I made Kransekake - or 'Norwegian wedding cake' - last night. In Danish it's spelled Kransekage. The best and simplest reference recipe is this one from the Sons of Norway. I love Kransekake because it's both a tasty dessert and a hearty breakfast.
Tuesday, October 28, 2008
Kransekake - The Best Recipe
I made Kransekake - or 'Norwegian wedding cake' - last night. In Danish it's spelled Kransekage. The best and simplest reference recipe is this one from the Sons of Norway. I love Kransekake because it's both a tasty dessert and a hearty breakfast.
Tuesday, October 21, 2008
Complexity Toyota Lean Startups
Venturehacks has a wonderful post today on lessons that startups can learn from Toyota to help them cut out paralyzing complexity and get lean:
Summary: “Lean” is the most capital-efficient way to run a business. Lean is the never-ending process of eliminating waste: finding every activity that does not create value for the customer and eliminating it. The two greatest wastes are overproduction (making things the customer doesn’t want) and inventory (making things that aren’t used immediately).
Summary: “Lean” is the most capital-efficient way to run a business. Lean is the never-ending process of eliminating waste: finding every activity that does not create value for the customer and eliminating it. The two greatest wastes are overproduction (making things the customer doesn’t want) and inventory (making things that aren’t used immediately).
Friday, October 17, 2008
Bessemer SaaS Law #10
Bessemer SaaS Law #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!
There is no denying that the cash flow characteristics of a SaaS business are wonderful in the long term, but lousy in the short term. The traditional software model with $100,000-$1 million licensed software and “net 60” payment terms presents a far rosier cash flow picture than monthly subscription streams of $5,000-50,000. This means SaaS companies must have impeccable financial stewardship. There have been many promising SaaS startups that stepped on the gas too early and were wiped out as a result. Always model the business with a comfortable cash cushion and recognize that
most SaaS businesses paradoxically consume more short-term cash if you start growing faster.
As a business, it is critical to weigh forward investments carefully. SaaS businesses typically require multiple rounds of investment and a good amount of capital. For example, it took $126m to NetSuite to go public, $66m for DemandTec, $61m for Salesforce and $45m for SuccessFactors. We believe that the best of the second generation SaaS businesses may be more efficient than many of these predecessors, but in almost all cases, significant capital will be required to build a dominant SaaS business.
As you grow the business, you should also constantly trade off cash vs. growth. If you must replenish supplies while still crossing the desert – and most SaaS businesses will need to raise multiple rounds of funding - optimize your growth rate (sales rep recruitment and marketing spending) so that you maximize your CMRR when you need to fundraise next. As private investors and public acquirers become more SaaS savvy, multiples of CMRR will likely become the primary valuation metric.
Full Index
There is no denying that the cash flow characteristics of a SaaS business are wonderful in the long term, but lousy in the short term. The traditional software model with $100,000-$1 million licensed software and “net 60” payment terms presents a far rosier cash flow picture than monthly subscription streams of $5,000-50,000. This means SaaS companies must have impeccable financial stewardship. There have been many promising SaaS startups that stepped on the gas too early and were wiped out as a result. Always model the business with a comfortable cash cushion and recognize that
most SaaS businesses paradoxically consume more short-term cash if you start growing faster.
As a business, it is critical to weigh forward investments carefully. SaaS businesses typically require multiple rounds of investment and a good amount of capital. For example, it took $126m to NetSuite to go public, $66m for DemandTec, $61m for Salesforce and $45m for SuccessFactors. We believe that the best of the second generation SaaS businesses may be more efficient than many of these predecessors, but in almost all cases, significant capital will be required to build a dominant SaaS business.
As you grow the business, you should also constantly trade off cash vs. growth. If you must replenish supplies while still crossing the desert – and most SaaS businesses will need to raise multiple rounds of funding - optimize your growth rate (sales rep recruitment and marketing spending) so that you maximize your CMRR when you need to fundraise next. As private investors and public acquirers become more SaaS savvy, multiples of CMRR will likely become the primary valuation metric.
Full Index
Bessemer SaaS Law #9
Bessemer SaaS Law #9. The most important part of Software-as-a-Service isn’t “Software” it’s “Service”!
