Thursday, August 27, 2015

6 reasons to be bullish on SaaS

Yesterday I argued that SaaS founders and investors shouldn’t worry about short-term movements of SaaS stocks and said that there are a lot of reasons to be bullish about the Cloud. Here are some of them.

1) SaaS is quickly becoming the norm
In the last years there’s been a dramatic shift in deployment preferences of software buyers. According to a survey by Software Advice, 88% of buyers with a deployment preference preferred on-premise solutions in 2008. Just six years later, the results were completely upside-down: In 2014, 87% of all buyers with a deployment preference preferred Cloud solutions.

2) Billions of dollars of on-premise revenues are still up for grabs
In spite of this tectonic shift of deployment preferences, IDC estimates that in 2015 the market share of on-premise deployments in the enterprise applications market is still almost 80%. That means that billions of dollars will move from on-premise to the Cloud in the next ten years.

3) Millennials will move up through the ranks
In the near future, more and more IT decision maker positions will be taken over by millennials. For this generation, which grew up with Facebook and Gmail, SaaS will be the default choice. In fact, most of them will laugh at the idea that software could not be Cloud-based.

4) The entire software market will continue to grow
It’s not only about increasing the Cloud’s piece at the expense of the on-premise piece, though. Pen & paper or Excel sheets are still used by myriads of people for all kinds of business processes, especially in SMBs. Building better, Cloud-based solutions for these use cases will significantly increase the size of the total software cake.

5) Mobile expands the market to non-desk workers
About ten years ago, the number of smartphone users was negligible. Today there are more than two billion smartphone users worldwide. This development, which I think is nothing short of amazing, has (almost) suddenly increased the number of target users for B2B software companies by tens of millions in the industrialized countries alone. People in industries like construction, landscaping, hospitality and many other areas of “non-desk work”, who previously weren’t using any software, are now getting mobile apps that help them become more efficient.

6) New technologies will catalyze adoption
SaaS has always been more than just a better deployment option. It has enabled the creation of new ecosystems (, new business models (Zenefits), new distribution strategies (Zendesk) and much more. The next wave of enterprise software will likely be powered by machine learning (check out this TechCrunch post for a good primer) and continued consumerization (and in some cases, new hardware). These and other innovations will allow SaaS applications to get even wider adoption and to provide even more value to its customers.

This is by no means meant to be an exhaustive list, and there are many more reasons to be bullish on SaaS. Want to let me know what you’re most bullish about? Tweet it to me!

Tuesday, August 25, 2015

Is SaaS doomed?

If one looks at the stock price development of public SaaS companies in the last few weeks, one could come to the conclusion that SaaS is over the hill. 17% down from its 52 week high. Veeva: 30% down from its 52 week high. Workday is 29% down, Box 47%, Hubspot 22%. Everyone got hit, as you can see in Tomasz Tunguz' post about the topic.

There are several reasons why this conclusion (that SaaS is past its prime) is wrong. Firstly, it's not just SaaS stocks which took a dive. The NASDAQ and the Dow Jones are both down more than 13% from their 52 week highs, too. Secondly, as this chart of the BVP Cloud Computing Index shows, SaaS stocks have outperformed the market significantly in the last couple of years, and it's not surprising that when the market corrects, stocks that went up more strongly than others are going down more strongly as well.

More importantly though, while public markets are good at valuing companies in the very long run, short term movements are – if not random – the result of all kinds of factors, most importantly supply and demand for stocks as an asset class, which itself depend on all kinds of factors that are not related to a specific company's ability to generate profits in the long run. That's why long-term public markets investors – let alone SaaS founders or VCs – shouldn't worry about the short-term movements of SaaS stocks. 

Fundamentally, there are lot of reasons to be bullish about the Cloud. I'll follow-up on that with another post soon.

Friday, July 17, 2015

The evolution of the SaaS landing page

When you look at the landing pages (or homepages or marketing sites, however you want to call them) of today's SaaS companies, they usually look quite beautiful. They typically have a clean, simple and friendly look, with very little text and a lot of images or videos. In many cases, these websites could just as well advertise a consumer product. This doesn't come as a surprise, since the consumerizaton of enterprise software has been one of the most important driving forces in the software world in the last years. But B2B software websites haven't always looked like this and it's fascinating to see how much things have changed. Join me as I go back in time and take a look at how SaaS landing pages looked like some years ago.

