Eastern European Champions & the 4 V’s of Big Data

Eastern European Champions

I had the opportunity to do a keynote at the IDCEE conference in Kiev last week. It was my first time in the city and I must say that I was immediately taken by the energy of the city and of the entrepreneurs that I met at the conference.

It took me some time to figure out a title and I eventually settled for “Building European Champions” as the region has proven its ability to generate very successful venture outcomes and will continue to be the birthplace of many successful technology companies. I would categorize these champions in two camps: the “Local Champions” and the “Global Champions”. The first category includes companies that have a dominant position in their national market and are often internet or ecommerce companies. This category would include among others Yandex, Mail.ru, KupiVIP and Avito in Russia as well as Allegro in Poland. The second category is composed of companies that have developed a unique IP locally and marketed it worldwide - typically in the gaming, software, security or mobile sectors. Skype is probably the most famous of them, but there are a lot of other examples including Game Insights, Kaspersky and Parallels in Russia, LogMeIn and Prezi in Hungary and Avast and AVG in the Czech Republic.

Why Eastern Europe?

Looking forward, Eastern Europe has several assets and macro trends that will contribute to foster more innovation and create successful technology companies:

• 400m+ people in the region
• GDP of $3T+ with most countries growing 2-5%+
• “Runet” (Russia Internet) is the largest market in Europe with 53m internet users and given its under-penetration (37%) it is still growing at double digits, increasing the gap with Germany which is currently number two and growing at 2% per annum. Out of these 53m internet users, 15m are shopping online, creating a fast growing $11B ecommerce market in Russia alone (expected to reach $19B by 2015)
• The mobile penetration is among the highest in the world with 1.7 mobile phone per person for the Top 4 EE countries (vs. 1.2 in GE, 1.3 in Brazil and 0.8 in India and China)
• The region has an exceptional talent pool: Eastern Europe was the first country to send a man into space in 1961 and has a very strong network of universities. It is not by chance than a Moscow team won the 2012 FB Hackathon with Boostmate, a tool to analyze social interactions and rank your closest friends.

In addition, the availability of cloud and open source technologies has further reduced the cost to get a technology business started as now anyone can get computing and storage capacity in the cloud or build a LAMP stack for a few hundred dollars. This low entry barrier should accelerate the pace of innovation.

A few facts on Big Data

I took advantage of this keynote to highlight a few areas where we see a lot of opportunities globally and in particular for Eastern European start-ups: Big Data, Cloud Computing and Mobile. I will elaborate a bit on the first one – Big Data.

Big Data is a key area of focus for our firm to the point that we even created a $100m “Big Data Fund” recently. Going through several reports, I found a few mind-blowing stats on the growth of structured and mostly unstructured data. Here are a few examples:

• 247B emails are sent every day (and the scary bit is that 80% is spam!) 
• It costs $600 to buy a disk drive that can store all of the world’s music
• 30B pieces of content are shared on Facebook every month
• Projected growth in global data generated annually is 40%. By 2020, the production of data will be 44 times what we produced in 2009
• 15 out of 17 sectors in the United States have more data stored per company than the US Library of Congress

Big Data is indeed…big! And getting bigger and bigger.

The 4 V’s of Big Data

Big Data is different from "large amount" of data. We have tried to define Big Data around a framework of four V’s that explain the essence of the concept: Volume, Variety, Velocity and Value:

• Volume: the first V is easy to grasp as it is about quantity. The proliferation of mobile phones, social media, machine data, web logs has led to large amounts of data being generated, stored and processed and this volume is increasing exponentially with the growth of new computing platforms and the shift of activities from offline to online
• Variety: this is where big data starts to differ from “a lot of data”. Big Data is not only about volume but also about the type of data. Large volume of structured data can stored in relational databases and accessed quickly by queries. Big Data contains structured data but mostly unstructured data (which is the key driver of growth as shown in the graph above). And this unstructured data contains valuable information that can now be extracted if the right infrastructure is in place (e.g., sentiment, preference, mood, purchasing intent)
• Velocity: Time is of the essence with Big Data. Business users need faster and faster response rate to derive the most value from information. Sometimes it needs to be in real time. The more data to analyze and the more challenging this becomes as all the pieces of the infrastructure needs to be perfectly tuned
• Value: This last V’s characterize the underlying purpose of storing Big Data – to derive business value. This means that on top of the technical aspect of storing and managing Big Data, there is a need for a strong BI and visualization engine to drive insights beyond data scientists

Looking at these four V’s helps define the underlying opportunities around Big Data: there is a need for larger and cheaper storage, fast access, data management tools, platforms (like Hadoop), BI and visualisation engines and new business applications that can help businesses capture, organize and derive the most value from Big Data.

I will finish this post with one example that came out of a discussion with the IT executive of a large US bank. One of the big data team collected and analyzed all the data of accidents on Route 101 linking San Francisco to San Jose. They found that a large part of the accidents were due to random objects falling from trucks on the road. Digging deeper, they found that a large part of these objects were real estate signs and they were able to correlate spikes in the number of accidents on route 101 with a shift in the real estate market in the bay area in quasi real time. Impressive! 

And this is just the beginning.

French Tax Law for Start-ups: Ringing the Alarm Bell

 

Accel has already invested over $60 million in French start-ups and we would like to invest more – but will there be enough entrepreneurs left if the new Tax laws are voted in? 

*********
 

This post is a translation of the article: « Pigeons » : le cri d'alarme d'un fonds américain published on LaTribune (12/10/2012) and is a response to the proposed tax law proposed by the government of Francois Hollande, suggesting to tax all capital gain at the same level than salaries or 60%.

*********

While France has been a fertile ground for innovative start-ups, the new fiscal law threatens to disrupt an ecosystem that has slowly emerged over the past 12 years. Instead of increasing the tax burden on these companies driving job creation, why not take full advantage of this evolution of the tax law to position France as the most attractive country for entrepreneurs in Europe?

France has proven its ability to develop innovative internet models

 

Over the past three years, we have invested over $60 million in French technology start-ups with Showroomprive (number 2 in Europe for online private sales), BlaBlaCar (Covoiturage.fr the European leader in ride-sharing) and Shopmium (offering coupons via a mobile app) and as a result have contributed to creating close to 600 jobs. While our investment focus covers all of Europe, we consider France to be a very important market for our business and we are actively seeking new investment opportunities.

