Category Archives: SaaS

Kellblog (Dave Kellogg) Featured on the Official SaaStr Podcast

Just a quick post to highlight the fact that last week I was the featured guest on Episode 142 of the Official SaaStr  podcast produced by the SaaStr organization run by Jason Lemkin and interviewed by a delightful young Englishman named Harry Stebbings (who also runs his own podcast entitled The Twenty Minute VC).

In the 31-minute episode — which Harry very nicely says was “probably one of his favorite interviews to record” — we cover a wide range of my favorite topics, including:

    • How I got introduced to SaaS, including my experience as an early customer of Salesforce in about 2003.
    • Challenges in scaling a software business, learned at BusinessObjects as we scaled from $30M to $1B in revenues, as well as at MarkLogic and Host Analytics.
    • My favorite SaaS metric.  If you had to pick one, I’d pick LTV/CAC.
    • Why simple churn is the best way to value the annuity of a SaaS business.
    • The loose coupling of customer satisfaction and renewal rates.
    • Why SaaS companies need to “chew gum and walk at the same time” when it comes to driving the mix of new and renewal business.
    • User-based vs. usage-based pricing in SaaS and how the latter can backfire in disincenting usage of the application.
    • My thoughts on bookings vs. ARR as a SaaS metric.  (Bookings is generally seen as a four-letter word!)
    • Why SaaS companies should make “the leaky bucket” the first four lines of their financial presentation.
    • Why I think it’s a win/win when a SaaS company gives a multi-year prepaid discount that’s less than its churn rate.
    • Why I view non-prepaid, multi-year deals as basically equivalent to renewals (just collected by finance/legal instead of customer success.)
    • Why it’s OK to “double compensate” sales and customer success on renewals and incidental upsells, and why it’s OK to pay sales on non-incidental upsells to existing customers (don’t put your farmer against someone else’s hunter).
    • Why you can’t analyze churn by analyzing churn and why you should have a rigorous taxonomy of churn.
    • My responses to Harry’s “quick fire” round questions.

You can listen to the podcast via iTunes, here.  Enjoy!

 

Detecting and Eliminating the Rolling Hairballs in your Sales Pipeline

Quick:  what’s the biggest deal in this quarter’s sales pipeline?  Was that the biggest deal in last quarter’s pipeline?  How about the quarter before?  Do you have deals in your pipeline older than your children?

If you’re answering yes to these questions, then you’re probably dealing with “rolling hairballs” in your pipeline.  Rolling hairballs are bad:

  • They exaggerate the size of the pipeline.
  • They distort coverage and conversion ratios.
  • They mess up expected-value forecasts, like a forecast-category or stage-weighted sales forecast.

Maybe they’re real deals; maybe they’re figments of a rep’s imagination.  But, if you’re not careful, they pollute your pipeline and your metrics.

Let’s define a rolling hairball

A rolling hairball is a typically large opportunity that sits in your current-quarter pipeline every quarter, with a close date that slips every quarter.  At 2 quarters it’s a suspected rolling hairball; at 3 or more quarters it’s a confirmed one.

Rolling Hairball Detection

The first thing you need to do is find rolling hairballs.  They’re tricky because salesreps always swear they’re real deals that are supposed to finally close this quarter.  What makes rolling hairballs obvious is their ever-sliding close dates.  What makes them dangerous is their size (including an accumulation of them that aggregate to a material fraction of the pipeline).

If you want to find rolling hairballs, look for opportunities in the current-quarter pipeline that were also in last-quarter’s pipeline.  That will find numerous bona fide slipped deals, but it will also light-up potential rolling hairballs.  To determine if an opportunity is  a rolling hairball, for sure, you can do one of two things:

  • See if it also appeared in the current-quarter pipeline in any quarters prior to the previous one.
  • Look at its stage or forecast category.  If either of those suggest it won’t be closing this quarter, it’s another big hairball indicator.

The more sophisticated way to find them is to examine “stuck opportunity” reports that light-up deals that are moving through pipeline stages too slowly compared to your norms.

But typically, the hairball is a big opportunity hiding in plain sight.  You know it was in last quarter’s pipeline and the quarter before that.  You’ve just been deluded into believing it’s not a hairball.

Fixing Rolling Hairballs

There are two ways to fix rolling hairballs:

  • Fix the close date.  Reps are subtly incented to put deals in the current quarter (e.g., to show they’re working on something, to show they might bring in some big sales this quarter). The manager needs to get on the phone with the customer and, after having verified it’s a real opportunity, get the real timeframe in which it might close.  Assigning a realistic close date to the opportunity makes your pipeline more real and reminds the rep that they need to be working on other shorter-term opportunities as well.  (There is no mid-term if you fail enough in the short term.)  The deal will still remain in the all-quarters pipeline, but it won’t always be in the current-quarter pipeline, ever-sliding, and distorting metrics and ratios.