The SaaS Stone Age

Fast-backward about 16 years. This is how the website of - the most innovative software company of that time – looked like in 1999: in 1999
(click for a larger version)

Interestingly, as horrible as the site looks by today's standards, it does have a bit of a consumer-ish feel and it actually became more enterprise-y over time (you can browse the history on the Internet Archive, which I've used to take these screenshots). So maybe in 1999 and the early 2000s the world wasn't ready for consumerization yet, or didn't figure out the right approach or they just saw more success with a top-down enterprise sales approach.

The Beginnings of Modern (SaaS) Times

Not much happened on the SaaS design front in the following years. Until 2004, that is, when a small, Chicago-based web design agency called 37signals launched its project management tool called Basecamp:

Basecamp in 2004
(click for a larger version)

Basecamp looked radically different from any other piece of B2B software. If it's possible to pinpoint the beginning of modern SaaS to a specific company or product, I think this honor is due to Jason Fried and his colleagues at 37signals. As much as I disagree with Jason on many things he writes about how to build a business – kudos to 37signals for their focus on product, design and usability. No other SaaS company had a bigger influence on SaaS design.

It took a few years – which shows how much ahead of its time 37signals was – but eventually other SaaS companies redesigned their websites or rebuilt them from the ground up:

Campaign Monitor in 2008
(click for a larger version)

The trend was clear: Less and less text, bigger font sizes, larger images, videos. SaaS companies which were founded at that time had a stronger focus on design from the get-go:

Clio in early 2009
(click for a larger version)
Zendesk in 2010
(click for a larger version)

Contemporary SaaS Design

In the years that followed, the trend towards simplicity, focus on design and consumerization continued, and I'd say that since around 2012 or 2013, having a reasonably beautiful and conversion-optimized marketing website is more or less table stakes. Today you can buy a SaaS landing page template for $18. A $18 design which looks better than every B2B website that was built before 2004 – makes me wonder if Moore's law applies in design, too. ;-)

Since most people are trend-followers rather than trend-setters, SaaS landing pages started to look more and more alike in the last few years: A navigation bar at the top; 1-2 devices that were made in Cupertino, with product screenshots on them; a large headline and smaller sub-headline; 1-2 call-to-action buttons; some customer logos. This (plus a few other things) was the anatomy of almost every SaaS landing page in 2014. Not bad, don't get me wrong, but if everyone follows that recipe it gets harder and harder to stand out and build something memorable.

But just when things started to get boring, some cutting-edge design-led SaaS companies pushed the envelope further:

Geckoboard's current website
Go to to see it live
Typeform's current website
Go to to see it live
Another view of Typeform's current website
Go to to see it live

Both examples make heavy use of video so the screenshots don't do them justice. Please go to Geckoboard and Typeform to see them in action. While still being focused on conversion, I think these websites are almost indistinguishable from art. Using high-quality video footage, very little text and beautiful typography, crafted with incredible attention to detail, these websites bring across a  value proposition in a fresh, unique and highly emotional way.

This little journey through time has shown that up until now, the evolution of the SaaS landing page has been a development towards ever more simplicity. It will be interesting to see if this trend continues in the coming years.

Disclosure: I'm an investor in Clio, Zendesk, Geckoboard and Typeform.

Thursday, June 25, 2015

By the time you're at $2-3M in ARR, you need a VP of Sales who's done it before

For most SaaS startups, the VP of Sales (along with the VP of Marketing) is one of the most crucial hires they need to make. Unless you have a no/low touch sales model and you're growing virally (a.k.a. you're successfully hunting flies or mice), someone needs to build a scalable sales organization, whether it's an inside sales team (a.k.a. hunting rabbits or deer) or a field sales team (a.k.a. hunting elephants).

It's also one of the toughest hires. Jason M. Lemkin gave an epic talk about the subject at our 3rd annual SaaS Founder Meetup, last year in San Francisco. Jason also wrote extensively about the topic on SaaStr. If you haven't read his articles yet, make sure you read all of them.