One of the most valuable and least appreciated assets of a SaaS business is the detailed usage data of your customers. For years, product marketing and product management groups in license software businesses have attempted to guess at the behavior of their customers. Good PM’s would interview, survey, and even watch their customers as they used the product, but it was very hard to truly know how they were using the product on a detailed level and incorporate this feedback in the major annual releases. SaaS businesses should instead learn from their consumer internet peers, and the user interaction methodologies of businesses like Google, Apple, Yahoo, LinkedIn, Yelp, Facebook, and others. These businesses are constantly taking advantage of their web application architecture to analyze detailed customer usage data, a/b test variations, iterate on small details of a page or a feature, and evolve the product each and every day. There are three levels of being Service Savvy, and SaaS businesses should strive for all three:
1) Basic proactive monitoring for likely churn or up-sell opportunities – this is too simple not to do, and all SaaS businesses should do this well. You already know who logs into your product, how often, what they do inside the product, and what results they achieved. So now you need to track the key usage metrics and measures, and create internal dashboards to know which customers are getting the most value (potential up-sell candidates!) and which are likely to churn (time to proactively intervene!). Work with your marketing team to automate “low usage” reports internally, and low usage escalation emails to your customers to ask them for an explanation of the behavioral changes.
2) Rapid testing and development cycles of your application based on customer feedback. Lookat what your customers are doing in the product, not what they tell you they’re doing. Look at which pages, features, and sub-components are getting the most active usage and why. Look at the outliers and understand whether there exist some interesting additional opportunities.
3) Analyze the aggregated data to determine best practices and benchmarks across your
customers. You can actually add value to your customers businesses by making them better in your product, and your product better by watching your best customers.
The other subtlety of a service offering is that customers have to be able to use the offering in production to recognize its value, and for your business to convert CMRR to MRR and GAAP revenue.
This implementation time is measured as the time from the day you acquire a new order until the day it goes into production. You want this lag to be as short as possible, and growth in this number is a strong leading indicator of possible product and/or implementation problems. Prudent SaaS companies have made wise investments in process and technology to make this time as short as possible. These investments span the range of simple items like streamlining workflows and improving user training to fully automated self-provisioning models that allow turn ups to happen without human intervention. As a general rule, the higher your price point the lower the need for automated provisioning and the lower your price point the higher the need. A fairly typical implementation range for SMB focused SaaS providers is 0-60 days, and enterprise focused offerings typically range from 2-4 months. Although “average implementation time” is typically not a key executive metric, it should be tracked as a second level metric and promoted as a primary metric if you are out of range or the trends are inappropriate.
Full Index
One of the most valuable and least appreciated assets of a SaaS business is the detailed usage data of your customers. For years, product marketing and product management groups in license software businesses have attempted to guess at the behavior of their customers. Good PM’s would interview, survey, and even watch their customers as they used the product, but it was very hard to truly know how they were using the product on a detailed level and incorporate this feedback in the major annual releases. SaaS businesses should instead learn from their consumer internet peers, and the user interaction methodologies of businesses like Google, Apple, Yahoo, LinkedIn, Yelp, Facebook, and others. These businesses are constantly taking advantage of their web application architecture to analyze detailed customer usage data, a/b test variations, iterate on small details of a page or a feature, and evolve the product each and every day. There are three levels of being Service Savvy, and SaaS businesses should strive for all three:
1) Basic proactive monitoring for likely churn or up-sell opportunities – this is too simple not to do, and all SaaS businesses should do this well. You already know who logs into your product, how often, what they do inside the product, and what results they achieved. So now you need to track the key usage metrics and measures, and create internal dashboards to know which customers are getting the most value (potential up-sell candidates!) and which are likely to churn (time to proactively intervene!). Work with your marketing team to automate “low usage” reports internally, and low usage escalation emails to your customers to ask them for an explanation of the behavioral changes.
2) Rapid testing and development cycles of your application based on customer feedback. Lookat what your customers are doing in the product, not what they tell you they’re doing. Look at which pages, features, and sub-components are getting the most active usage and why. Look at the outliers and understand whether there exist some interesting additional opportunities.
3) Analyze the aggregated data to determine best practices and benchmarks across your
customers. You can actually add value to your customers businesses by making them better in your product, and your product better by watching your best customers.
The other subtlety of a service offering is that customers have to be able to use the offering in production to recognize its value, and for your business to convert CMRR to MRR and GAAP revenue.
This implementation time is measured as the time from the day you acquire a new order until the day it goes into production. You want this lag to be as short as possible, and growth in this number is a strong leading indicator of possible product and/or implementation problems. Prudent SaaS companies have made wise investments in process and technology to make this time as short as possible. These investments span the range of simple items like streamlining workflows and improving user training to fully automated self-provisioning models that allow turn ups to happen without human intervention. As a general rule, the higher your price point the lower the need for automated provisioning and the lower your price point the higher the need. A fairly typical implementation range for SMB focused SaaS providers is 0-60 days, and enterprise focused offerings typically range from 2-4 months. Although “average implementation time” is typically not a key executive metric, it should be tracked as a second level metric and promoted as a primary metric if you are out of range or the trends are inappropriate.
