strategy across all those platforms. Last May I wrote: “Content that some readers pay for in one medium (now, usually print) should never be offered without charge to other readers in another medium (usually electronic). Instead, publishers should distribute editorial to their subscribers on a variety of platforms. This is not to say that much content should not be freely available to readers and paid for by advertising revenues.”
For Technology Review, this means that our daily news stories and blog posts–about 80 percent of the editorial we create–can be read free on all our electronic platforms. That’s been so since we started publishing daily news and opinion, and it won’t change. But starting with this November/December issue, readers on the Web must pay to read the longer magazine stories we publish less frequently, stories that subscribers to our print and digital publications have always paid to read.
You can purchase a subscription to the print or digital magazine; the latter you can read either in a Web browser or on a tablet or smart phone. All subscribers have access to current and archived magazine stories on the Web. Readers who do not care to pay for a subscription can purchase individual magazine stories or packages of stories on all our electronic platforms. On the Web, readers who don’t know if they want to subscribe will be given three free magazine stories–a kind of metered journalism.
I hope this works for them as I’ve always believed that readers should pay for content, regardless of distribution channel, as I outlined in this post about the San Jose Mercury News. As a marketer and strategist, I also agree with flexible packaging and the freemium model.
Posted in Uncategorized
One of the advantages of children is that they keep you plugged into pop music. Hence, I’ve had the lyrics of Travie McCoy’s song Billionaire drilled into my head over the past several weeks.
I wanna be a billionaire, so freaking bad
Buy all of the things I never had
I wanna be on the cover of Forbes Magazine
Smiling next to Oprah and the Queen
As it turns out, Forbes thinks there 937 billionaires in the world, so if Travie’s wish ends up granted, he’ll be in the top 0.000014% of the population. With this as context, it did come as a surprise the other day when I stumbled into an advertising supplement in the August 30, 2010 issue of Forbes Magazine entitled So You Want To Be A Billionaire, sponsored by a wealth advisor named Hannah Grove. Part of the supplement’s pitch is to buy a book written by Grove’s partner Russ Alan Price, entitled The Family Office: Advising the Financial Elite, which fetches $150/copy.
While I doubt that any of the information presented is scientific — and I’ve not spent the $150 to find out — most of the time books like these seek to identify supposed patterns that separate the ultra-rich from the regular riff-raff one encounters day-to-day. Since they’re not scientific, the patterns are typically someone’s perception as to how the ultra-rich are different, other than the obvious “they seem to have a lot more money.”
Here are seven rules presented in the Forbes supplement. I don’t believe for a second that anyone is likely to place themselves in the top 0.000014% by following them, but I think seeing the perception an advisor to the ultra-rich (who, mind you, probably isn’t in that club himself) is interesting if not useful. The table aims to differentiate working professionals and the ultra-rich along several dimensions.
Commitment
Self-Interest
Line of Money
Connections
Payouts
Failure
Centered
In some ways the list is interesting — e.g., the attitude towards failure is in my opinion healthy, though I believe that most entrepreneurial people have it. Sometimes it’s almost tautological: saying the ultra-rich focus self-interest on making money is like saying champion athletes are focused on winning. Yes, that’s true: if you meet 10 professional athletes you will find they are very competitive people; so, however, were the 10,000 they beat out over the years on their fight to the top. That is, competitiveness was an enabling, not a differentiating trait.
Anyway, if you like this kind of information, a free teaser download is here and the full $150 book is here.
Posted in Uncategorized
See EMC’s press release on the deal here. First, some takeaways from the press release and related coverage:
So what does all this mean?
Here’s my estimate on the valuation range. This is based on math, guesswork, intuition, and standard ratios.
Bear in mind that it doesn’t take much to swing these numbers because they are built by multiplying estimates and ranges. A few changes here or there and I can $200M. Or I can get $500M. My real hope is that I have enough offsetting errors that I end up close to the right answer! If I get new information that either changes my estimates or simply provides the facts, then I will try to update this post and share it.
Posted in Uncategorized
This is a post on marketing as much as sports. Here’s my logic:
The real problem here is FIFA which stubbornly refuses to use technology to solve this problem. Video replays and ball-sensors are obvious solutions to the problem. (I’d also argue that soccer should add a fifth referee simply to manage the pushing and shoving in the box on set pieces, much as years ago hockey added a fourth one just to look after nastiness off the play.) Yet FIFA somehow insists that such things are not in the culture of soccer, which is frankly an idiotic excuse for not fixing the problem. As a friend once said about presentations — why is the presenter the only person in the room who can’t see the tweetstream? — why is the center referee the only person on the planet who can’t see the video replay?
Back to marketing, if FIFA won’t fix the problem, then over time I think Adam Smith will. People will gradually lose interest in a sport that every day becomes more and more out of touch with both technology and consumer expectations. Yes soccer has a huge worldwide audience today, but if such injustices continue, worldwide interest will erode over time, and in America, soccer — from an audience size perspective — will continue to be a C-tier sport.
Posted in Uncategorized
I'm Dave Kellogg, the CEO of Host Analytics, the leader in cloud-based enterprise performance management.
Previously, I was SVP/GM of Service Cloud at Salesforce and CEO at unstructured big data provider MarkLogic. Before that, I was CMO at Business Objects for nearly a decade as we grew from $30M to over $1B. Prior to that I ran marketing at Versant. I started my career in technical and product marketing positions at Ingres.
I love disruption, startups, and Silicon Valley and have had the pleasure of working in varied capacities with companies including 10gen, AppMesh, Hadapt, Tableau, Wall-It, and WeMakeItSafer. I also served on the board of Aster Data until its successful sale to Teradata.
I periodically speak at UC Berkeley's Haas School of Business and with an annual program from Hautes Études Commerciales de Paris (HEC).
Read Frequently Asked Questions. Contact Dave.
