52 Bicycles

Byron Deeter at Bessemer has Top 10 Laws for Being “SaaS-y”:

1. Your key business metrics are: CMRR (Contracted Monthly Recurring Revenue) and Cash - “Bookings” is for suckers.
2. It takes at least $300K of CMRR to climb the Sales Learning Curve - Stop at three sales reps until at least two of them are making $100K MRR quotas.
3. Separate your “hunters” and “farmers” - As soon as you’ve climbed the Sales Learning Curve, begin ramping your sales force by hiring renewal-oriented account managers. Keep the hunters moving, and let farmers tend to the crops.
4. It’s a whole new ecosystem - Channels are very hard for SaaS companies to build, so don’t base your plan on SIs and traditional ISVs. You will need to sell directly for a long time.
5. 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.
6. One datacenter - Invest early in backup and disaster recovery, but stick to one data center, at least until well after IPO.
7. Single instance, multi-tenant - Have only one version of the code in production. Really. “Just say no” to on-premise deployments.
8. By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful SaaS business.
9. Constantly trade off cash vs. growth - If you must replenish supplies while still crossing the desert, optimize your growth rate (sales rep recruitment and marketing spending) so that you maximize your recurring revenue run rate when you need to fundraise next.
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!

He suggests that a company can skip one of these rules, but the others are pretty hard-and-fast. My notes as a business attacking this from a different perspective:

1. Beware rule 9 - cash buys time, so don’t go spending it like water when crossing the desert. His counter is likely that one should get the supplies you need before starting the crossing, which is an argument for major up-front financing - i.e. VC. If you are not going to get VC, keep spending down and replenish through revenue.
2. The fundamental assumption of rule 10 is that this is a major front-end investment for a back-end annuity. However, SaaS and software in general has a low point of entry, so consider that you can make a splash with limited front-end investment, and that the security of the back-end annuity is in jeopardy. A successful firm is constantly adjusting, so one should preserve cash to facilitate those adjustments.
3. Finally, if the model is back-end revenue stream, one should shift one’s cost structure to the back-end. This means minimizing the cost of customer acquisition, and the cost of handling the first customer. Scalability means the ability to expand capacity when it is needed - achieving that is more about flexibility than building a huge infrastructure up-front.

Of course, there are risks to the bootstrapping approach - if you grow too fast, you will outgrow your limited infrastructure. But that’s a high-class problem ,and software can be adjusted relatively rapidly and for only moderate expense to accomodate scaling. Further,  if you are in that position, getting financing at more attractive terms or valuations will be an option, because it’s muchBut  easier to invest in expansion than starting.

But either way, check out the article, because it makes many smart points and is asking excellent questions.

This entry was posted on Saturday, March 1st, 2008 at 7:52 pm and is filed under Technology Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Reddit This