David SkokSerial Entrepreneur turned VC (Matrix Partners)

Author of ForEntrepreneurs Blog

The Key Drivers for SaaS Success

What Outputs do we want to optimize?

Growth

Profitability

Cash

What’s so different about SaaS?

$(7,000)

$(6,000)

$(5,000)

$(4,000)

$(3,000)

$(2,000)

$(1,000)

$-

$1,000

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10

Month 11

Month 12

Cash Flow for a Single Deal

CAC (Cost to acquire the customer) Subscription payments * GM%

Cash Impact of a typical deal

$(7,000)

$(6,000)

$(5,000)

$(4,000)

$(3,000)

$(2,000)

$(1,000)

$-

$1,000

$2,000

$3,000

Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

Month 13

Month 14

Month 15

Month 16

Month 17

Month 18

Negative Cash Flow

If cash flow is bad for one customer…

what happens when we

grow, and add many more customers?

Model: slow increase in the no of customers added every month

$(1,000,000)

$(500,000)

$-

$500,000

$1,000,000

$1,500,000

Mon

th 1

Mon

th 3

Mon

th 5

Mon

th 7

Mon

th 9

Mon

th 1

1M

onth

13

Mon

th 1

5M

onth

17

Mon

th 1

9M

onth

21

Mon

th 2

3M

onth

25

Mon

th 2

7M

onth

29

Mon

th 3

1M

onth

33

Mon

th 3

5M

onth

37

Mon

th 3

9M

onth

41

Mon

th 4

3M

onth

45

Mon

th 4

7M

onth

49

Mon

th 5

1M

onth

53

Mon

th 5

5M

onth

57

Mon

th 5

9

Cash Flows

SubscriptionPayments

* GM%

CAC

Cumulative Cash Flow

$(3,000,000)

$(2,000,000)

$(1,000,000)

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

The SaaS Cash Flow Trough

$(3,000,000)

$(2,000,000)

$(1,000,000)

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

“The thing that surprises many investors & boards of directors about the SaaS model is that, even with perfect execution, an acceleration of growth will often be accompanied by a squeeze on profitability and cash flow.”

Ron Gill, CFO at Netsuite

What’s the impact of faster growth?

$(10,000,000)

$(5,000,000)

$-

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

10 moreCustomers/Month

5 moreCustomers/Month

2 moreCustomers/Month

Cash Flow Troughgets deeper

When your SaaS business is losing money at an increasing rate, how

can you tell if the business is going to work eventually?

Unit EconomicsA Powerful Tool

Unit Economics

Can I make more profit from my customers than it costs me to acquire them?

Unit Economics

CACCAC LTVLTV

Cost to Acquire a Customer Lifetime Value of a Customer

A Viable Business Model

CACCAC LTVLTV

But surprising how many Entrepreneurs underestimate CAC

<

First Guideline for SaaS Success

LTV > 3x CAC

A Deeper Look at LTV

Computing LTV

Conceptual formula:

LTV = Avg Monthly Profitper customer

CustomerLifetime

Computing the Customer Lifetime

Customer Lifetime = 1 Churn

So CHURN is an important driver

Customer Churn vs $ Dollar Churn

Customer Churn vs $ Dollar Churn

Customer 1$1k MRR

Customer 2$5k MRR

Starting period

Customer Churn vs $ Dollar Churn

Customer 1$1k MRR

Customer 2$5k MRR

Starting period

Customer 2 Churned 50% Customer Churn

83% $ Dollar Churn

A year later

Customer 1$1k MRR

Customer Churn vs $ Dollar Churn

Customer 1$1k MRR

Customer 2$5k MRR

Starting period

Customer 1 Churned 50% Customer Churn

17% $ Dollar Churn

Customer 2$5k MRR

A year later

Customer Churn vs $ Dollar Churn

Customer 1$1k MRR

Customer 2$5k MRR

Starting period

Customer 1 Churned 50% Customer Churn

-16% $ Dollar Churn

A year later

Customer 2$7k MRR

Negative Churn

>Expansion Revenue

from Existing Customers

Revenue Lostfrom Churning

Customers

Implies another part of the Sales Funnel

Expand, Upsell,

Cross Sell

Top of Funnel

Middle of Funnel

Sales

How do we get Expansion Revenue?

If we only have one SaaS product, what more can we

sell the customer?