Full Index
Bessemer SaaS Law #8
Bessemer SaaS Law #8. Single instance, multi-tenant, single datacenter - Have only one
version of the code in production. Really. “Just say no” to on-premise deployments.
This is a guiding architectural principle for best-of-breed SaaS companies. The notion of a multi- instance, single tenant offering should only apply to legacy software companies moving to a dedicated hosting model because they don’t have the luxury of an architectural re-design. It is possible to use virtualization to provide multiple instances, but this hybrid strategy will make your engineering team much more expensive and much less nimble. If designing a SaaS product out of the gate, the best situation is single instance, multi-tenant. There are hybrid models that have worked, but in general it is a hard and fast law that should not be debated and we will leave
the hybrids to the “clean tech” entrepreneurs. The same can typically be said about a single global data center. You want to leverage your core infrastructure as much as possible, even when expanding internationally for as long as possible. You should invest early in backup and disaster recovery, but stick to one data center as long as
possible and at least past $2M CMRR. SaaS companies have this debate all the time, and yet the recent data is pretty clear: most SaaS companies can get by with a single datacenter in North America until well past their IPO. In fact, Salesforce.com is passing $1 billion in revenue and announced plans for additional datacenters only a year ago.
Data centers are extremely expensive and create significant organizational complexity on every level. Many of the historical issues around data backup, disaster recovery, and global application latency that caused companies to add a second datacenter can also now be better addressed in other ways.
With a single code base in North America, it will obviously make it much more difficult to sell a SaaS deal to foreign governments or defense departments (yet another reason why the Swiss military probably won’t be a beta customer for you!), but focus is a good thing. You still have the vast majority of the global market available to you, and the macro trends are only moving even more in your direction.
It really does add a lot of overhead cost and operational complexity that is hard to absorb unless the business is at scale…meaning typically $2M++ of CMRR. And when you do open a second facility make sure it’s funded by customers, typically as part of a broad international expansion.
Full Index
version of the code in production. Really. “Just say no” to on-premise deployments.
This is a guiding architectural principle for best-of-breed SaaS companies. The notion of a multi- instance, single tenant offering should only apply to legacy software companies moving to a dedicated hosting model because they don’t have the luxury of an architectural re-design. It is possible to use virtualization to provide multiple instances, but this hybrid strategy will make your engineering team much more expensive and much less nimble. If designing a SaaS product out of the gate, the best situation is single instance, multi-tenant. There are hybrid models that have worked, but in general it is a hard and fast law that should not be debated and we will leave
the hybrids to the “clean tech” entrepreneurs. The same can typically be said about a single global data center. You want to leverage your core infrastructure as much as possible, even when expanding internationally for as long as possible. You should invest early in backup and disaster recovery, but stick to one data center as long as
possible and at least past $2M CMRR. SaaS companies have this debate all the time, and yet the recent data is pretty clear: most SaaS companies can get by with a single datacenter in North America until well past their IPO. In fact, Salesforce.com is passing $1 billion in revenue and announced plans for additional datacenters only a year ago.
Data centers are extremely expensive and create significant organizational complexity on every level. Many of the historical issues around data backup, disaster recovery, and global application latency that caused companies to add a second datacenter can also now be better addressed in other ways.
With a single code base in North America, it will obviously make it much more difficult to sell a SaaS deal to foreign governments or defense departments (yet another reason why the Swiss military probably won’t be a beta customer for you!), but focus is a good thing. You still have the vast majority of the global market available to you, and the macro trends are only moving even more in your direction.
It really does add a lot of overhead cost and operational complexity that is hard to absorb unless the business is at scale…meaning typically $2M++ of CMRR. And when you do open a second facility make sure it’s funded by customers, typically as part of a broad international expansion.
Full Index
Bessemer SaaS Law #7
Bessemer SaaS Law #7. 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.
Almost all businesses will look to go global at some point if they continue to grow. But SaaS vendors face more barriers to globalization than traditional software companies because you can’t just localize the UI and ship a new CD to some remote country. Given the different architecture and high service level expectations in the SaaS industry, companies are faced with questions about latency, data access and security through replicated local datacenters, in-country customer support personnel, packaged integration with other regional software and SaaS products, and other similar issues.
