Smart SaaS

I'm becoming a big fan of SaaS companies and this blog by Kevin Dobbs provides some incite into how SaaS companies need to be setup, funded and run.

What are Venture Capitalists Saying About SaaS? by Kevin Dobbs

Flat is the New Up:

One phrase that was uttered more than once is that ‘Flat is the New Up’. Although when it comes to Software as a Service… it appears that ‘Up is still Up’. Even in 2008, most publicly traded SaaS companies have bounced back from their lows by an aggregate of 20%, which is much better than the S&P 500. Apparently Wall Street likes SaaS companies and now are valuing them at 3 to 3.5 times their recurring revenues, unfortunately at the beginning of 2008 that number was closer to 8x. Keep in mind that this is better than a lot of public firms that are currently trading at their cash values. Other Wall Street analysts are valuing SaaS firms at 12x their cash flow but it is difficult to understand if there is a consistent valuation metric that firms or investors should be using.

Customer Acquisition Costs:

When building your SaaS business model, it is important to assume that for every dollar of recurring revenue you will probably need to invest $.50 to $1.00 in your Customer Acquisition Costs (CAC). It is important than ever to have an active program of testing various CAC channels and tactics to maximize your investments. Then you need to have a smart statistical framework that you can explain to your investors.

Key take aways:
1 You need to still need to have a great idea, product and team but you might need to have reduced risk for your potential investors.
2 Demonstrate your company knows how to stretch a dollar as far as possible. Fewer employees is better… think Craigslist.
3 Show traction. Number of transactions, members, customers, revenues, profits.
4 Shop carefully for your potential investors and don’t waste time with Zombies.