As Jason explained in this post, one of the things that makes hiring the right VP of Sales so hard is the timing. If you try to hire your "Mr. Make it Repeatable" or your "Ms. Go Big" VP of Sales too early, say at $500k in ARR, you'll almost certainly not get a great one. The reason is that a great one will most likely not leave his or her current position at a successful, fast-growing, well-funded SaaS company, which pays him or her hundreds of thousands of dollars in salary and bonus/commission per year, to join your tiny little startup.

Starting to look for your VP of Sales too late is equally dangerous, though. If you want to grow roughly in line with the T2D3 formula, which most venture-funded SaaS startups should shoot for, you need to hire a lot of sales people in year 3. An exception are SaaS startups with a no/low-touch sales model and viral growth (see above) and potentially companies which have a massively negative net MRR churn rate and therefore don't have to acquire as many new customers. If you're fortunate to be in one of these categories, you may not need a big sales team, but most SaaS companies aren't.

That's why I think most SaaS companies that don't have sales management experience in the founder team need to start looking for a VP of Sales by the time they're at around $1.5-2M in ARR so that by the time they're at around $2-3M, they've recruited a VP of Sales who can take them to $10M and beyond. My thinking becomes clearer if you take a look at this model, which calculates how many sales people you need to get from, say, $1M in ARR to $10M. Note that a big and productive sales team may be necessary to achieve that goal, but it's obviously not sufficient. You also need a great product, great marketing, etc. – otherwise your sales team won't have enough warm leads and closing them will be too hard.

(click for a larger version)

Click here to download the Excel sheet.

Here's how the model works:

  • Enter your current ARR in cell D10. You can of course also enter your ARR target for a future date, depending on what you want to calculate. In the template, I'm assuming that you're at or close to the end of year 1 and want to work out your hiring plan for year 2 and year 3.
  • Enter the monthly growth rate that you're targeting for year 2 and year 3 in cells D11 and D12, respectively. Note that this should be your "net MRR/ARR growth rate", which takes into account all MRR movements like churn, expansion or contraction. The sample data that I've put in reflects the T2D3 formula (grow to $1M in ARR in year 1, triple in year 2 and triple again in year 3).
  • Input your monthly net MRR churn rate (i.e. [churn MRR plus contraction MRR] minus [expansion MRR plus reactivation MRR]) in cell D13.

Using these inputs, the spreadsheet will calculate the new ARR from new customers that you have to acquire in order to meet your growth targets. See row 25.

Now ... how many sales people do you need to achieve these target numbers? This depends on the following inputs:

  • Your AEs' quota, i.e. how much new ARR you expect each AE to bring per month. The model assumes that your AEs will on average meet their quota. In reality, some of your sales people won't meet their quota and some will exceed it, so this number really is just the average which you expect to achieve.
  • Ramp-up time, i.e. the time it takes your AEs to reach full productivity. The model assumes that they're 100% productive in month 4. For months 1-3, you can enter different percentages in cells G10-12.
  • The size of your sales support team. In cells K10-14 you can enter how many Sales Directors, SDRs and SDR Directors you expect you'll need in proportion to the number of AEs.

The sample numbers that I'm using in the template are broadly in line with the results of this benchmarking survey. As you can see in the spreadsheet and in the chart, based on these assumptions your total sales headcount increases from 2 to 9 in year 2 and from 9 to 30 in year 3. So in year 3 you'll have to hire and train 21 new sales people (plus replacements for people that leave or are let go). 

Without a VP of Sales who has built and scaled a sales team before, that's tough. 

PS: As you can see in the chart below, there's a 1:1 correlation (approximately) between ARR and sales headcount. That's OK in the $1-10M ARR stage, but in the longer term the best SaaS companies manage to grow revenues faster than sales spendings, primarily by focusing on account expansions to achieve an ever-increasing negative MRR churn rate and by continuously getting up sales efficiency.

(click for a larger version)

Tuesday, June 16, 2015

Why we politely ask for a deck first

When founders reach out to us to pitch us for an investment, they usually have a fundraising deck which they’re happy to send over. But every so often it also happens that a founder wants to set up a call or a meeting before sending over any material. In these cases I usually ask the founder if he or she could send us a deck first, with a view to have a call or meeting as a potential second step. But every time I do this, it makes me feel uncomfortable because I don’t want to come across as impolite, arrogant or unapproachable. In this post I’d like to give some background on how we work, which will hopefully make it easier to understand our behavior in the scenario I described above.

