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

No comments: