Cool infographic regarding small businesses and their use of social media. This demonstrates some tangible business value now being derived from leveraging social media sites.
On Saturday, April 22nd, Steve Lohr from the NY Times wrote a column titled, “Amazon’s Trouble Raises Cloud Computing Doubts“. The article asserts that outages with Amazon’s cloud computing services will likely force many companies to rethink their strategy to rely upon outside vendors for their compute and storage services.
The article includes some comments from an IDC analyst who suggests that due to this outage, companies must now have a “conversation” about what they keep inside the four walls and what they place outside ‘in the cloud’ – as though systems managed inside a company are somehow safe or safer. Ridiculous. Companies with internally-managed infrastructure have outages every day. It’s the strategy they’ve put in place to handle these outages that matters.
Just as companies today weigh the cost of investing in disaster recovery for their internal systems, companies that rely upon cloud computing vendors need to perform a similar assessment. I would assert that the “conversation” suggested in the article should really have been targeted at whether or not you need disaster recovery services and how much you are willing to pay your PaaS/IaaS vendor to supply them.
Disaster recovery services are available ‘in the cloud’ – as the article points out that Netflix has availed itself of - but these services aren’t automatically included and cost more. The companies that experienced outages when a portion of Amazon’s cloud infrastructure went down chose not to pay for disaster recovery services and they got exactly what they paid for.
I would suggest that a more accurate headline for the article should have been something like, “Lack of a Strategy for Your Cloud Computing Services is a Disaster Waiting to Happen”. Unfortunately, this boring title wouldn’t be nearly as sensational and wouldn’t sell papers…or online subscriptions…and it’s probably one of the reasons why I’m not a journalist.
If you have at least some sort of marginal interest in what is going on in 2011 with respect to start ups, you can’t help to have read or heard about the new “bubble” controversy.
Valuations and deal sizes for “hot start ups” are reaching lofty heights.
Just off the press is an article from Dan Primack, a journalist for Fortune magazine. In his article titled, “Venture capital shows sign of bubble” he writes the following:
Venture capitalists invested $5.87 billion in 736 U.S.-based companies during the first quarter of 2011, according to a new MoneyTree Report released by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Reuters. That works out to $7.98 million per deal, which is 18% larger than the average deal size during the prior quarter. It also is 21.6% higher than the average deal size in Q1 2010, and a whopping 47% larger than the average deal size in Q1 2009. Moreover, the average early-stage, expansion-stage and later-stage deal was larger in Q1 2011 than was the comparable deal in 2010. That’s important, because it indicates that this isn’t just reflective of VCs putting more of their eggs into less-risky, later-stage deals.
He goes on to cite the following statistics:
Overall, software companies continued to lead all industry sectors with $1.1 billion raised for 187 companies last quarter. This was followed by industrial/energy with $1.03 billion for 75 companies and biotech with $784 million for 85 companies. The quarter’s largest deal was a $201 million round for BrightSource Energy, an Oakland, Calif.-based thermal power plant developer, that raised $201 million. The rest of the top five was Plastic Logic ($200 million), Fisker Automotive ($111 million), Tabula ($108 million) and SoloPower ($78 million). Per usual, Silicon Valley led the nation with $2.49 billion invested in 212 companies. New England placed second with $639 million for 90 companies, and New York Metro snared $580 million for 69 companies.
So, the question currently being bandied about the proverbial watercooler is are we or are we not in a bubble? If we are in a bubble, are we in 1998 or 2000 (referring to the relative beginning and end of the last formally recognized bubble) and if we are in a bubble will this one end like the last one or will the ending be somehow different this time.
From my own perspective at InterWest, we are seeing more deals than ever in 2011. The weeks are literally jammed with back to back meetings with great entrepreneurs with great ideas. And, the deals that are getting done, for companies in a hot sector (e.g. consumer internet) and/or with a proven team are being fought for and won at valuations that may be hard for the entrepreneurs to live up to — and for the venture firms to generate a great return if anything goes wrong and the company takes longer and more capital to reach its goals.
That said, one observation made by Keval Desai, an early member of Google and VP at Digg, is that:
- There are 7B people on the planet.
- 2/3rds of them don’t have Internet yet
- 95% without smartphones
- Facebook only has 10% share
- There is an entire new generation that is using mobile tablets, as infants, that will learn, socialize and play completely differently than anyone born prior to them.
In addition, the rapid rise of the mobile/cloud computing market is also driving a complete transformation and overhaul of back end systems thereby creating opportunity throughout the technology markets.