I have understanding for founders who want to walk us through their story and vision rather than sending over some slides. A startup is a founder’s baby which they often have a deeply emotional relationship with, and it’s understandable that when they pitch it, they want to leave the best possible first impression. It’s also understandable that founders want to get to know us first and learn more about us before sending us confidential information. What’s more, most founders are very smart people who are great to talk to. For all these reasons, I wish we could talk to all founders who reach out to us.

But it’s impossible. In the last 90 days we’ve logged 987 potential investments in our Zendesk (which we use for deal-flow management). Even with three Associates and one Intern, we can’t talk to all of these startups. If we did, we wouldn’t have enough time to dive in deeply into sectors, do due diligences, spend time with our portfolio companies and do many other things which are important for our business.

This is why using the pitch deck as the first filter is so important for us. When we go through a deck, a couple of minutes are usually enough to determine if we want to learn more. There are plenty of reasons why a company may not be the right fit for us (and Point Nine not the right partner for the company): It may be too early-stage or too late-stage. It may be a sector we’ve looked at before and aren’t excited about or it may be an area which we don’t have any expertise in. Or it may be in a field that’s too close to one of our existing portfolio companies. Most of the time when we pass quickly after having seen a deck, it doesn’t say anything about the quality of the startup and only means that the company is outside of our investment focus.

Obviously our process isn’t perfect. Not taking a closer look at each incoming request means we will miss great companies (and grow our anti-portfolio). But the same is true for any other approach.

A few closing comments:

  • I know that most other VCs feel the same about this, so if you want to raise money, spending time on producing a great pitch deck is time well spent. I also think that creating a deck is a great exercise because it helps you think through each area of your business systematically.
  • Michael wrote a great post about “What should be in my fundraising slides”.
  • Don’t ask for NDAs.
  • Don't send your pitch deck to dozens of VCs. Do your research to find out which 5-10 firms look like the best fit for you and start with those.
  • You don’t have to include everything in your “teaser” deck. I would recommend to include KPIs in the deck, since these are crucial for the investor to determine if you’re at the right stage, but it’s perfectly fine to leave out sensitive information like details on your product roadmap.

Wednesday, June 03, 2015

Announcing Point Nine Capital III

Today we’ve announced Point Nine Capital III, our new €55M fund. Investors in PNC III include institutional investors like Horsley Bridge Partners, Sapphire Ventures, Flossbach von Storch and Vintage Investment Partners as well as a number of highly successful Internet entrepreneurs. To our existing LPs: Thank you for your continued trust! To the new ones: Welcome on board!

When we raised PNC II, our goal was to build a leading independent European early-stage venture capital firm. While it’s still very early days for us, we think we’ve made good progress towards that goal in the last years.

PNC II was based on a couple of ideas and principles:

Live Berlin, think world
We saw a strong need for a Berlin-based seed VC because Berlin was starting to become a great startup destination, yet there was not a single VC that was headquartered in the city. At the same time, we didn’t want to limit ourselves to investing only in Berlin (or only in Germany for that matter) because we saw great startups being founded all over Europe (and elsewhere). Before PNC II we had already invested in Berlin-based companies like DaWanda, Delivery Hero and Mister Spex as well as in companies from Denmark (Zendesk), the UK (FreeAgent, Geckoboard, Server Density), Canada (Clio, Unbounce), the US (StyleSeat, Couchsurfing,...) and even New Zealand (Vend) and Japan (Gengo), so we were already used to this approach.

Focus on early-stage investments in SaaS, marketplaces and eCommerce
While we wanted to be pretty agnostic with respect to geography, we were going to be pretty focused when it comes to stage and industry. We’d only do early-stage investments (seed and early Series A) and would focus on three categories: SaaS, marketplaces and eCommerce.

Be “The Angel VC”
Both Pawel and I had a background as angel investors, and just because we raised a fund we didn’t want to give up our angel investor mentality. We wanted to combine a founder-friendly, no-nonsense, value-add approach with the ability to make bigger investments and do more follow-on financing.