 

  • Fix the size. While a realistic close date is the best solution, what makes rolling hairballs dangerous is their size.  So, if the salesrep really believes it’s a current-quarter opportunity, you can either reduce its size or split it into two opportunities (particularly if that’s a possible outcome), a small one in the current quarter along with an upsell in the future.  Note that this approach can be dangerous, with lots of little hairball-lets flying below radar, so you should only try if it you’re sure your salesops team can produce the reports to find them and if you believe it reflects real customer buying patterns.

Don’t let rolling hairballs pollute your pipeline metrics and ratios.  Admit they exist, find them, and fix them.  Your sales and sales forecasting will be more consistent as a result.

A Look at the Tintri S-1

Every now and then I take a dive into an S-1 to see what clears the current, ever-changing bar for going public.  After a somewhat rocky IPO process, Tintri went public June 30 after cutting the IPO offering price and has traded flat thus far since then.

Let’s read an excerpt from this Business Insider story before taking a look at the numbers.

Before going public, Tintri had raised $260 million from venture investors and was valued at $800 million.

With the performance of this IPO, the company is now valued at about about $231 million, based on $7.50 a share and its roughly 31 million outstanding shares, (if the IPO’s bankers don’t buy their optional, additional roughly 1.3 million shares.)

In other words, this IPO killed a good $570 million of the company’s value.

In other words, Tintri looks like a “down-round IPO” (or an “IPO of last resort“) — something that frankly almost never happened before the recent mid/late stage private valuation bubble of the past 4 years.

Let’s look at some numbers.

tintri p+l

Of note:

  • $125M in FY2017 revenue.  (They have scale, but this is not a SaaS company so the revenue is mostly non-recurring, making it easier to get to grow quickly and making the revenue is worth less because only the support/maintenance component of it renews each year.)
  • 45% YoY total revenue growth.  (On the low side, especially given that they have a traditional license/maintenance model and recognize revenue on shipment.)
  • 65% gross margins  (Low, but they do seem to sell flash memory hardware as part of their storage solutions.)
  • 87% of revenue spent on S&M (High, again particularly for a non-SaaS company.)
  • 43% of revenue spent on R&D  (High, but usually seen as a good thing if you view the R&D money as well spent.)
  • -81% operating margins (Low, particularly for a non-SaaS company.)
  • -$70.4M in cashflow from operating activities in 2017 ($17M average quarterly cash burn from operations)
  • Incremental S&M / incremental product revenue = 73%, so they’re buying $1 worth of incremental (YoY) revenue for an incremental 73 cents in S&M.  Expensive but better than some.

Overall, my impression is of an on-premises (and to a lesser extent, hardware) company in SaaS clothing — i.e., Tintri’s metrics look like a SaaS company, but they aren’t so they should look better.  SaaS company metrics typically look worse than traditional software companies for two reasons:  (1) revenue growth is depressed by the need to amortize revenue over the course of the subscription and (2) subscriptions companies are willing to spend more on S&M to acquire a customer because of the recurring nature of a subscription.

Concretely, if you compare two 100-unit customers, the SaaS customer is worth twice the license/maintenance customer over 5 years.

saas compare

Moreover, even if Tintri were a SaaS company, it is quite out of compliance with the Rule of 40, that says growth rate + operating margin >= 40%.  In Tintri’s case, we get -35%, 45% growth plus -81% operating margin, so they’re 75 points off the rule.

Other Notes

  • 1250+ customers
  • 21 of the Fortune 100
  • 527 employees as of 1/31/17
  • CEO 2017 cash compensation $525K
  • CFO 2017 cash compensation $330K
  • Issued special retention stock grants in May 2017 that vest in the two years following an IPO
  • Did option repricing in May 2017 to $2.28/share down from weighted average exercise price of $4.05.
  • $260M in capital raised prior to IPO
  • Loans to CFO and CEO to exercise stock options at 1.6% to 1.9% interest in 2013
  • NEA 22.7% ownership prior to opening
  • Lightspeed 14.5% ownership
  • Insight Venture Partners 20.2% ownership
  • Silver Lake 20.4% ownership
  • CEO 3.8% ownership
  • CFO 0.7% ownership
  • $48.9M in long-term debt
  • $13.8M in 2017 stock-based compensation expense

Overall, and see my disclaimers, but this is one that I’ll be passing on.