France is indeed a country with a proven track record of developing innovative business models.

Here are a few examples: the “flash sales” model was launched by VentePrivee and Showroomprive, the two European leaders and has been copied in the US by several companies such as Gilt Groupe; “online retargeting” was invented by Criteo, who currently operates in 30 countries with over 3,000 customers and whose success relies, among other things, on its 10,000m2 R&D centre located downtown Paris. Since its launch, Criteo has created 800 jobs, 40% of those in R&D; France has also been a pioneer in the space of ride-sharing with the creation of covoiturage.fr, a company that has built a strong community of over 2 million members and transporting a number of passengers equivalent of 1,000 high speed trains every month. And the list of success stories continues with companies such as Free, Meetic, AuFeminin.com, PriceMinister, SeLoger…

The second strength of France resides in its talent pool of entrepreneurs. With the experience accumulated during the first internet boom, this talent pool has grown considerably and gained in strength over the past few years. Those who have enjoyed success have given back to the community as business angels, through the creation of seed funds such as ISAI, Kima Ventures or Jaina Capital, or by sharing their personal experience through forums, conferences or teaching. A good example is the creation of École Européenne des Métiers de l'Internet (EEMI) in September 2011, founded by Marc Simoncini (Meetic), Jacques Antoine Granjon (Vente-privee.com) and Xaviel Niel (FREE).

Finally, another notable strength of France resides in its Telecom infrastructure. Indeed, France enjoys the highest penetration rate for broadband in Europe (32.7% for France vs. 26.5% on average in Europe according to Eurostat, Jan. 2011).

Amendments proposed to the 2013 Tax law are insufficient and threaten to destabilize the ecosystem

 

I will not go over the initial regulation proposal, which recommended a 60% tax rate on profits made by entrepreneurs after an exit (basic idea is to apply same tax rate on salary and capital gains). Instead, I will focus the discussion on the recent amendments suggested by the minister of economy and explain why these amendments are insufficient and threaten the growth of a booming ecosystem that has already proven to be and should remain a source of job creation.

The first amendment relies on the definition of « founder » and imposes a minimal ownership of 10% of the company and a holding period of two to five years to benefit from a lower tax rate. Let’s examine first the ownership constraint proposed by the amendment: the ownership level of a founder in his / her company depends on two key factors: the number of founders in the start-up and the potential dilution that occurs with fund raising (needed to sustain the company’s growth). Imposing a minimum ownership threshold on founders penalizes teams with several co-founders, while the combination of talents and skill sets coming from having several co-founders is usually core to the success of a start-up. This proposal also penalizes companies that have struggled to grow and had to raise several round of funding before reaching a critical mass, and have therefore been diluted more than they would have liked. Finally, it puts a break on the fast growing start-ups that could benefit from an additional injection of capital to fuel their growth but won’t do it to avoid further dilution. In our portfolio, we have companies with founding CEOs who own less than 10% of their companies for some of the reasons I just listed. Why should they be penalised in such an arbitrary way? The duration criterion is also very punitive for start-ups playing in the dynamic technology market. Let’s take an example in our portfolio: Playfish, a “social gaming” company, was launched in London in 2007. It enjoyed explosive growth, created 200 jobs in two years, and was acquired in 2009 by the American giant Electronic Arts. If that company had had to comply with the proposed regulation, its founding partners would have faced the following dilemma: either forfeit 60% of their gains in tax, or … ask Electronic Arts to come back later. Why should rapid success stories be penalised more than companies whose success is slower to come?

The second amendment proposes to apply tax rebates on capital gains applicable over a six years period for those who cannot meet the founder status. While this measure also relies on an arbitrary duration, which does not account for the dynamic environment in which start-ups operate, it will also create inequalities among start-up teams by dividing them into three “classes”: the “founders” who will be protected in some instances, the employees who have received stock options (and will fortunately not be impacted by this regulation) and the employees who have received shares and will be subject to a complex tax waiver scheme. Is this the “social justice” announced by the government?

To conclude, the ecosystem of internet start-ups is based on three key stakeholders: the entrepreneurs, who create the start-ups, the employees, who contribute to their success and the investors (business angels and venture capitalists), who invest capital to fuel growth. Those three constituents share the risks and play a key role in the development of start-ups. The proposed law, instead of bringing more cohesion to the ecosystem and aligning stakeholders’ interests, will in fact introduce inequalities that will ultimately lead to disequilibrium and conflicts… in addition to adding unnecessary complexity to the model. 

Why not take advantage of this law to make France the champion of Entrepreneurship in Europe?

 

Instead of introducing extra layers of complexity and penalising both start-ups and entrepreneurs, why not going back to simplicity and proposing positive changes that would position France as a beacon for innovation and entrepreneurship in Europe?

If we all agree that start-ups need to be protected given they are a unique vector of economic growth and job creation, why not take a step further and give them an attractive tax rate that could apply equally to all shareholders independently of any ownership level or duration? Why not apply a 15% tax rate on all capital gains coming from start-ups? Not only would such a measure boost the French technology ecosystem, but it would also attract entrepreneurs and investors to France.

One way to create boundaries for this proposal, would be to apply it only to shares acquired during the first twelve years of a start-up’s existence, after this date all transactions would be taxed at the current capital gain tax rate (regardless what the rate is – although I personally do not agree with the tax rate currently proposed by the government).  So why twelve years? While that threshold should be thought through, it would apply well to our current portfolio: among the 250+ active companies we have funded, the proportion of those founded before 2000 is minimal.

Such a change would play to France’s advantage and give a boost to the start-up ecosystem. Why not take a chance?