Simply put, North America is a massive market with a rising tide around SaaS. There is no need to go global early and force this cost and complexity upon your organization. In most SaaS sub- markets, we find that Europe is roughly three years behind the US in adoption, and Asia is slightly behind Europe – although we have recently seen some interesting pockets of activity in Japan and India that may be accelerating. A rough rule of thumb is that you should look to pass $1M CMRR ($12M Annual Contract Value) before even considering Europe, and even then you should let customer deals pull you into the region as you incrementally hire sales and services professionals. Unless you have some extremely unfair advantage in Asia, wait until Europe is a clear home run before even considering opening up a sales war on another front. Your default position should be to consider Europe as your pre-IPO growth story, and Asia only after you’re a high-flying public company.
Full Index
behind customer demand. Save Asia for post-IPO.
Almost all businesses will look to go global at some point if they continue to grow. But SaaS vendors face more barriers to globalization than traditional software companies because you can’t just localize the UI and ship a new CD to some remote country. Given the different architecture and high service level expectations in the SaaS industry, companies are faced with questions about latency, data access and security through replicated local datacenters, in-country customer support personnel, packaged integration with other regional software and SaaS products, and other similar issues.
Simply put, North America is a massive market with a rising tide around SaaS. There is no need to go global early and force this cost and complexity upon your organization. In most SaaS sub- markets, we find that Europe is roughly three years behind the US in adoption, and Asia is slightly behind Europe – although we have recently seen some interesting pockets of activity in Japan and India that may be accelerating. A rough rule of thumb is that you should look to pass $1M CMRR ($12M Annual Contract Value) before even considering Europe, and even then you should let customer deals pull you into the region as you incrementally hire sales and services professionals. Unless you have some extremely unfair advantage in Asia, wait until Europe is a clear home run before even considering opening up a sales war on another front. Your default position should be to consider Europe as your pre-IPO growth story, and Asia only after you’re a high-flying public company.
Full Index
Bessemer SaaS Law #6
Bessemer SaaS Law #6. By definition, your sales prospects are online - Savvy online
marketing is a core competence (sometimes the only one) of every successful SaaS business.
You sell a product that requires an internet connection and a web browser for access, which means your prospects are online! Numerous studies show that your customers are now doing most of their primary research online, and it should not surprise you. As a consumer, you wouldn’t imagine buying a car, making an offer on a home, planning a vacation, or completing other large purchases without first doing some research online. The same is now true for executives at your target customers. You should therefore be aggressive in marketing to them online.
This is a clear example where business-to-business (B2B) marketers need to learn from their business-to-consumer (B2C) counterparts. The most innovative B2C companies are lead generation machines, leveraging search engine optimization (SEO), viral marketing, Search Engine Marketing (SEM), email marketing, and other technically-advanced methods. Yet many B2B companies don’t have a clue.
The incumbent technology leaders like IBM, Oracle, or SAP, have done very little in online marketing, and thus have given their smaller challengers a huge opportunity. Private SaaS companies have so many disadvantages against the larger incumbent vendors that it is imperative for them to exploit this potential advantage. Whether they use an automated product like Eloqua (as is the case with a dozen of our companies) or a team of marketing analysts and spreadsheets, online marketing and demand generation is simply a “must have” for SaaS companies.
Full Index
marketing is a core competence (sometimes the only one) of every successful SaaS business.
You sell a product that requires an internet connection and a web browser for access, which means your prospects are online! Numerous studies show that your customers are now doing most of their primary research online, and it should not surprise you. As a consumer, you wouldn’t imagine buying a car, making an offer on a home, planning a vacation, or completing other large purchases without first doing some research online. The same is now true for executives at your target customers. You should therefore be aggressive in marketing to them online.
This is a clear example where business-to-business (B2B) marketers need to learn from their business-to-consumer (B2C) counterparts. The most innovative B2C companies are lead generation machines, leveraging search engine optimization (SEO), viral marketing, Search Engine Marketing (SEM), email marketing, and other technically-advanced methods. Yet many B2B companies don’t have a clue.
The incumbent technology leaders like IBM, Oracle, or SAP, have done very little in online marketing, and thus have given their smaller challengers a huge opportunity. Private SaaS companies have so many disadvantages against the larger incumbent vendors that it is imperative for them to exploit this potential advantage. Whether they use an automated product like Eloqua (as is the case with a dozen of our companies) or a team of marketing analysts and spreadsheets, online marketing and demand generation is simply a “must have” for SaaS companies.
Full Index
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