Byron Deeter, Partner with Bessemer Venture Partners, a founding CEO of one SaaS business and a board member of three other pure-play SaaS companies, has firsthand experience with the on-demand model and is well-qualified to state that CEO’s of pure-play SaaS companies need to change their paradigm. When one lacks a role-model and cannot find a neatly put together list of best practices, the skillful CEO pulls together his own rule book. Deeter and his team studied both hybrid and pure-play SaaS companies and developed their own list of best practices for the on-demand model. Veteran software CEO’s might want to heed his advice and shift their paradigm. I strongly urge my readers to read Deeter’s article Bessemer’s Top 10 Laws for Being “SaaS-y”. I’ll try to summarize below his ten “laws” for running a successful SaaS business.
1. Cash is King (i.e. Contracted Monthly Recurring Revenue or “CMRR”): The old model that would value a longer deal with slightly less CMRR over a short term deal with a larger CMRR is out. The new model recognizes the likelihood that renewals will make up the difference. The need for working capital in the SaaS model emphasizes the importance of “customer churn” on this first rule. “The top performing SaaS companies typically achieve annual renewals on a customer count basis above 90% (much of which is often due to bankruptcies, acquisitions, and other events beyond the company’s control), and over 100% renewals on a dollar value basis due to up-sells into this installed base.”
2. Sales Learning Curve – don’t ramp up your efforts too quickly: Refine your sales model and as it grows think in terms of CMRR.
3. Once the Sales Learning Curve peaks begin to hire more renewal orientated account managers. These new account managers should be compensated on customer service, renewals, and upsells.
4. Sell Directly – Channel relationships are unattractive. Without systems integration work nor the need to require huge hardware purchases or vast amounts of software licenses, the old Channel partnership model is not appealing. A new generation of partners and resellers will develop.
5. Don’t rush to go global - Hold on Europe and save Asia for later. More barriers exist such as service level expectations, data access, and security. Don’t weigh down your company with the costs. Develop a strategy where Europe and Asia will come online as you become a public company.
6. One datacenter: Studies show one datacenter is sufficient. No need to take on the costs and organizational complexity, at least until your company is public. Invest in backup and disaster recovery.
7. Design a SaaS product that is single instance and multi-tenant. Multi-instance and single tenant does not apply to this model.
8. Online marketing is a core competence – Your sales prospects are online. Leverage search engine optimization.
9. Cash flow is critical due to low monthly subscriptions and so financial management is key. Weigh investments carefully and structure them in a way to allow future CMRR to produce measureable amounts.
10. Have enough investment capital to last at least 4 years. It takes a while to get to breakeven. The SaaS model takes a lot of R&D and sales expense on the front end.
I particularly like Deeter’s eleventh rule. Oh, did I say there were only ten? Here is number 11:
You can ignore one of the above 10 rules. But only one. Deeter recognizes that there are no absolutes and welcomes a refinement when needed. However, his studies show successful SaaS companies stayed very close to the above best practices.
