Three Perspectives on SaaS Companies - FLG Perspectives on SaaS Companies SaaS CEO/Board Issues...

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Transcript of Three Perspectives on SaaS Companies - FLG Perspectives on SaaS Companies SaaS CEO/Board Issues...

  • Three Perspectives on SaaS Companies

    Presented at Cooley Godward Kronish

    October 28, 2009

  • CFO Perspectives

    Skip Smith & Mary Korn FLG Partners

    Three Perspectives on SaaS Companies

  • Three Perspectives on SaaS Companies

    SaaS CEO/Board Issues CFO Perspective

    What makes a SaaS company?

    SaaS Revenue recognition primer

    Multiple elements in sale

    New accounting next year

    Capitalization of software

    State sales and use tax

    Systems for SaaS companies

  • Three Perspectives on SaaS Companies

    What makes a SaaS Company?

    Key attributes:Recurring revenue streamsHosted application software often accessed via a browser

    Standalone or integrated applicationsCore systems Accounting or CRMAncillary systems Travel management or paymentsMedia, gaming, analytics, etc.

    Fragmented, rapidly growing companiesHard to build from a financial perspectiveValuable when turn profitable (begin generating cash)

  • Three Perspectives on SaaS Companies

    SaaS Revenue Recognition

    Multiple revenue elements:Subscription monthly, per seat or per transaction bookedImplementation/professional service fees

    If bundled, determine standalone value (VSOE) and recognize over expected life of relationshipIf separately charged, then recognize when deployment is effective (if VSOE for subscription renewal exists)EITF 08-01 will somewhat liberalize VSOE requirements for new fiscal years (required for years beginning after 6/15/10)

    Hardware/software combinations:Now driven by software treatment thus recognition spread over useful life of device (SOP 97-2)More up front recognition for mixed hardware (iPhone, etc.) coming in 2010 (EITF 09-3)

  • Three Perspectives on SaaS Companies

    Rev Rec Takeaways

    Get it right from the start Lock down pricing schemes Develop a standard contract to maintain consistent Ts and Cs Get auditor buy in early for recognition policy

    Especially for implementation revenue treatmentRestatements are very costly in time and opportunity

    Adoption of EITF 08-1 treatment will improve pricing flexibility and may accelerate revenue recognitionCalendar year companies should consider adoption of EITF 08-1 and 09-3 treatment starting in January 2010

  • Three Perspectives on SaaS Companies

    Capitalization of Software

    Capitalization of internal use software governed by EITF 98-1Essentially capitalize software costs after demonstration of technical feasibility, then amortize over useful life (3-5 years)Write off all maintenance and updates other than major rewritesTrack R&D costs carefully for GAAP, management and tax purposes (including possible R&D tax credits)

    Key Takeaways:Wide ranging practice but be conservativeCosts capitalized now are a drag on earnings laterEstablish a simple timekeeping and project system early

  • Three Perspectives on SaaS Companies

    State Sales and Use Tax

    Not an income tax so nexus is much easier to achieve

    States are looking for revenue a very dynamic areaExpanding tax base to include much of digital commerce Active states include Washington, NC, Texas, NY, Wisc, etc.

    Taxation dependent upon local statues and tax nexusNexus can be achieved by having employees in state or visits by sales or training personnel or simply having customers in stateTax rates applied at the zip code levelMonthly filing and deposit requirements

  • Three Perspectives on SaaS Companies

    Sales & Use Tax Takeaways

    SaaS company is responsible for assessment and collection of these taxes regardless of contractual provisions otherwiseGet compliant early to avoid expensive penalties and interest

    Begin with focus on larger transactionsTax issues can delay strategic transactions (FAS 5 issues)Build compliance into systems earlyReview state level changes a couple of times per year

  • Three Perspectives on SaaS Companies

    Systems Needs for SaaS

    Financial reporting system (QuickBooks, MS Dynamics, etc)Simple project capability

    Database for revenue and contract management Salesforce or homebuilt that scalesManage pending implementationsFeed revenue to financial system Feed management dashboards and metrics

    Key TakeawaysSpreadsheets breakBuild links from operational systems to feed financialsEstablish firm audit trails

  • CFO Perspectives

    Operational

    Three Perspectives on SaaS Companies

  • Operational considerations

    Three Perspectives on SaaS Companies

  • Right from the Start

    SalesBuild inside sales firstSales comp plans tied to acquisition of MRRSeparate hunters and farmersAvoid costly enterprise sales techniques