 

The New 2017 Gartner Magic Quadrants for Cloud Strategic CPM (SCPM) and Cloud Financial CPM (FCPM) – How to Download; A Few Thoughts

For some odd reason, I always think of this scene — The New Phone Book’s Here – from an old Steve Martin comedy whenever Gartner rolls out their new Magic Quadrants (MQ) for corporate performance management (CPM). It’s probably because all of the excitement they generate.

Last year, Gartner researchers John Van Decker and Chris Iervolino kept that excitement up by making the provocative move of splitting the CPM quadrant in two — strategic CPM (SCPM) and financial CPM (FCPM). Never complacent, this year they stirred things up again by inserting the word “cloud” before the category name for each; we’ll discuss the ramifications of that in a minute.

Free Download of 2017 CPM Magic Quadrants

But first, let me provide some links where you can download the new FCPM and SCPM magic quadrants:

Significance of the New 2017 FPCM and SCPM Magic Quadrants

The biggest change this year is the insertion of the word “cloud” in the title of the magic quadrants.  This perhaps seemingly small change, like a butterfly effect, results in an entirely new world order where two of the three megavendors in the category (i.e., IBM, SAP) get displaced from market leadership due to the lack of the credibility and/or sophistication of their cloud offerings.

For example:

  • In the strategic CPM quadrant, IBM is relegated to the Visionary quadrant (bottom right) and SAP does not even make the cut.
  • In the financial CPM quadrant, IBM is relegated to the Challenger quadrant (top left) and SAP again does not even make the cut.

Well, I suppose one might then ask, well if IBM and SAP do poorly in the cloud financial and strategic CPM magic quadrants, then how do they do in the “regular” ones?

To which the answer is, there aren’t any “regular” ones; they only made cloud ones.  That’s the point.

So I view this as the mainstreaming of cloud in EPM [1].  Gartner is effectively saying a few things:

  • Who cares how much maintenance fees a vendor derives from legacy products?
  • The size of a vendor’s legacy base is independent of its position for the future.
  • The cloud is now the norm in CPM product selection, so it’s uninteresting to even produce a non-cloud MQ for CPM. The only CPM MQs are the cloud ones.

While I have plenty of beefs with Oracle as a prospective business partner — and nearly as many with their cloud EPM offerings — to their credit, they have been making an effort at cloud EPM while IBM and SAP seem to have somehow been caught off-guard, at least from an EPM perspective.

(Some of Oracle’s overall cloud revenue success is likely cloudwashing though they settled a related lawsuit with the whistleblower so we’ll never know the details.)

Unlikely Bedfellows:  Only Two Vendors are Leaders in Both FCPM and SCPM Magic Quadrants

This creates the rather odd situation where there are only two vendors in the Leaders section of both the financial and strategic CPM magic quadrants:  Host Analytics and Oracle.  That means only two vendors can provide the depth and breadth of products in the cloud to qualify for the Leaders quadrant in both the FCPM and SCPM MQ.

I know who I’d rather buy from.

In my view, Host Analytics has a more complete, mature, and proven product line – we’ve been at this a lot longer than they have — and, well, oligopolists aren’t really famous for their customer success and solutions orientation.  More infamous, in fact.  See the section of the FCPM report where it says Oracle ranks in the “bottom 25% of vendors in this MQ on ‘overall satisfaction with vendor.’”

Or how an Oracle alumni once defined “solution selling” for me:

Your problem is you are out of compliance with the license agreement and we’re going to shut down the system.  The solution is to give us money.

Nice.

For more editorial, you can read John O’Rourke’s post on the Host Analytics corporate blog.

Download the 2017 FCPM and SCPM Magic Quadrants

Or you can download the new 2017 Gartner CPM MQs here.

# # #

Notes:

[1] Gartner refers to the category as corporate performance management (CPM).  I generally refer to it as enterprise performance management (EPM), reflecting the fact that EPM software is useful not only for corporations, but other forms of organization such as not-for-profit, partnerships, government, etc.  That difference aside, I generally view EPM and CPM as synonyms.

The Role of Professional Services in a SaaS Business

I love to create reductionist mission statements for various departments in a company.  These are designed to be ultra-compact and potentially provocative.  My two favorite examples thus far:

I like to make them based on real-life situations, e.g., when someone running a department seems confused about the real purpose of their team.

For example, some police-oriented HR departments seem to think their mission is protect employees from management.  Think: “Freeze, you can’t send an email like that; put your hands in the air and step away from the keyboard!”

I think otherwise. If the HR team conceptualizes itself as “helping managers manage,” it will be more positively focused, help deliver better results, and be a better business partner — all while protecting employees from bad managers (after all, mistreating employees is bad management).