 

*********************

The Accel 5 Mantras of Ecommerce in Turkey

I was lucky to enjoy the sun, warmth and excitement of Istanbul in the past couple of days to attend the Webrazzi Summit, which is the poster child of Turkey’s vibrant start-up scene. I have been to Turley several times in the past 18 months, and find the region very exciting. There is a lot to like in this country with a large and fast growing internet market still very underpenetrated:

• Strong macroeconomic trends with a 2011 GDP growth of 8.1% and a GDP per capita which grew from $6k in 2001 to $14k in 2011
• Good infrastructure with 38m internet users (5^th European country), mobile penetration above 90% and a very strong logistics and payment networks (45m+ credit cards)
• Very attractive demographics with half of the population below 30 year-old and very active online (5^th country on Facebook, 8^th on Twitter)

As you can see, I am Istanbul-lish!

Being invited to speak at the conference, I decided to present some of the things that Accel learned after speaking to dozens of internet and ecommerce companies in the region. I summarized these learnings into 5 “Mantras” that are developed in the presentation embedded below:

1. “Me too” is not enough: don’t be the 50^th private shopping club or Groupon clone. There is no room for you in the market. Think “differentiation”
2. eCommerce is not a cheap journey: be prepared! Most successful ecommerce companies raise more than $50m during their lifetime, so watch every penny you spend and pay specific attention to (1) Inventory and working capital and (2) marketing costs (in particular a repeat basket is not free!)
3. Run your business with numbers: eCommerce is all about numbers and doing a 100 small things right
4. Build your brand by focusing on user experience: a strong brand is necessary to reduce your CAC and increase your profitability and the best way to build it is to focus on providing a great user experience (product, service and payments)
5. Mobile will be bigger than you think: mobile will represent 20%+ of you sales before you realize it!

The Accel 5 mantras of e commerce in Turkey from Philippe Botteri

Tired of paper and pen?

Who is not tired of having to sign a document on paper and then send a copy by fax or scanner? Or even worse, have to travel for a signture: last month, I had to sign a notarised document for a family matter and the only way to make this happen was to travel to Paris and show up at the notary's office to sign one single document. Very expensive signature both in terms of time and travel costs....Isn't this crazy XXIst century?

Hopefully, this will be over soon as Docusign expands its network of 20m users, who have already signed more than 150m documents in 188 countries. Venture is all about investing in disrupting technology and Docusign is disrupting a very basic process: signing a document. It sounds very simple but the complexity is to make this service as easy and simple as is a signature on paper, while being able to manage the flow of the document and provide the required security to make signatures reliables.

This technology is impacting nearly all the areas of a company: from human resouces employment contracts and onboarding documents, to procurement, sales, legal and finance. Signatures are everywhere and with a digitized workflow, documents can travel across department, subsidiaries and countries within seconds, shortening the execution cycles from days to minutes. In addition, the rise of tablets and mobile devices will accelerate the growth by making the signature process ubiquitous.

Facebook is your social network, LinkedIn your professional network and Docusign will be your identity network.

As several sites announced last week, Docusign raised a large $50m round to fuel its growth, in particular in Europe and Accel participated alongside Kleiner Perkins and existing investors. I look forward to work with Keith Krach, Mike Dinsdale, Tom Gonser and the rest of the Docusign team on this great adventure!

Apple in numbers

Apple posted some interesting numbers that I thought I would share with you, as some of them are mind-boggling:

400m card accounts linked to iTunes (this is now more than any other store on the planet, larger than the US population and close to 6% of the worldwide population!)

There are over 650,000 apps on the iOS app store, of which 225,000 are iPad only apps (this is an amazing stat show developers are now just focusing on iPad instead of iPhone)

Over 30B apps have been downloaded – with consumers downloading more than 50M apps a day. This represents more than 4 app per person on the planet

Over its lifetime, Apple has paid $5B to iOS developers compared to $12B to music labels – Apple now pays more to developers than music labels and will generate $5B in gross income this year.

By Q1’2012, there were 365M iOS devices in the market

Amazingly, apps are sending 7B notifications a day! Close to 20 per device...

SMS businesses are hurting – of the 365M devices, 140M use iMessage (Apple free messaging platform), sending 1B messages a day or close to 3 per device

130M devices now connect to GameCenter (which is basically Apple’s attempt to harmonize leader boards/stats across games


So, does this justifie a $560B market cap?

Perspective on gaming and mobile apps on Bloomberg

I was invited for the second time by Maryam Nemaze to talk about investing trends in technology. It was a but surprising to see the first question starting with Apple earnings but that's part of the game! It was a fun session. I did talk about software but unfortunately this part was cut in the online video. I guess the gaming and mobile sectors are more consumer friendly.

BlablaCar - Travel Revolution

Some countries in Europe may have lost their AAA ratings, but they have not lost their appetite to innovate and create new online services. Blablacar is one such example of innovation: with a fast growing community of 1.6m members in France (www.covoiturage.fr), the UK (www.blablacar.com) and Spain (www.comuto.es), this company is changing the way people travel on the old continent, becoming a very compelling alternative to trains and planes.

The website connects drivers and passengers who are willing to share a journey in their car. While the site addresses all kind of trips, from short commuting to long distance, most of the activity is around trips of 150+ miles. The passengers compensate the driver for the gas and toll costs, making it a fair trade. For example, a trip from Paris to Lyon (290 miles) would cost €25-30 compared to €100+ for the train. On top of being cheaper (cost is of course an important driver), people are also using the service because it is more social (a lot of people don't like to drive alone), more granular (with the scale, you can find a driver closer than the nearest train station!), and of course more environmentally friendly.

Blablacar is to cars what Airbnb is to houses: a way for people to monetise their unused assets on one hand and to consume differently on the other hand. This trend, described by Rachel Botsman in her book "The Rise of Collaborative Consumption" is growing as people becomes more and more inclined to use things rather than to own things. This explains the success of companies like Netflix or Zipcar, but like Airbnb, Blablacar is pushing the concept further with the assets being owned by the consumer instead of the company.

It is interesting to note that this model has been invented in Europe (Blablacar started in 2006) and while there have been some similar and more recent initiatives in the US (e.g., Zimride, Ridejoy), they have not yet seen the explosive growth that the service has observed in Europe with more than 1 Billion miles shared by the community and more than 8m passengers transported!

As Techcrunch announced earlier today, Accel led a $10m round in the company to help them develop their service across all Europe. We are happy to jump on board this rocket ship and help the company change the lives of millions more people!

In search of Europe's next tech stars...