    EngineeringArchitectureAlways onQA

    MarketingEmbrace developersOnline marketing skillsConstantly measure the effectiveness of marketing spendDeploy guerilla marketing techniquesAnalytics

    Three Perspectives on SaaS Companies

  • Invest in Lead Generation

    Marketing = lead generationMeasure lead generation conversionUse tools to generate leads & accelerate sales cycles inexpensivelyPractice guerilla marketing tactics

    Offer demo accounts and start up kitsFrequent e-marketing initiatives

    Explore segmented marketing Evangelize customer references

    Three Perspectives on SaaS Companies

  • Sales Learning Curve

    Set goal of MRR/Sales HC before hiringUse MRR to determine when to hire

    Restrict sales hiringUse MRR vs fully burdened cost of sales to assessAccelerate sales hiring only MRR justifies

    Commission plans direct behavior$1 of commission for $1 of MRR = 8.3% rate Inside sales

    Inside salesRequire $60K-75K MRR

    Field salesRequire $80K-100K MRR

    Stay local

    Three Perspectives on SaaS Companies

  • Develop an API Strategy Early

    Adopt an open API strategy from Day One Use APIs to drive integration strategyAPIs can drive adoptionRight API strategy can lead to new channelsEntice developers to create extensions to enhance your product lineView developers as a channel

    Three Perspectives on SaaS Companies

  • How to Measure and Monitor Performance

    Three Perspectives on SaaS Companies

  • Critical Internal Systems & Processes

    Allocate funds for internal investmentHave nimble & smart internal systemsBilling system that supports recurring billingBe flexible & able to process secure paymentsBe aware of changing regulatory environmentReporting databasePartner/developer tracking databaseCampaign manager tool setStandard contracts

    Customize only for large accounts

    Three Perspectives on SaaS Companies

  • Build Programs to Encourage & Track Usage

    Analytics rule!Know exactly how customers are using your productMeasure user adoptionTest new featuresSpot potential problem areasCustomize your marketing programsFocus product feature roadmap

    Three Perspectives on SaaS Companies

  • How to Measure

    Product design & architectureReporting systemDatabases

    Code & customer account / usageReporting and metricsBilling

    BI toolsTo report, track & measure

    Analyst resourcesTo assess & compareInternal compass

    Three Perspectives on SaaS Companies

  • What to Measure Part I

    MRR: monthly recurring revenue *CLTV: lifetime value of a customerChurn Rate: the % of customers who end their relationship in a given periodRetention rate: 1- churn rateRenewal rateUpsellSelling costsValue by year acquired

    What does this tell you about the customer?

    Three Perspectives on SaaS Companies

  • What to Measure Part II

    Deferred revenue: revenue that cannot yet be recognized on the I/SLife cycle of deferred revenue: how long DR hangs out on the B/SBacklog: off balance sheet tracking of undelivered elements

    Professional services, training, customization

    GPM: gross profit marginCPNC: cost per new customer

    Go ahead if CPNC < CLTV

    Three Perspectives on SaaS Companies

  • What to Measure Part III

    CAC: customer acquisition costMany ways to measure

    Change in revenue/S&M spendChange in GM/S&M spend

    Bessemer & Hummer Winblad have published their formulasPrograms should permit you to track

    By marketing activityEven by individual customer

    Three Perspectives on SaaS Companies

  • The Ideal Dashboard

    Three Perspectives on SaaS Companies

  • What Matters

    MRR *CLTVChurn RateRetention rateCACCashValue of installed baseValue of plan to come from new business

    Deferred revenueLive cycle of deferred revenueBacklogAvg seats/customerAvg price/seatCustomer growthOther marketing costs

    SEO, PPC, CPA, CPM

    Three Perspectives on SaaS Companies

  • Projecting and Conserving Cash

    Three Perspectives on SaaS Companies

  • Vulnerability of Fixed Costs

    Major spend areasHeadcountFacilitiesMarketingDelivery costs

    Fixed costs of operations providing response, reliability, security are hard to cutKnow your data center costs

    Colo, rack space, power, bandwidth, maintenance, hands-on adminPublic SaaS companies have long climb to profitability

    Major cause of losses was high S&M expenseWatch marketing effectiveness & manage sales team costs

    Three Perspectives on SaaS Companies

  • Cash Management 101

    13 week rolling forecastInflowsOutflowsCash flows from operating activities

    Annual budgetForecast cash flow through end of fiscal yearSaaS may consume $30M before CFBE occurs

    RunwayKnow when it ends at current spendKnow what to do about it

    Three Perspectives on SaaS Companies

  • CFO Pers