Think long-term and give before you take
VC investing is an incredibly relationship-driven business. To be successful, you constantly need other people’s help and goodwill. What that means is that if you’re a newcomer, you should try to “give” as much as you can to as many people as you can in order to build long-lasting relationships.

Small is beautiful
Our original goal for PNC II was to raise €30M. We ended up raising a little more (~ €40M), but it was still a typical micro VC size. One reason for becoming a micro VC was, of course, that we wouldn’t have been able to raise a €100-200M fund, so it was an easy decision. :-) But we also felt that a €30-40M fund was the right size for a European seed fund: Big enough to invest needle-moving amounts in startups and have capacity for follow-ons, but not a size at which you need multiple unicorns just to survive, as my friend Jason M. Lemkin put it. (Not that we have anything against unicorns, but you know what I mean.)

Three years later

Three years later we feel encouraged by the early results of our strategy. Many PNC II portfolio companies have raised large follow-on financings from great investors like Accel, Acton, Balderton, Bessemer, Emergence, General Catalyst, Matrix, MHS, Storm, Valar and others. In many cases, valuation has gone up significantly since our initial investment, in a few cases as much as 10-20x and more. Again, it’s still very early and it will take another five years or so to see if we’ve done a good job with PNC II, but we’re super excited that so many of our portfolio companies are on a great track. We’re also extremely grateful for the appreciation that we’re getting for our work – from portfolio founders, other investors, our LPs and the bigger startup community.

Finally, we’re also extremely happy with the team that we’ve been able to build. Assessing an ever-increasing number of investment opportunities and managing a portfolio of around 50 companies wouldn’t be possible without the fantastic work of our Associates or our Operations Team. Thanks guys, you’re awesome. :)

So, we’re happy with our strategy, and we’re going to continue it with PNC III. We’ll continue to invest heavily in Berlin but will also continue to invest all over Europe and beyond. We’ll keep our “Angel VC” tagline, and we’ll continue to do our best to be a “good VC”. We’ll stick to early-stage, and while PNC III is a little bigger than PNC II, we’re not leaving micro VC territory.

In terms of sectors, we’ll stay focused on SaaS and marketplaces, although we’ll also keep exploring new areas like bitcoin, IoT or drones (interestingly, the investments which we’ve made in these new areas so far all fall under SaaS or marketplaces from a business model perspective). The one area which we got somewhat less excited about in the last years is eCommerce, mainly because it requires so much capital and because the margins are usually small. There are (very) notable exceptions, of course – Westwing is one of the best-performing companies of PNC I, and if Stefan Smalla ever starts another eCommerce company we’ll invest in it again in a heartbeat.

Copy & paste?

So a lot of things are going to stay the same, which explains why, when we told our partners at Horsley Bridge about our plans for the new fund, Kathryn said, with her inimitable wit: “Sounds like copy & paste”. That’s true, but I should point out that other things have changed and will continue to change rapidly. Some of the “pattern matching” that we’ve used to pick great companies 3-7 years ago doesn’t work any more because what used to be innovative a couple of years ago is table stakes today. Many of tomorrow’s unicorns might and probably will be based on technologies which barely exist today. Add all the changes that are happening in the funding ecosystem, and it’s clear that while we’ll stick to our core values, we’ll have to keep re-inventing ourselves to stay relevant. So don’t worry about us getting slow and saturated. We’ll stay hungry and foolish.

Friday, May 08, 2015

A closer look at the 6 things to pre-empt 90% of Due Diligence

Since last week's post about 6-7 things to pre-empt 90% of Due Diligence was liked/shared/retweeted quite a bit, I'd like to follow up with some additional details on what exactly SaaS Series A/B investors will look for when you supply them with the data and material that I've mentioned. In my post I suggested that you should prepare a key metrics spreadsheet, a chart with your MRR movements, a cohort analysis, a financial plan, an analysis of your customer acquisition channels and, if you're selling to bigger customers, information about your sales pipeline and details about your largest customers. Let's go through these items one by one and try to anticipate some of the questions potential investors will think about.

As a caveat, I'm going to mention some benchmark numbers but it's very important to note that none of these numbers can be viewed in isolation. There is not one number which will determine if investors want to invest. It's always about many puzzle pieces which together form a picture of the strength of your company.