A short interview on Bloomberg about where I see venture opportunities in Europe.

SaaS Multiples: Recovery or Bubble?

With companies like Saleforce and SuccessFactors trading north of 8 times 2011 revenues, SaaS valuations are just back to the 2007 peak, but what is remarkable however, is that, after a period of strong correlation in 2008/2009, SaaS companies (represented by the SaaS 13 Index) have massively outperformed the overall technology sector (Nasdaq) in the past 12 months, creating a gap of more than 60%!

What happened? It would have been easy to explain the difference by changes in the 2010/2011 revenue growth projections but unfortunately that is not the case. SaaS companies projected to grow 18% over this period in January 2010 and this projection moved up only to 20% today. In comparison, the overall technology sector growth was projected at 9-10% in early 2010 and this forecast did not change significantly today.

So if the difference cannot be explained by short term projections, we need to look over an extended period. To justify a 60pts difference, we have to believe that the current growth rates of 10% for technology and 20% for SaaS will continue to hold for the next 9 years before converging. So the question becomes: "Can SaaS outperform technology growth by 2x over the next decade?" Not unreasonable.


Scale matters

To drill down further and better understand how public markets value SaaS companies, I split the SaaS 13 Index into two groups: companies above $1B in market cap (large cap) and below $1B (small cap) and compared the performance of both indices to the Nasdaq:


The result is very interesting: small caps are highly correlated to the Nasdaq but the large caps have taken off sharply, and on average, small caps are trading at 3.5x revenues while large caps are trading at 6.4x. The relative growth rates partially explain the difference as large caps are growing on average 3-5pts faster, but they do not seem to account for the entire gap.


The sales productivity ratio (measured with the Customer Acquisition Cost or CAC ratio) are also fairly similar for the two groups (except for a small cap dip in Q4 09) and therefore do not explain the difference

Why is scale so much rewarded by public markets? Scale is usually correlated with market leadership and large market size, and Wall Street is rewarding with a premium multiple these large SaaS companies because (1) their growth is supported by a secular trend (now it is clear that Cloud Computing is here to stay!) and (2) their leadership position in multi-billion dollar markets will likely make them dominant players in the software landscape, even though they are still small today (SuccessFactors $2.5B market cap or even Salesforce at $17.5B seem tiny compared to the $223B of Microsoft). Unreasonable? Time will tell!

A Quick & Funny Summary of AdTech

I love this video: everything you need to know about online advertising!

"10 Things Every CEO Needs to Know About Product Design" unveiled at the Bessemer Annual Cloud CEO Conference

For the third year in a row, Bessemer hosted its Cloud CEO Conference, assembling roughly 100 CEOs/CxOs of our cloud and rich internet applications portfolio companies (Yelp, LinkedIn, Playdom, Zoosk, Smule, Wix, Eloqua, Teamviewer, Cornerstone OnDemand, Intacct, Criteo, Bizo and many others) as well as a few leading public cloud executives (Josh James from Omniture, Jeff Jordan from OpenTable, Adam Selipsky from Amazon Web Services, Grieg Coppe, CSO of Intuit, Michael Simon from LogMeIn...). The event was very well received by the group with our survey showing a rating of 4.4 out of 5! The full agenda of the event can be seen at the following link

The event started with an optional golf round on May 11th afternoon at the Palo Alto Golf and Country Club with a wonderful weather to welcome the participants. The golf was followed by cocktail, dinner and poker: a very fun start to prepare the full day of content and networking on May 12th at the Rosewood SandHill.

Unveiling of the "10 Things Every CEO Needs to Know About Product Design"

The best rated session of the day was the presentation by Jason Putorti on product design. Jason is the design Czar who designed the Mint user experience and we are incredibly lucky to have him as our first Designer In Residence!

Jason's presentation was focused on the "10 Things Every CEO Needs to Know About Product Design and User Experience". The full presentation is available at the bottom of the post but here are the key highlights:

1. Design can change businesses: little things can have a great impact. A simple example: the difference between "I am on Twitter" and "You should follow me on Twitter here" increased the registration rate by 173%!
2. Design is more than pretty picture: it is all about the user experience and the brand you are trying to build
3. Talk benefits not features: It is much better to write "Understand your money" than "20 colorful configurable charts and graphs". Another way to think about it is Microsoft vs. Apple packaging :+)
4. Think in flows, not screens
5. Do not make the user think: Make obvious what is clickable, minimize noise, omit needless words
6. Start with a great story: Make the value obvious and present it first in the user flow
7. User design as a lever: The best marketing tool you can have is a well designed application
8. Get out of the office: Watch people experience your product or service
9. Have your bible: Synthesize your design guidelines in a company style guide
10. Repeat & refine: Allot product cycles to improvement

10 Things CEOs Need to Know About Design

View more presentations from Jason Putorti.

A few highlights from the different keynotes and speakers

On top of Jason, we also had the chance of having many great speakers at the event and here are a few quotes and notes that I have taken during the different keynotes and panels:

• Joe Payne, CEO of Eloqua moderated the panel on Revenue Performance Management. One of his secret: "Incentivize your marketing team on sales not leads"

• Jeff Jordan, CEO of OpenTable speaking about his IPO process: "Build relationships with key public investors 2-3 years before going public (Morgan Stanley, Fidelity and T. Rowe). It is enough to meet them 1-2 times a year and it helps a lot during the roadshow"..."don't expect the IPO to boost your consumer brand, it does not help a lot"

• From the panel on the "Consumerization of Software" that I was moderating: "integrate your user flow from landing page to payment and usage into one single flow", "test, test, and test: user feedback is key"..."Use the 1/60 rule: less than one minute to understand the value and less than 60mn to experience it"

• Sarah Friars, lead software analyst for Goldman Sachs on IPO timing: "Go when you can"

• Michael Simon, CEO of LogMeIn on the Exit/IPO panel: "Pick the bankers you really like as you will spend a LOT of time with them!"..."1 out 25 company going public is bought in the process, ...the likelihood is fairly low"

• Bob Goodman, Bessemer on the same panel: "Bankers are good negotiators, that's why you hire them: the only way to get something out of them is to adopt a 'take it or leave it' stance!"..."having a large VC on your board helps keep the bankers honest and they are less likely to walk on your toes"

Looking forward to the fourth edition next year!