Over the past year, I’ve developed one of these pithy mission statements for professional services, also known as consulting, the (typically billable) experts employed by a software company who work with customers on implementations after the sale:

Professsional services exists to maximize ARR while not losing money.

Maximizing ARR surprises some people.  Why say that in the context of professional services?  Sales brings in new ARR.  Customer Success (or Customers for Life) is reponsible for the maintenance and expansion of existing ARR.  Where does professional services fit in?  Shouldn’t they exist to drive successful implementations or to achieve services revenue targets?  Yes, but that’s actually secondary to the primary mission.

The point of a SaaS business is to maxmize enterprise value and that value is a function of ARR.  If you could maximize ARR without a professional services team then you wouldn’t have one at all (and some SaaS firms don’t).  But if you’re going to have a professional services team, then they — like everybody else — should be there to maximize ARR.  How does professional services help maximize ARR?  They:

  • Help drive new ARR by supporting sales — for example, working with sales to draft a statement of work and by building confidence that the company can solve the customer’s problem.  If you remember that customers buy “holes, not bits” you’ll know that a SaaS subscription, by itself, doesn’t solve any business problem.  The importance of the consultants who do the solution mapping is paramount.
  • Help preserve/expand existing ARR by supporting the Customer Success (aka, the Customers for Life) team, either by repairing blown implementations or by doing new or expanded implementations at existing customers.  This could entail anything from a “save” to a simple expansion, but either way, professional services is there maximizing ARR.
  • Help do both by enabling the partner ecosystem.  Professional services is key to enabling partners who can both provide quality implementation services for customers and who can extend the vendor’s reach through go-to-market partnering.

Or, as our SVP of Services at Host Analytics says, “our role is to make happy customers.”

I prefer to say “maximize ARR without losing money” but we’re very much on the same page.  Let’s finish with the “not losing money” part.  In my opinion,

  • A typical on-premises software vendor drove 25% to 30% gross margins on professional services.  Those were the days one big one-shot license fees and huge multi-million dollar implementations.  In those days, customers weren’t necessarily too happy but the services team had a strong “make money” aspect to its mission.
  • A typical SaaS vendors have negative 20% to negative 10% gross margins on services (and sometimes a lot more negative than that).  That’s because some vendors subsidize their ARR with free or heavily discounted services because ARR recurs whereas services revenue does not.

I believe that professional services has real value (e.g., our team at Host Analytics is amazing) and that if you’re driving 0% to 5% gross margins with such a team that you are already supporting the ARR pool with discounted services (you could be running 25% to 30% margins).  Whether you make 0% or 10% doesn’t much matter — because it won’t to someone valuing your company — but I think it’s a mistake to shoot for the 30% margins of yore as well as a mistake to tolerate -50% margins and completely de-value your services.

Don’t Start a Customer Relationship with a Lie

As a manager, I like to make sure that every quarter that each of my direct reports has written, agreed-to goals.  I collect these goals in a Word document, but since that neither scales nor cascades well, I’ve recently been looking for a simple SaaS application to manage our quarterly Objectves and Key Results (OKRs).

What I’ve found, frankly, is a bit shocking.

Look, this is not the world’s most advanced technical problem.  I want to enter a goal (e.g., improve sales productivity) and associate 1-3 key results with that goal (e.g., improve ARR per salesrep from $X to $Y).  I have about 10 direct reports and want to assign 3-5 OKRs per quarter.  So we’re talking 30-50 objectives with maybe 60-100 associated key results for my little test.

I’d like some progress tracking, scoring at the end of the quarter, and some basic reporting.  (I don’t need thumbs-ups, comments, and social features.)  If the app works for the executive team, then I’ll probably scale it across the company, cascading the OKRs throughout the organization, tracking maybe 1,200 to 1,500 objectives per quarter in total.

This is not rocket science.

Importantly, I figure that if I want to roll this out across the entire team, the app better be simple enough for me to just try it without any training, presentations, demos, or salescalls. So I decide to go online and start a trial going with some SaaS OKR management providers.

Based on some web searches, PPC ads, and website visits, I decide to try with three vendors (BetterWorks, 15Five, and 7Geese).  While I’m not aiming to do a product or company comparison here, I had roughly the same experience across all three:

  • I could not start a free trial online
  • I was directed to an sales development rep (SDR) or account exec (AE) before getting a trial
  • That SDR or AE tried to insist on a phone call with me before giving me the trial
  • The trial itself was quite limited — e.g., 15 or 30 days.

