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.
For those of you who have seen the movie “There’s Something About Mary” – the 1998 comedy starring Cameron Diaz, Ben Stiller and many other great actors/comedians – there is a scene where a hitchiker (Harland Williams) is picked up by Ted (Ben Stiller) and the hitchhiker – who the audience knows is a psychotic killer – starts telling Ted about his great new business idea:
Hitchhiker: You heard of this thing, the 8-Minute Abs?
Ted: Yeah, sure, 8-Minute Abs. Yeah, the excercise video.
Hitchhiker: Yeah, this is going to blow that right out of the water. Listen to this: 7… Minute… Abs.
Ted: Right. Yes. OK, all right. I see where you’re going.
Hitchhiker: Think about it. You walk into a video store, you see 8-Minute Abs sittin’ there, there’s 7-Minute Abs right beside it. Which one are you gonna pick, man?
Ted: I would go for the 7.
Hitchhiker: Bingo, man, bingo. 7-Minute Abs. And we guarantee just as good a workout as the 8-minute folk.
Ted: You guarantee it? That’s – how do you do that?
Hitchhiker: If you’re not happy with the first 7 minutes, we’re gonna send you the extra minute free. You see? That’s it. That’s our motto. That’s where we’re comin’ from. That’s from “A” to “B”.
Ted: That’s right. That’s – that’s good. That’s good. Unless, of course, somebody comes up with 6-Minute Abs. Then you’re in trouble, huh?
Hitchhiker: No! No, no, not 6! I said 7. Nobody’s comin’ up with 6. Who works out in 6 minutes? You won’t even get your heart goin, not even a mouse on a wheel.
Ted: That – good point.
Hitchhiker: 7’s the key number here. Think about it. 7-Elevens. 7 dwarves. 7, man, that’s the number. 7 chipmunks twirlin’ on a branch, eatin’ lots of sunflowers on my uncle’s ranch. You know that old children’s tale from the sea. It’s like you’re dreamin’ about Gorgonzola cheese when it’s clearly Brie time, baby. Step into my office.
Hitchhiker: ‘Cause you’re f&*%n’ fired!
The scene is hysterically funny – at least to me! But it might be one of those things you have to see/hear live to appreciate.
Anyway, lately I feel like I’ve been hearing the equivalent of “7 Minute Abs” business ideas. That is, the business premise is to take a successful idea with an existing brand and an existing installed base- make a relatively small refinement – and expect to build a complete company around it – unseating the incumbents, etc.
So, what am I talking about? Someone comes in with an idea for a new CRM application but it has a mobile twist. Someone else comes in with an idea for a real estate website – but with a lot more social capabilities. Another comes in with an idea to connect homeowners with handymen (handypeople?) but it’s a mobile app v a web app.
In fairness, these aren’t bad ideas and unlike “6 minute abs” they are almost always an improvement over the original. However, in my opinion, most of the incumbents could easily replicate the new idea – with little chance of IP infringement – if it takes off.
I think it’s important that if you are going to go after an existing market with an installed base, make sure that your business model/product idea has demonstrable and radical differentiation — something where the value proposition is easy to describe and simple to convey.
In other words, make sure you’re not “dreamin’ about Gorgonzola cheese when it’s clearly Brie time”.
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.