State of the SaaS 13: Q1 2010 Sentiment

As we are entering a new year, I thought it would be interesting to publish every quarter an update on the state of the 13 public SaaS/Cloud companies in the Index. So, here is the first edition, including the recent Q4 2009 earnings and the updated 2010 forecast.

1) Slightly improved sentiment for 2010, but companies are still planning for a long recovery

The following chart compares the median growth rate for the SaaS 13 group both in November 2009 after the Q3 reporting season and in March 2010 after the Q4 reporting season. Given the predictability of SaaS GAAP revenues on a quarterly basis, the fact that the 08/09 projections were unchanged is not a surprise. However, despite healthy Q4 results (most companies were at or above plans) few have increased their 2010 guidance and the median moved only from 15% (same as 2009) to 17%. If we consider that 2009 was probably the worst year in the past 5 years, forecasting the same growth for 2010 is not very encouraging. You could argue that it takes some time to restart the SaaS flywheel after a slow year, but an acceleration in 2010 should at least translate into a stronger 2011 guidance, which is not really the case (10/11 growth median is 18%, so barely above 2010). The SaaS growth recovery does not seem to take a "V" shape

2) Sales productivity is ramping up: bottom was hit in the first half of 2009

However, the sales and productivity of the group, measured by the median "Customer Acquisition Cost ratio" or "CAC ratio", seems to be recovering more steeply. Given the lag in GAAP revenue recognition, the Q4 09 revenues are indicating an increased productivity in Q3 2009 (we have unfortunately to look backward due to the GAAP revenue recognition model), but the trend is very encouraging. Given that the revenues are not growing very fast, this means that most of the companies have reduced their sales force and focused on productivity improvement. Also, even if the productivity is increasing, it is still far from the 0.75-1.0 range where you would expect companies to start pumping more investment in sales and marketing to drive growth

3) Focus on profitability

It is interesting to see that the improving sales and marketing productivity is not pushing companies to be more optimistic on their top line but on their bottom line. While the group sentiment for 2010 did not improve significantly vs. November 2009, the projections for 2011 are now a lot more optimistic - 42% higher 2011 aggregated EBITDA announced in March 2010 vs. the November 09! This is a significant guidance revision, which shows the current focus and mindset of the management of these companies. A sign that the SaaS industry is already maturing or a reflection of the public investors expectations?

4) Cash balance increase indicates a focus on M&A to drive further growth

The past few months have also been marked by a few high profile equity and debt announcements - most notably SuccessFactors, Taleo and Saleforce.com. In total, the cumulative cash balance of the group increased by 64%, or more than $1B! As this cash will not be used to fund organic growth initiatives, we can expect several acquisitions in the coming 24 months. To date, Salesforce has been focused on small tuck-in technology acquisitions, so it is an interesting move for them. There aren't any companies at scale built on Force.com that would justify such a raise, so either Salesforce will have to buy a light technology at scale (email marketing?) that can easily be ported to Force or they will have to breach their platform credo.

All in all, an interesting start for the year!

A funny perspective on Google innovation...

Happy New Year 2010!

A bit of French humor... so much for Cleantech!

"Bloody ecologists!"

Cloudonomics and 2010 Planning for your SaaS and Cloud Computing business

As we get close to the end of the year, I thought it would be interesting to put together a post on how to approach the 2010 planning. I was fortunate to be invited to present at Dreamforce a few weeks ago to tackle this topic on stage, so if you want more color, fell free to watch the video below, but here is a quick summary:

1) Be more than ever metrics driven: as we get into a period of recovery, but with still a lot of uncertainty, it is critical to base your plan around the 6 C's of Cloud Finance (CMRR, Cash, Churn, CAC ratio, CLTV and CMRR Pipeline):

• Make sure than your CMRR (Committed Monthly Recurring Revenue) line will cross your MRE (monthly recurring expenses)


• Calculate your CAC ratio in the past quarters to see if it is capital efficient to spend more in S&M in 2010


• Focus on customer retention and make sure you allocate enough resources to your account management and product team


• Measure you CMRR Pipeline carefully: this is the only metric giving you forward visibility onto the future performance of your business (see slide 18 for more details)

2) Manage your cash carefully but don't underinvest: capital is available but your metrics will tell you if you can raise outside capital or not in good terms

3) Watch for cheap revenue: you may be able to buy failing competitors for their customer base or interesting technology at a very interesting price. The recession created opportunities!



You can download the PDF by clicking here

To help you build and assess your plan, I thought you might also be interested in this recent benchmarking of public SaaS companies that Steve Klei, a veteran SaaS CFO put together (Click on the picture to see the full slide show) :

Follow Cracking The Code on Twitter

New SaaS 13 Index: Welcome to LogMeIn (Nasdaq: LOGM)!

While poised with a limited number of transactions this year, the world of public Cloud Computing and SaaS companies has been marked by two events in the past few months: the acquisition of Omniture by Adobe and the high profile IPO of LogMeIn, a leading provider of PC remote access and support with a very interesting freemium model.

The acquisition of Omniture by Adobe for $1.8B was a great outcome for the company (kudos to Josh James, their visionary founder & CEO!) and the second SaaS public transaction in history behind the acquisition of Webex by Cisco in 2007 for $3.2B. After Google buying Postini, the SaaS M&A market continues to be full of surprises. Who would have thought that Adobe would acquire Omniture? It is intriguing to see the M&A dynamics in the space, highlighting the interest of tech companies for recurring revenue streams - even SAP announced in their analyst call earlier this month that they were moving from perpertual licenses to five year term licences. Hopefully this trend will continue (and accelerate!) in 2010.

On the IPO front, LogMeIn made the news, being one of the few tech IPO on the NASDAAQ in 2009. The stock was very well received, jumping 25% on its first day of trading. Today, the stock is still up 22% and the company is trading at a very healthy 4.2 EV/09 rev. multiple, with 43% 08/09 growth rate and double digit free cash flow margin. Congrats to Jim Kelliher, CFO and Michael Simon, CEO, for a successful IPO!