Given all this, it could be entirely possible that we see many years of growth in many, many different technology areas without the big bubble pop we saw last time. Companies started today that see early traction and growth - and revenue – have a good shot at not suffering the fate of the Bubble 1.0 companies like “pets.com” but instead could survive to become the new large incumbents that help to reshape the world in which we work and play.
Of course, this doesn’t factor in exogenous issues such as instability in the Middle East, natural disasters, etc. which could act as a countervailing dampener.
So, while hot start up valuations may appear to be “bubbly”, we may look back and feel they were actually fairly valued. The next few years should be pretty interesting…but hopefully “interesting” in a good way.
I received a report from SaaS Capital titled “Leaders and Laggards: SaaS Growth and the Cost of Capital”. The subject of the report is how the public markets value a high growth SaaS company (their definition of high growth is >25% YoY).
The report states, “13 public SaaS companies tracked by Pacific Crest Securities have increased in value 40% since the beginning of 2008. During that same period, the S&P index has yet to return to its pre-recession value.”
It goes on to say, “…not all public SaaS companies have performed equally well. To be a standout in this space, growth needs to be greater than 25% per annum, and the market opportunity needs to be significant (e.g. CRM, ERP, HCM, etc).”
They claim that growth dominates over profitability for a couple of reasons. The first is that the SaaS market is still immature with only a third of the entire software market spend. The second is that these companies have been able to demonstrate significant profitability after sales and marketing spend is cut back.
I’m not sure I necessarily buy into this last statement because I’ve yet to see any high growth SaaS companies that have cut back on their sales and marketing spend in favor of profitability. In fact, I remember a few years ago speaking with Phill Robinson, the then-current CMO of Salesforce. His comment to me was that he had not reached a point of diminishing return from his investments in Google Adwords – and Salesforce has continued to invest heavily in sales and marketing – mostly “brand” marketing v demand marketing surprisingly.
Here is the chart that SaaS Capital showed with the relative performance of each of the 13 public SaaS companies.
So, it’s true for public SaaS companies but does high growth spell high valuations for private SaaS companies?
The answer is a resounding “yes”. In fact, even more so. For fast growing private SaaS companies, valuations have recently been over the top. In the public markets, the high multiple ranges but is about 10x-12x annual revenues.
In the private markets, a high growth SaaS company with “only” a 12x multiple could be a great deal for an investor. One of the companies I looked at last year had less than $5M in revenue but the pre-money valuation of the round when it was completed was in the mid $100M range – all because its YoY growth rate and its pipeline had grown so fast and it was in a very large and addressable market.
In contrast, a low growth SaaS company is in a precarious position. The authors of the SaaS Capital report cite a private SaaS company they have been working with that generated $11M in revenues and is profitable but only growing somewhere north of 10% per annum. The company was unable to find any interested strategic investors and is hoping to get a financial buyer to pay 1.5x revenue this year. If they do, I think they should consider themselves fortunate.
So, if you want a successful outcome for your SaaS business, by defnition it needs to generate high growth. To do that, you need the capital to invest in sales and marketing. And, as I have written about in previous blogs, in a high volume SaaS model, lead generation not sales capacity, fuels growth. This is one reason why I believe we haven’t seen any leading SaaS companies emerge that haven’t been venture backed at some point to fuel growth.
So, by definition, if you’re a SaaS company it’s incumbent upon you to find marketing personnel who are experts at lead generation. I know this is one of the critical hires in each one of my SaaS portfolio companies and it is becoming increasingly more difficult to attract this highly sought after talent.
Given the importance of lead generation for the SaaS model and company valuations, I suspect over the next few years, that marketers with proven lead generation skills in the SaaS market may see base + variable compensation on the same level as sales personnel.
I was reading the Wall Street Journal this past Saturday and came across an article on page B3 regarding GroupOn’s revenue growth from 2009 to 2010. For anyone who has been asleep for the past year, GroupOn is a “daily deals” website offering online discount coupons for primarily local goods/services.
According to the article, from $33M in 2009, GroupOn’s revenue virtually exploded in 2010 to $750M. From an employee base of 120 in 30 cities in 2009, the company now has 4,000 employees across 565 cities. Holy cow!
As I read the article, it reminded me of the significant challenges companies must deal with when faced with explosive growth. We were faced with a similar challenge at Siebel Systems in 1998 as we had doubled from 1997 and we were preparing to double revenue the following year (from $418M to $800M). As it turned out, we doubled in 1998 ($813M) and we doubled again in 1999 to $1.7B.