Variable Pricing AxesA critical factor for expansion revenue

Driving SaaS Success Using Key MetricsBasicEdition

Features

Driving SaaS Success Using Key MetricsBasicEdition

Features

Users

Driving SaaS Success Using Key MetricsBasicEdition

Features

Users

Depth of Usage

Examples: • Mailing list size • Database size • Amount of storage used

CASH

Another Important Variable:

Cash ConsumedHugely impacted by “Months to recover CAC”

Impact of Months to Recover CAC

$(5,000,000)

$-

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

Mon

th 1

Mon

th 7

Mon

th 1

3

Mon

th 1

9

Mon

th 2

5

Mon

th 3

1

Mon

th 3

7

Months to recover CAC: 6.3 Months to recover CAC: 12.5

Months to recover CAC: 18.8

6.3 monthsto recover CAC

12.5 monthsto recover CAC

18.8 monthsto recover CAC

Cumulative Profit / Cash Flow

6.3 monthsto recover CAC

$(5,000,000)

$-

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

Mon

th 1

Mon

th 7

Mon

th 1

3

Mon

th 1

9

Mon

th 2

5

Mon

th 3

1

Mon

th 3

7

Months to recover CAC: 6.3 Months to recover CAC: 12.5

Months to recover CAC: 18.8

Impact of Months to Recover CAC

12.5 monthsto recover CAC

18.8 monthsto recover CAC

Cumulative Profit / Cash Flow

2x Deeper P&L trough2x longer to reach breakeven

3x Deeper P&L trough3x longer to reach breakeven

Second Guideline for SaaS Success

Months to recover CAC < 12 months

Required for Capital Efficiency

More On CACThe impact of sales complexity

Sales Complexity

FreemiumNo Touch

Self-Service

Light TouchInside Sales

High TouchInside Sales

Field Sales Field Sales with SE’s

How I assumed the two would relate

A rough estimate of CAC versus Sales Complexity

FreemiumNo Touch

Self-Service

Light TouchInside Sales

High TouchInside Sales

Field Sales Field Sales with SE’s

$0-$40

$30 –$200

$300 -$800

$3,000 -$8,000

$25,000 –$75,000

$75,000 –$200,000

Rough Estimates of Cost of Customer Acquisition (CAC)

The relationship is roughly exponential

CAC (logarithmic)

Sales Complexity

The Primary Unit of GrowthAdding a Salesperson

Revenuevs

Expense

0

7500

15000

22500

30000

Month 1 Month 4 Month 7 Month 10

MRR

Expense

Losses

The SaaS Cash Flow Trough

$(200,000)

$(100,000)

$-

$100,000

$200,000

$300,000

$400,000

Cumulative Net Profit - New Sales Hire

Total amount invested:

$110k

23 Months to get back the investment

But a great return on

investment

What happens if we hire 2 sales people

every month?

What happens at the company level when we add 2 new sales hires every month?

$(3,000,000)

$(2,000,000)

$(1,000,000)

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

Cumulative Net Profit

Total amount invested:

$2.6m

32 Months to get back the investment

Comparison: hiring one versus two sales people per month

$(3,000,000)

$(2,000,000)

$(1,000,000)

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

Mon

th 1

Mon

th 3

Mon

th 5

Mon

th 7

Mon

th 9

Mon

th 1

1M

onth

13

Mon

th 1

5M

onth

17

Mon

th 1

9M

onth

21

Mon

th 2

3M

onth

25

Mon

th 2

7M

onth

29

Mon

th 3

1M

onth

33

Mon

th 3

5

Cumulative Net Profit

1 sales hire a month 2 sales hires a month

The cash flow trough is halved

Not adequately shown, but the acceleration after

breakeven is also halved

Salesperson Unit Economics

A typical good ratio is around 6x in SaaS

CACOTE LTVQuota

5x<

On Target Earnings

CASH IN ADVANCE

Annual up-front payment

Instead of Monthly

What happens if we collect a year’s payment in advance?Looking at the whole company picture when hiring 2 salespeople per month

$(500,000)

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Mon

th 1

Mon

th 4

Mon

th 7

Mon

th 1

0M

onth

13

Mon

th 1

6M

onth

19

Mon

th 2

2M

onth

25

Mon

th 2

8M

onth

31

Mon

th 3

4

Cashflow comparison -monthly payments vs

year in advance

Net profit Net Cash Flows

$(5,000,000)$-

$5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000

Mon

th 1

Mon

th 3

Mon

th 5

Mon

th 7

Mon

th 9

Mon

th 1

1M

onth

13

Mon

th 1

5M

onth

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Mon

th 1

9M

onth

21

Mon

th 2

3M

onth

25

Mon

th 2

7M

onth

29

Mon

th 3

1M

onth

33

Mon

th 3

5

Cumulative Cashflow comparision - monthly

payments vs year in advance

Cumulative Net Profit

Cumulative Net Cash Flows

Eliminates the cash flow trough, and means $35m more cash in this

scenario

Summary

Summary

• Key Drivers of SaaS Success: • Months to recover CAC • LTV:CAC Ratio

Reduce CAC • Lower costs per lead

• Increase Funnel conversion rates

• Increase PPR (Productivity per Sales Rep)

• Simplify your product

• Reduce human touch

Increase LTV • Achieve Negative $ churn

• Improve product stickiness • Sell to the right customers • Nail On-boarding and Customer Success • Use variable pricing axes • Nail expansion sales

• Increase Gross Margin %

• Increase average deal size

For more information…

Visit my blog:

www.forentrepreneurs.com

Full slide deck is available here:

www.forentrepreneurs.com/saastr