These events led me to redesign the SaaS 13 Index. I have changed the composition of the Index with LogMeIn officially replacing Omniture and Dealer Trak and AthenaHealth replacing Salary.com and LivePerson. The Index has also been reset to start at 100.00 on January 1st 2008. All the multiples and CAC ratio have been adjusted to reflect this update.

As you can see on the graph below, the Index made a nice come back this year and we are just at 11% down since Jan. 2008 after flirting with the lows in March 09 at -65%.

Unveilling of the Bessemer's 10 laws of Cloud Computing and SaaS - Winter 2010 Release

When we first published the Bessemer’s Top 10 Laws for Being “SaaS-y" on Sandhill.com almost two years ago in conjunction with our annual Cloud/SaaS CEO Summit, we were overwhelmed with the positive response and feedback we received. We have heavily modified many of the best elements that we believe are still relevant, and have added several entirely new concepts for this update publication on Cloud Computing and SaaS.

The Cloud computing stack is currently defined by three levels: SaaS, PaaS, and IaaS. Software as a Service (SaaS), the most mature of these segments, is comprised of end user applications like Salesforce.com. Platform as a Service (PaaS) is the service and management layer of the cloud platform, and is evolving dynamically to include things such as intelligent provisioning, as well as application and network management. Infrastructure-as-a-Service (IaaS) is the foundational layer of cloud computing, and includes raw storage, compute, backup, disaster recovery, databases, and security. As the first segment to emerge in scale and the most application oriented, SaaS has lead the market to date with the largest market size, highest gross margins, and highest per-seat pricing. Recently, however, we have seen the rapid emergence of hyper-growth businesses in the PaaS and IaaS markets demonstrating that these will soon be independent, multi-billion dollar segments in their own rights with the potential for massive sales volume and attractive cash flow characteristics.

Here is the new version of the 10 Laws of Cloud Computing and SaaS:

1. Less is more! Leverage the cloud everywhere you practically can (more...)
   
   
2. Get instrument rated, and trust the 6C's of Cloud Finance (more...)
   
   
3. Study the Sales Learning Curve and Only Invest behind Success (more...)
   
   
4. Forget everything you learned about software channels. The internet is your new channel and Technology Enabled Service providers are among the few partners that actually care if you succeed (more...)
   
   
5. Build Employee Software. Employees are now powerful customers, not just their managers! We are witnessing the “Consumerization of Software” so focus on ease of use (more...)
   
   
6. By definition, your sales prospects are online - Savvy online marketing is a core competence (sometimes the only one) of every successful Cloud business (more...)
   
   
7. The most important part of Software-as-a-Service isn’t "Software" its "Service"! Support, support, support! (more...)
   
   
8. Leverage and monetize the data asset (more...)
   
   
9. Mind the GAAP! Cloud accounting is all about matching revenue and costs to consumption…well, except for professional services! (more...)
   
   
10. Cloudonomics requires that you plan your fuel stops very carefully (more...)
    

BONUS LAW: You can ignore one or two of these rules, but not more - Great companies innovate, but pick your battles! (more...)

You can download the full white paper at www.bvp.com/cloud or click here

Impact of the recession on SaaS Sales&Marketing productivity

The SaaS 13 Index representing the 13 major public SaaS companies has recovered very strongly (up 82.36%) since the beginning of the year, outperforming strongly the NASDAQ (up 29.5%). This strong recovery has highlighted the resiliency of the recurring revenue model in a downturn as well as the stength of the shift to soaftware-as-a-service and cloud computing. The growth rate has declined from an average of 46% from 07/08 to 14% forecatsed this year, but a few players are still showing a very strong growth, such as SuccessFactors (33%) and Constant Contact (49%).

However, if the SaaS & Cloud computing industry is doing relatively well in this downturn, the recession has severely impacted the sales&marketing productivity of these companies, with longer sales cycle, smaller deal size and limited upsells opportunity. One way to measure this productivity is to look at the Customer Acqusition Cost ratio that I have defined in a previous post. Typically, you want this ratio to be close to 1.0, equivalent to a one year payback on your sales&marketing investment. If the ratio is lower than 0.33 (3 year payback), you really need to rethink your sales process.

The following graph shows the evolution of the median CAC ratio by quarter for the SaaS 13 Index. As you can see, despite the strong recovery in stock value, the productivity has declined sharply in the past quarter and the figures do not show at this point that the bottom has been reached.

However, as the second graphs shows, some companies such as Constant Contact, Vocus or Salesforce do start to show a stabilization or an improvement in their productivity metrics. Just some food for thought as you build your investment portfolio...

The historical CAC trends are now available on the Google Spreadsheet that you can access by clicking on this link and I have also posted a live feed on the CAC ratio trend on the left column of the blog.

Laughing Out (c)Loud

A funny video of Larry Ellison, the CEO of Oracle on Cloud Computing. It was taken at a Churchill Club event last month. But does Larry hate cloud computing that much or is he hiding a potential future acquisition of Salesforce.com? What is the announcement hidden behind the surprising high profile slot given to Mark Benioff, the CEO of Salesforce.com, at Oracle user conference on October 13th?

United Breaks Guitar and more!

A few months ago, as I landed back from a snowboarding trip in SFO, I realized that my new snowboard bag had been cut over two inches during the handling. To cut such a thick nylon cover, the handler must have tried very hard! When I complained at the United Airlines desk, the employee looked at me in disdain, saying that this was not enough to be called a "damage" and that - of course - she could not do anything for me. Unfortunately, I am not a musician, so United got away with it.

Today, United did not: David stroke back at Goliath using the power of internet technologies.

It all started on March 31, 2008. Dave Carroll and his Sons of Maxwell bandmates were sitting in a plane at O'Hare, waiting to disembark when a fellow passenger cried out:

"My God, they're throwing guitars out there."

They looked out the window. They saw a United worker tossing one of their guitars. Carroll discovered later that among those flying instruments was his $3,500 Taylor, which ended up smashed. And so began a nine month saga of trying to get United to pay for the damage. When the airline wouldn't, Carroll made a decision. He said on his site:

"I promised the last person to finally say 'no' to compensation ... that I would write and produce three songs about my experience with United Airlines and make videos for each to be viewed online by anyone in the world."

