A few days ago I participated in Pacific Crest’s workshop for private SaaS companies. This workshop is being held every year as part of Pacific Crest’s technology conference. In addition to the spirited discussion among SaaS company executives and investors, during the workshop Pacific Crest’s Brendan Barnicle and David Spitz presented the results of two surveys they conducted. Brendan spoke about the CIO survey (sample of about 100 CIOs) regarding SaaS trends and sentiment. David presented the results of the SaaS private company survey (sample of about 70 private SaaS companies) about business metrics. A number of Trident Capital’s SaaS portfolio companies were invited to participate in the workshop in addition to me. Of the material that was presented, the data that caught my attention included:
Overall 2011 IT budgets are expected to increase by 0.9% over 2010 numbers, compared to the 1.1% increase that was anticipated during the 1H11. Of the surveyed CIOs 35% indicated their intention to re-evaluate their IT budgets during 2H11, with 60% of them anticipating selective budget increases.
SaaS application usage in the enterprise is increasing and adoption of such applications is becoming a higher priority. The surveyed CIOs indicated that today 16% of the applications used by their corporations are SaaS, whereas next year the number will be 17%.
CRM and BI/analytics, including web analytics, remain the top the areas where SaaS applications are first being used in the enterprise. More importantly, according to the survey and other information presented by SaaS vendors in the conference, CIOs are now asking for suggestions on the types of SaaS applications to include in their portfolio. I think that CIOs are realizing the unstoppable SaaS adoption and they don’t want to be marginalized by opposing it as was the case just a couple of years ago. According to InformationWeek, 65% of contracts with SaaS companies are still being initiated by the business, and only 35% is initiated by CIOs.
During 2Q11 SaaS vendors were able to increase prices, around 5%, or they offered fewer discounts. Two reasons were given for this trend. First, corporations are finding that SaaS applications can drive revenues or significantly reduce cost. Second, their employees like using these applications so their usage is expanding within each company. Several of the private SaaS company executives participating in the workshop confirmed this pricing trend but they also countered that they are spending more time than in the past negotiating terms with clients.
Data is becoming an increasingly important component of every SaaS solution. SaaS vendors are starting to exploit the data they collect from each customer either in order to offer additional applications around this data, or to provide benchmarking services among their clients. Almost a year ago I had written about this opportunity and called it insight-as-a-service. In the main conference, Realpage reported how it is using data to offer 10 new applications to its customers.
Security, or the perception about the higher security vulnerability of SaaS applications, remains the biggest obstacle to the broader adoption by the enterprise of cloud computing in general and such applications in particular. The CIOs must also move from a product to a service mentality in order to better support the business units that adopt SaaS applications. The employees of SaaS companies realize the importance of service and are focusing on this issue much more than the employees of on-premise software companies.
During 2011 SaaS companies have been growing faster than during 2010 (median revenue will grow 44% during 2011 vs 40% during 2010) but with over 30% of the respondents projecting YoY growth that will be greater than 60%.
SaaS companies expecting to do $10-25M in 2011 revenue are growing the fastest compared to other smaller and larger companies that were surveyed. These companies expect an average growth rate of 75%. This rate is about double of what it was last year’s, indicating that for SaaS companies $10-15M in revenue provides them with “escape velocity.”
In last year’s survey, SaaS companies that were using field sales were growing faster than those relying predominantly on inside sales. The 2010 survey results were more balanced. The companies using inside sales were growing at similar rates to those using field sales. Moreover, among the 2011 survey participants field and inside sales were the two dominant go-to-market models. Internet and channel appear to be used relatively infrequently as the primary sales models. As I had also reported from our own SaaS portfolio company results, the field sales model is being predominantly used by companies whose solutions command higher ACV (over $60-70K).
Median CAC for new customer dollar was reported at $0.93, whereas for upsells and renewals was reported at $0.28 and $0.16, along expected patterns.
The surveyed companies reported that they expected their gross margin at scale (defined as $50M in annual license revenue) to be 71%. Pacific Crest’s target model is at 79%. Companies that are expected to grow by more than 45% expect to spend 38% of their budget in sales and marketing.
More companies, particularly those with larger ACVs, are reporting contract lengths of more than 1 year, again indicating a trend that we have also been seeing in our own portfolio companies. A few of the company executives that participated in the workshop indicated that their customers are asking for longer-term contracts (primarily 3 years) typically paying 1 year upfront. In fewer cases, SaaS company CEOs reported that they are pushing multiyear contracts on their customers.
Companies are moving away from pricing based on seats and are looking for other business models that are primarily related to the application’s usage.
Best in class churn among the companies surveyed was reported at around 5%.
Most companies that have reached “escape velocity,” i.e., annual revenues that are larger than $10-15M, have raised $25-40M
Companies are reaching breakeven and are expecting to generate free cash flow at around $20M of annual revenue.
I walked away from the workshop with a few conclusions regarding the state of SaaS. First, the data presented reaffirmed the unstoppable wave that SaaS and cloud computing represent, along with the tremendous investment opportunity in these sectors. Second, the presented data further validated the data we track in our own SaaS portfolio companies: customer behavior metrics, annual growth rates, contract terms, ACV, CAC, churn, capital efficiency, and escape velocity. As I had written a couple of years ago, the 2008 recession catalyzed and even accelerated the adoption of SaaS applications in the same way the Y2K problem catalyzed the use of IT outsourcing during the late ‘90s and the first decade of this century. I expect that even if the economy continues to exhibit the weakness that has recently been reported, SaaS companies will do great. Enterprises have come to understand and appreciate the financial benefits resulting from the use of SaaS applications to both their top and bottom lines. Finally, over the past couple of years, more than ever before, enterprises have comprehended the importance of customer centricity and customer intimacy. Through the use of SaaS applications, corporations are able to more easily collect and analyze pertinent transactional customer data and mash it with social, mobile and sensor data creating big data collections of unprecedented detail that help them better understand their customers and thus become more customer-centric.