At BetterWorks, after getting stuck with the SDR, I InMailed the CEO asking for an SDR-bypass and got one (thanks!) — but I found the application not intuitive and too hard to use.  At 7Geese, I got directed to an AE who mailed me a link to his calendar and wanted to me to setup a meeting.  After grumbling about expectations set by the website, he agreed to give me a trial.  At 15Five, I got an SDR who eventually yielded after I yelled at him to let me “follow my own buyer journey.”

But the other thing I noticed is that all three companies started our relationship with a lie of sorts.  What lie?  In all three cases they implied that I’d have easy access to a free trial.  Let’s see.

If you put a Free Trial button on your website, when I press it I expect to start an online process to get a free trial — not get a form that, once filled, replies that someone will be in touch.  That button should be called Contact Us, not Free Trial.

7Geese was arguably more misleading.  While the Get Started button down below might imply that you’re starting the process of getting access to a trial, the Get Started Now button on the top right says, well, NOW.

Worse yet, if you press the Get Started Now button on 7Geese, you get this screen next.

Tailored tour?  I pressed a button called Get Started Now.  I don’t want to setup a demo.  I want to get started using their supposedly “simple” OKR tracking app.

15Five was arguably the most misleading.

When you write “14 days free. No credit card needed.” I am definintely thinking that when I press Get Started that I’ll be signing up for a free 14-day trial on the next screen.  Instead I get this.

I didn’t ask to see if 15Five was right for my company.  I pressed a button that advertised a 14-day free trial with no credit card required.

Why, in all three cases, did these companies start our relationship by lying to me?  Probably, because in all three cases their testing determined that the button would be clicked more if it said Get Started or Frial Trial than if it said something more honest like Contact Us or  Request Free Trial.

They do get more clicks, I’m sure.  But those clicks start the relationship on a negative note by setting an expectation and immediately failing to meet it.

I get that Free Trials aren’t always the best way to market enterprise software.  I understand that the more complicated the application problem, the less a Free Trial is effective or even relevant.  That’s all fine.  If you haven’t built a viral product or work in a consumer-esque cateogry, that’s fine.  Just don’t promise a Free Trial on your website.

But when you’re in a category where the problem is pretty simple and you promise a Free Trial on your website, then I expect to get one.  Don’t start our relationship with a lie.  Even if your testing says you’ll get more clicks — because all you’ll be doing is telling more lies and starting more customer relationships on the wrong foot.

The Evolution of Marketing Thanks to SaaS

I was talking with my friend Tracy Eiler, author of Aligned to Achieve, the other day and she showed me a chart that they were using at InsideView to segment customers.  The chart was a quadrant that mapped customers on two dimensions:  renewal rate and retention rate.  The idea was to use the chart to plot customers and then identify patterns (e.g., industries) so marketing could identify the best overall customers in terms of lifetime value as the mechanism for deciding marketing segmentation and targeting.

Here’s what it looked like:

saas-strategic-value

While I think it’s a great chart, what really struck me was the thinking behind it and how that thinking reflects a dramatic evolution in the role of marketing across my career.

  • Back two decades ago when marketing was measured by leads, they focused on how to cost-effectively generate leads, looking at response rates for various campaigns.
  • Back a decade ago when marketing was measured by opportunities (or pipeline), they focused on how to cost-effectively generate opportunities, looking at response and opportunity conversion rates.
  • Today, as more and more marketers are measured by marketing-sourced New ARR, they are focused on cost-effectively generating not just opportunities, but opportunities-that-close, looking all the way through the funnel to close rates.
  • Tomorrow, as more marketers will be measured on the health of the overall ARR pool, they will be focused on cost-effectively generating not just opportunities-that-close but opportunities that turn into the best long-term customers. (This quadrant helps you do just that.)

As a company makes this progression, marketing becomes increasingly strategic, evolving in mentality with each step.

  • Starting with, “what sign will attract the most people?” (Including “Free Beer Here” which has been used at more than one conference.)
  • To “what messages aimed at which targets will attract the kind of people who end up evaluating?”
  • To “who are we really looking to sell to — which people end up buying the most and the most easily – and what messages aimed at which targets will attract them?”
  • To “what are the characteristics of our most successful customers and how can we find more people like them?”

The whole pattern reminds me of the famous Hubspot story where the marketing team was a key part forcing the company to focus on either “Owner Ollie” (the owner of a <10 person business) or “Manager Mary” (a marketer at a 10 to 1000 person business).  For years they had been serving both masters poorly and by focusing on Manager Mary they were able to drive a huge increase in their numbers that enabled cost-effectively scaling the business and propelling them onto a successful IPO.

hubspot

What kind of CMO does any CEO want on their team?  That kind.  The kind worried about the whole business and looking at it holistically and analytically.