SaaStr18 Dave Kellogg Ten Non-Obvious About Scaling SaaS

1 © 2018 Host Analytics, Inc., All Rights Reserved
Ten Non-Obvious Things About
Scaling a SaaS Company
Dave Kellogg, CEO of Host Analytics
@kellblog, www.kellblog.com, ceo@hostanalytics.com
February 7, 2018
Revision 1.4

Dave Kellogg Thirty-Second Self Introduction
Day Jobs
 CEO of Host Analytics
 Cloud apps for planning, consolidations, reporting
sold to corporate FP&A departments (EPM)
 SVP/GM at Salesforce ($3B)
 CEO of MarkLogic ($0M to $80M)
 CMO of BusinessObjects ($30M to $1B)
 Two prior startups ($5M to $240M)
Boards and Spare Time
 Alation, data catalogs
 Nuxeo, content / digital asset mgmt
 Granular, agtech SaaS ($300M exit)
 Aster Data, NoSQL ($295M exit)

Ten Non-Obvious Things?

 How big is the deal we’re working on at XYZ Co?
 What’s the forecast for this quarter?
 How big is your company?
 What number is on the first line of the first slide of your investor deck?
No No’s
 Answering in bookings, TCV, GAAP revenue
 Failing a priorities test, connotations, interference with fundraising
1. You Must Run the Company Around ARR
Everybody knows that, but do you?

One-Slide SaaS Financials Dashboard
This says you are ARR-first
See: https://kellblog.com/2016/12/23/saas-startup-one-slide-financial-dashboard/
(More follows)

CAC ratio = prior-S&M / incremental-ARR
 Include or exclude upsell ARR?
 Include or exclude cost of customer success?
 Do on per-customer (CAC) or ARR-dollar (CAC ratio) basis?
LTV/CAC = (1/churn-rate * sub-GM) / CAC-ratio
 Which CAC? Churn before or after expansion? Negative churn?
In try-and-buy environment if you spend 100 units to get customers worth 50 but who are
reliably worth 150 in 2 quarters, is your CAC ratio 2.0 or 0.66?
 What does acquisition cost really mean?
2. SaaS Metrics: Way More Subtle Than Meets the Eye
See: https://kellblog.com/2014/07/30/the-ultimate-saas-metric-ltv-cac/

 Is the renewals denominator 100 or 115?
 Inner fund-raiser wants 100, inner manager wants renewals target at 115
 When do you take the 15 units of upsell?
 Does the day-365 transaction count as 10 units of churn and 20 of upsell or 0 units of churn
and 10 of upsell?
 How can I not lose credit for the 15 units of upsell?
 That’s why they made retention rates
SaaS Metric Subtlety: A Churn Example
Buys 90 units of A
and 10 units of B
Buys 15
units of A
Drops 10 units
of product B
Buys 20 units
of product A
Day 1 Day 180 Day 365
See: https://kellblog.com/2016/12/27/a-fresh-look-at-how-to-measure-saas-churn-rates/

Imagine if you spent your life talking to investors who can’t see the underlying metrics
 New ARR bookings, CAC, churn, payment terms
And who were forced to guess using outside-in metrics like billings
 Revenue + change in deferred revenue
And fed scraps like survivor-biased retention rates?
If you’re raising one or two rounds before an eventual IPO, which CFO should you hire now?
 Warning: boards love hiring the person you need 3 years from now
 Which is great if and only if they can do (and are interested in doing) the job at hand
3. Former Public CFOs May Not Get VC SaaS Metrics

Simple example
 You have 10% churn rate and zero upsell opportunity
If multi-year discount < churn rate, it’s a win/win transaction
 Few companies actually break the discount in two, but it doesn’t prevent
this logic from working
But the deal needs to be prepaid
 At a startup, a non-prepaid, multi-year deal looks a lot like a renewal
processed by legal instead of customer success
4. Multi-Year Deals Make Sense in Certain Situations