While this is a high quality problem to have, the fact is this type of growth places enormous stress on executives, managers and employees. And, it is a problem that few executives/managers have personally had any experience with.
One of the issues we faced at Siebel was not only with external hiring, but also ensuring that our executives/managers could scale with the business. For example, people who may have been great first line managers were becoming second and/or third line managers in the course of a single year. Not everyone had that experience nor was everyone capable of making that type of transition.
To his credit, Tom Siebel realized that in order to “keep the wheels from coming off” (his words), we needed to put in place a hiring program that would ensure that employee 5,000 was as capable as employee 100. Additionally, we needed to ensure that managers who whose organizations were exploding internally, weren’t collapsing under the weight of new/different responsibilities.
We knew it was an impossible challenge to make perfect external hires and transition every manager from one level to the next. Therefore, we needed to put in place a process that ensured when we made a mistake and hired the wrong person or we identified that a manager was failing that we had a mechanism to quickly identify and rectify the situation.
We needed a plan to hire several thousand people in a single year. This meant that people who we had hired within the past year would likely be responsible for hiring additional people within the year. These would be people who themselves had limited experience with our “Core Values” and/or our operating principles.
The opportunity to do this wrong and hire a lot of people who would be detrimental to our business was extremely high. This would cost us a lot up front and even more downstream with our customers, partners and shareholders.
To address the the critical challenge of talent acquisition, we put in place a recruiting and training function across the company. Working with HR, each senior executive was assigned a dedicated recruiter who helped to draft the job roles/specifications that aligned with employees who were currently viewed as successsful in their role within their groups.
We held “Super Saturdays”, where we would bring in dozens of candidates and have them interview with current employees and managers in an intense day long process. By the end of the day, we accumulated all the comments on each candidate from each interviewer and assessed whether or not we wanted to make an offer. For those candidates who made it through the process, HR generated an offer letter and the hiring manager met with the candidate at the end of the day and personally made the offer. It was a long and exhausting day but we were able to make many great hires within a single day without impacting the business during normal business hours.
Then, in each group certain managers who had tenure with the companyand the organization, were tasked with creating a training curriculum that helped to train new employees. For example, in the Alliance organization, we took the dozens of recent MBAs we had recruited earlier in the year and put them through an indepth program where they were trained on how Siebel created and managed its alliances.
We operated a “boot camp” where newly-minted alliance managers learned the general policies of Siebel Systems (e.g. Core Values) along with organization-specific issues such as the structure of the Siebel Alliance Program, how to write an alliance business plan, and how to work with other functions within Siebel Systems. At the end of the month long training each manager was tested and certified.
Similar training was performed in Product Management, Sales, Engineering, etc.
Consequently, new employees were able to quickly assimilate into the company and understand our Core Values, our policies, learn who were the key people in different functions across the company, how to work across the organization and how to work within their own organization.
In addition, we knew that not every employee – new or otherwise – was going to work out and as important as it was to bring on great people, it was equally important to be able to identify and remove people who were unable to contribute as we needed. To address this very real issue, we created an objective process.
Every employee at Siebel had a set of quantifiable and written objectives which were captured in an internal system we developed. Today, there are products like Rypple that will help companies capture and track their objectives/commitments. As a result of this process, every six months we stacked ranked every employee across the organization and we eliminated the bottom 5-10% performers.
I don’t claim this was a perfect process by any stretch – I don’t believe everyone liked/agreed with this approach or that mistakes weren’t made from time to time where we terminated or kept the wrong employee – but overall this program helped to quickly identify and resolve employee situations that weren’t working out.
Between these two programs, we were able to “keep the wheels on” even in our hyper growth days.
I think these ideas can even apply to companies that only need to make a few hires. Many times interviews take a back seat to the business and are stretched out far longer than necessary. From what I have seen, most start up companies are poorly prepared to execute quickly in this area. Interviews can be disjointed with candidates left wondering who they need to interview with next or where they stand. Offer letters take days/weeks.
For high tech companies, people are our most precious asset. So, just as it is critical to have a world class development process, having an outstanding hiring process is critical to success.
For those key hires that could make/break a company and who are likely to be highly desirable by your competitors, putting in place a world class hiring process so they join your team vs. someone else’s could be the difference between your company becoming the market leader or an also ran.
So…ask yourself “how good is our hiring process?” Even if you aren’t in hyper growth, are the wheels coming off?