He followed through with his threat. He posted his country ode, "United Breaks Guitars," on YouTube Monday. Since then, the video has been viewed more than half a million times and is a hit with the media.

United apologized, plans to use the video internally to help "change its culture," and, according to a spokeswoman for the carrier:

"We are in conversation with one another to make what happened right."

The lesson here? Don't piss off a musician (and don't fly United yet!)

Bessemer Venture Partners Expands BVP VII Fund

We just announced the expansion of our fund and I wanted to share with you the good news!


New Capital Earmarked for Global High-Growth Investments

LARCHMONT, N.Y., Feb. 26

Bessemer Venture Partners (BVP), the oldest venture capital practice in the United States, today announced the closing of a $350 million supplement to its current fund family, BVP VII, which closed in June 2007. With the additional capital, BVP will target innovative, high-growth companies around the world.
"Great companies have been founded during downturns and Bessemer sees a lot of investment opportunity in the current market environment," said Ed Colloton, Chief Operating Officer of Bessemer Venture Partners. "This supplement to our BVP VII fund will ensure that we can take advantage of future investment opportunities and that the companies within the Bessemer portfolio have continued access to capital."
Throughout its history, BVP has funded some of the world's most talented entrepreneurs, helping them to build their businesses and dominate growing markets. Successful exits over the last several years include the sale of Postini to Google, Gracenote to Sony, Pure Networks to Cisco, PA Semi to Apple, IAG Research to Neilsen, Skype to eBay, Flarion Technologies to Qualcomm, and Celtel to MTC (now Zain), and IPOs of IPC, Bladelogic, Mellanox, Affymax, Motilal Oswal Financial Services, OnMobile, Sirtris Pharmaceuticals, Shriram EPC, and Blue Nile.
About Bessemer Venture Partners: Bessemer Venture Partners is a global investment group with offices in Silicon Valley, Boston, New York, Mumbai, and Tel Aviv. As the oldest venture capital practice in the United States, Bessemer has partnered as an active, hands-on investor in Ciena, Ingersoll Rand, Parametric, Skype, Staples, VeriSign, and W.R. Grace. Over the last century, Bessemer Venture Partners and its predecessor funds have invested in more than 100 companies that have gone public on exchanges in Canada, India, London, and the United States. To learn more, visit http://www.bvp.com/.

2009 Bessemer Venture Partners. All marks are trademarks or registered trademarks of their respective companies.

Building Your SaaS Sales Compensation Plan

Compensating the sales force is a difficult task and the key is usually to keep things simple, so that each sales rep knows what he needs to optimize to make more money at the end of the quarter. For SaaS companies, we found that MRR is the best metric on which to base sales commissions. While it may make sense to offer very slight adjustments for favorable payment terms and one time revenue, net additions to MRR should dominate the sales rep’s thoughts. The reps’ top 3 priorities should be (i) MRR, (ii) MRR, and (iii) MRR.

I had the opportunity to exchange on this topic with Gary Messiana, a BVP Entrpreneur-In-Residence and former VP Sales and CEO of Netli and he shared with me the basic structure he was using at Netli before the company was acquired last year by Akamai.

When he initially built the sales compensation plan, he wanted the sales rep to think MRR and the most logical thing to do was to give $1 of commission for $1 of MRR sold. $1 of MRR generates $12 of annual revenue, so $1 commission equals 1/12=8.3% which is very close to the typical 8% paid for sales commissions.

The second thing he did was to define was the ramp up of the commission rate to make sure the best sales rep would get the most upside. To do that, he applied another simple rule:

• For 0-25% of the quota, $0.25 commision per $1 of MRR
• For 25%-50% of the quota, $0.5 per $1 of MRR
• For 50%-75% of the quota, $1.0 per $1 of MRR
• For 75%+ of the quota, $1.5 per $1 of MRR

To avoid reps pushing deals from one quarter to the next, the quota was set annually and the compensation rules defined above were based on the annual target instead of a quarterly target. By doing this, the sales reps had a very high incentive to perform during the entire year.

Finally, he added a “continuity rule”. As a CEO, Gary typically based his sales board plan at 70% of sales quota. To ensure he would make his number, he defined a "continuity rule" stating that a rep who is below 70% of its annualized target at any point in the year would be on a “B” plan where he basically gets nothing (may be half or 25% of the “A” plan” defined above).

This simple compensation plan structure worked very well at Netli. The company had the chance of selling a very sticky product to large customers paying upfront, so there was no need to improve the sales bonuses based on cash collection and multi-year contracts. The payment rules were also very straightforward: 50% at signature and 50% at cash collection.

To know whether it is worth adding more complexity to this sales comp plan, you need to ask yourself two questions:

• Am I better off with a one year contract to preserve my ability to raise the price or do I need multi-year contracts to reduce the churn?


• What is my cost of capital and how much is worth an incremental upfront payment?

Typically, if you churn is low (98%+ renewal rates), you will tend to favor one-year contract to preserve the flexibility of increasing prices and it is not worth adding incentives to extend the life of the contract. If not, you might want to add some acceleration in the incentive structure to push the sales of longer contracts. If you assume that the cost to renew a contract costs you 20% of the MRR, then adding increasing the commission by 10% for each additional year seems reasonable.

Accelerating bonuses for upfront cash payment depends on your cost of capital. If you assume a 20% cost of capital (typical for equity, debt is generally cheaper), then getting an upfront payment for one additional year on a $10k MRR contract saves you $24k. You can therefore pay an incremental $2k commission to the sales person (20% acceleration) and make it worth it for everyone.

The table below gives you an example on how acceleration could work for a company willing to emphasize the focus on upfront cash payment and contract length:

As a SaaS company matures, it does not want to bog down its top performing sales reps with the job of renewing their growing account bases. So invariably the team splits into hunters for new accounts and farmers for renewals and upsells. Obviously, hunting takes more effort and resource than farming--the Vice-President Sales needs to determine the ratio between the two based on how easy it is to renew an account, and apply that ratio in the sales commissions. For example, $1 of MRR might generate $1 of commission for the first year, and 20 cents for each year of renewal. In this example, the new account sales rep can be compensated for longer term contracts by paying the “hunt commission” for year one and “farm commissions” for subsequent years (e.g. $1.20-1.40 for a three year contract). In this way, the rep will apply the proper attention to closing long term contracts where the risk of churn has been mitigated. Upsells are typically worth more than renewal and less than new customers so we found that 50% of new MRR worked pretty well.