Bookings = things that turn to cash in 90 days
 Everybody cares about cash
 Bookings != total contract value (TCV), which is usually not prepaid
5. Bookings is Not a Four-Letter Word
Sensibly defined, it’s an important idea

Adoption predicts renewal?
 Generally necessary but not sufficient
When do happy customers not renew?
 Corporate (e.g., acquisition) and/or new executive dictum
 Replacing a system people feel “meh” about is easy, replacing one they love is hard
 Business failure (e.g., in SMB)
When do unhappy customers renew?
 By accident: miss an autorenewal deadline in the contract
 By distraction: miss their window to migrate
6. Renewals, CSAT Less Correlated Than Meets the Eye
Beware using renewals as a proxy for customer satisfaction; measure NPS

7. You Can’t Analyze Churn by Analyzing Churn
Example churn taxonomy
$300$1000
$750Business
Related
Lost
Accounts
Seat
s
New Player/
Team
$350
Traini/Sup
t
Shrinkin
g
Accounts
Discontinued
Usage
Discount
$150
Functionalit
y
$150
Financial / Out
of Business
$300
Product
Related
$250
Acquisition
$50
Sponsorship
$20
Didn’tNeed
$36
$50
MYD
30
Corp
Dictum
$28
Produc
t
Relate
d$100
CorpDictum
$30
Functionali
ty
$33
Overkill
$100 $60 40
Other
20
Affordability

Beautiful charts just classify churn by type
But analyzing churners just shows what people who
churned had in common
 Selection (survivorship) bias
When you want to analyze what separates people
who churn from people who don’t
 Control group
You need to do some heavy stats on a range of
input and a few output variables
 Success, deliberate renewal, lasted N years
You Can’t Analyze Churn by Analyzing Churn, II
Selection bias, lack of control group
The damaged portions of returning
planes show locations where they can
take a hit and still return home safely.

Why hunter/farmer?
 Focus QCRs on new business; pay lower rates on renewals and upsell
Boards hate
 Paying sales commission rates on renewals … and they’re right
 Double compensation … and sometimes that’s myopic
Let intelligence, not dogma, drive your model as function of situation and tier
 Land and fries/burger expand: hunters and farmers
 Land and salesy expand: farmers with shotguns (“account managers”)
 Land and hard/competitive expand: farmers track for hunters
 Small land and big expand: hunters in a zoo
 Avoid: dead farmers (putting your farmer against competition’s hunter)
8. Finding Your Own Hunter/Farmer Model is Hard

Only 20% of SaaS firms lose money on prof services
 Subsidize new and renewal ARR
 Lower than I’d have guessed; trend is upwards
Most investors won’t care if your services aren’t that big
(<15% of revenue) and roughly breakeven.
High services prices / expert consulting set a benchmark
for partner ecosystem
Heavy services losses have two consequences
 Reduce blended gross margins
 Some investors may add services losses back to CAC
9. You Don’t Have to Lose Money on Prof Services
Source: KeyBank/PacCrest 2017 annual SaaS study.
$2.5M+ in revenue

10. You Need Not Sacrifice Long-Term Team Members
on the Altar of Experienced Talent
They’re Right
 To assume you need to systematically
replace executives over time as the
company grows
 Not everyone can or wants to grow
through the zones on the rule of 1s and 3s
 1-3, 3-10, 10-30, 30-100, …
They’re Wrong
 To underestimate the value in retaining
institutional knowledge
 To assume that everyone has a ego such
that they won’t take reassignment
 If they don’t support creative solutions on
title, office, and compensation
(No matter what your board says)
Create a culture of creativity and change, not of stasis

Make everyone understand
that they will have more fun and make more money,
if they worry more about being on the right bus
than they worry about having the right seat.
See: https://en.wikipedia.org/wiki/Further_(bus)

Thank You
Subscribe Kellblog.comFollow @kellblog

SaaStr18 Dave Kellogg Ten Non-Obvious About Scaling SaaS

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