Key metrics spreadsheet

  • What's your visitor-to-signup conversion rate? Typically this metric is in the 1-5% range. If you're significantly below that, that doesn't have to be a red flag – there can be good reasons for a lower rate – but it may raise questions.
  • What's your signup-to-paying conversion rate? In my experience, most good SaaS companies convert 5-20% of their trial signups into paying customers (but again, there can be exceptions).
  • What's your lead velocity? Are you getting more and more new trials/leads every month?
  • What's your account churn rate and more importantly your MRR churn rate? The best SaaS companies have an account churn rate of less than 1.5% per month and a negative MRR churn rate (which doesn't mean that you can't have a great company with somewhat higher churn or that you have to be at negative MRR churn at the time of your Series A/B).
  • How fast and how consistently have you been growing MRR? Have you been adding an ever-increasing amount of net new MRR month over month?
  • How has your ARPA developed? Have you been able to increase it?
  • Are you able to sell annual plans?
  • How long did it take you to get to $1M ARR? The best SaaS companies get there within 12-15 months after launch (but again, lots of exceptions ... there are companies that start slowly and skyrocket later).
  • How much have you been spending on customer acquisition? As a rule of thumb, most SaaS companies should target a CAC payback time of 6-12 months, although in some cases there can be good reasons to spend significantly more.
  • What are your CoGS and what's your Gross Profit Margin? As a pre Series A startup you're probably not great at tracking/attributing CoGS ... which I think is OK.

MRR movements

  • How much MRR have you been gaining by acquiring new customers? Have you been able to add MRR by expanding existing accounts as well? 
  • How much MRR have you been losing due to churn or downgrades?
  • Mamoon Hamid of Social+Capital has coined the term "Quick Ratio" for the ratio between added MRR and lost MRR, and he's looking for companies with a Quick Ratio of > 4. If your Quick Ratio is significantly below that, is it trending in the right direction?

Cohort analysis

  • How does your account and MRR retention look like for some of your older customer cohorts? Do you have low or even negative MRR churn?
  • Taking a "vertical" look at the cohort analysis, are you getting better and better over time, i.e. do your younger cohorts look better than older ones?
  • What's your estimated CLTV based on this cohort data?
  • How does usage activity look like on a cohort basis? Is there a lot of "hidden churn" (customers who got inactive and are likely to cancel soon)?

Financial plan

  • Is your plan both ambitious and realistic? Most investors are looking for T2D3 type growth, i.e. once you've reached around $1M in ARR you should try to grow 3x y/y for two years.
  • Is your plan a coherent continuation of your historic/present numbers, both methodically and with respect to your key assumptions? Projecting a sudden, drastic improvement of your key drivers is understandably much harder to sell to investors.
  • Are your key assumptions plausible, and what's the impact of somewhat more pessimistic assumptions?
  • Did you sanity check the outcome of your model? If the result of your model is that you'll be a money printing machine within two years, that's usually a sign that you're underestimating future costs. :)

Customer acquisition channels

  • How did your customers find you? Organic, paid, both? Ideally you have strong organic growth (which is strong proof of product/market fit) as well as some success with paid customer acquisition channels (which can be scaled more easily).
  • How does your conversion funnel look like for different sources of traffic? What are your costs per lead and per customer for different marketing channels?
  • How close are you to building a (somewhat) predictable and repeatable sales and marketing machine? Do you have a sense for the scalability of your customer acquisition channels

Sales pipeline

  • How does your current pipeline look like? Do your short-term targets look realistic based on your "in closing" pipeline? Does your overall pipeline support your mid-term targets?
  • How has your pipeline developed? Has it become stronger and stronger over time?
  • Are you starting to get a handle on closing probabilities and closing timelines?

In the original post I said as a bonus tip that if you're an enterprise SaaS company, you should put together some additional information about your largest customers. Here's another bonus tip: Include information about your NPS (which is hopefully very high) and how it has developed over time.

Ideally, all these puzzle pieces together, along with the size and attractiveness of the opportunity you're going after and the strength of you and your team, will form the picture of a SaaS startup which has clear product/market fit, enthusiastic customers, strong initial traction, continuously improving metrics and which is on its way to building a repeatable, scalable and profitable customer acquisition engine.

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