For company with complex UI or usability issue, you might also want to add a small incentive to reward the sales of training module as this will impact churn, but this should be short term fix as your engineering team works hard to improve the product.

I hope this will give you the basic structure to help you build your SaaS sales compensation plan.

Apple Introduces Revolutionary New Laptop With No Keyboard

Happy New Year 2009 and thank you for your continued readership!

I am working on a post-mortem of the SaaS 13 Index for 2008, but before getting into these gloomy numbers, I thought I would start the year with something more refreshing.

Getting through the downturn: a few thoughts for SaaS companies planning their 2009 budget

A few days ago, Bessemer West Coast SaaS Practice - David Cowan, Byron Deeter and myself, hosted a CFO Dinner for our SaaS portfolio at John Bentley's in Redwood City. A couple months ago, when we started planning this dinner, we thought we would use most of the time to debate SaaS metrics, the business model as well as our recent update on the "Bessemer 10 laws of SaaS", but, in the meantime, the macro-economic climate changed drastically and we decided to focus the discussion on the impact of the current environment on 2009 planning. Fifteen CFO's participated - about half of them from Bessemer portfolio SaaS companies (Cornerstone On Demand, Intacct. Lifelock, LinkedIn, OneStop, Perimeter and Retail Solutions) - among a total audience of about 25 people.

Overall, it was interesting to see that the economy had not affected this peer group overall, with strong results for Q3 and a healthy pipeline shaping for Q4. Despite these currently strong numbers, the attendance was very cautious: it is unclear at this date if we are going to see a budget flush supporting Q4 or if the contracts are going to sit on the CFOs desk and never close, but in any case, the consensus was that we are heading towards a difficult environment in 2009 and it is time to plan accordingly.

To start the discussion, we presented a few data points on how our SaaS 13 Index (13 public SaaS companies) has been affected by the downturn - and unfortunately, the hit has been pretty hard, with the Index losing 60% year to date as illustrated by the chart below:

SaaS 13 Index (Jan. 1st 2008 = base 100)

This number compares to the Nasdaq reaching a low point of -46% and currently showing a -40% drop year to date. The fact that SaaS valuations are being more affected by the downturn than the Nasdaq can be surprising given the supposed resiliency of the SaaS model (recurring revenues) but it translates the public investors belief that SMB software spend is going to be hit very hard by this recession. With this decline, the average EV/08 rev. multiple fell down to ~2.2x and unfortunately no one has been spared. The lowest drop in the Index is Concur at -35% and the highest is Salary.com at -84% (SLRY is trading very close to cash now!). This drop in public valuations basically means that private companies lost half of their value in a comparable way and therefore the cost of capital doubled in the past month, pushing much higher the hurdle for any additional investment, be it in sales, marketing or R&D.

How long will the downturn last? It is difficult to say, but if we look at the time required for the Dow Jones to recover after a crash since the early twenties, the answer is likely to be years, not quarters. It is also intriguing to see that the market bottom was reached only two years after the start of the decline for the 1929, 1973 and 2000 crises, so we might need another year before the market reaches it lowest point.



So were do we go from here? Here are a few strategic thoughts that might be helpful as you plan for next year:

1. Cash is King…and scarce: if you are in a funding cycle, raise as soon as possible and as much as possible. If not - plan to cash flow breakeven with what you have left. Preserving cash is your #1 priority

2. It is time to fix your key SaaS metrics:

• P&L: MRR = MRE: you control your destiny when your monthly revenue equals your monthly expenses
• Sales & Marketing: Your cost of capital doubled, so if a CAC ratio > 0.5 was OK a few months ago, the hurdle is now higher and should be close to CAC>1 – Keep only reps making quota and cut marketing activities with lower ROI
• Customer Lifetime Value (CLTV) >0 – Adjust operations, RD and GA to make your business model profitable
  

3. Be realistic on valuation: the best public SaaS companies lost 60% of their value on average, so it is likely your valuation is down too!

4. Watch for cheap MRR (M&A, Other structure to avoid buying assets?): you will soon be able to buy failing competitors. Volatility creates opportunities

5. Don’t wait for the slowdown to hit you, it will be too late


In addition to these high level comments, you might consider also consider some of these more tactical moves:


Sales& Marketing

• Focus on your farmers: account management is critical to keep your churn low and improve “up-selling”. Monitor account activities and be proactive
• Trade-off pre-payments for MRR by increasing pre-payment discount and sales bonus
• Review sales comp structure: more commission less salary
• Keep you voice up in the market: customer need to know you are still alive!
• Rethink vertical segmentation: Healthcare? Is Government a good idea?
• Review your marketing media allocation: offline media prices will go down and could generate attractive ROI, tradeshows might have less impact due to travel restrictions…

G&A

• Manage your DSOs tightly – they will go up! And check for payment that can be deferred
• Wisely manage debt: finance your A/R and leverage only when needed to extend runway
• Chase and implement “quick wins”: shut down all retained searches immediately, renegotiate services contracts and leases, limit travel…

R&D

• Review product roadmap: what new features are absolutely necessary?
• Move R&D offshore

Operations

• Follow your customer growth, don’t grow data center and support capacity ahead

That said, I would like to close this post will a couple of more cheerful comments. Firstly, keep in mind that chaos creates opportunities and there will be a huge prize for the companies able to navigate carefully through this downturn (competitors will disappear, you will be able to hire great talents...). Secondly, SaaS companies are much better positioned in this downturn than other companies given the recurring nature of the business, the lower upfront cost for customers (no need for financing in a difficult credit environment) and the overall lower total cost of ownership. So hopefully, this recession will accelerate the shift from on-premise offering to SaaS. This was one of the premise of our investment thesis and we will see if it proves to be true!

Here is the full presentation if you want to dive deeper:

Bessemer 5 Cs of SaaS Finance

View more presentations from Philippe Botteri.