I have so far reviewed nine laws of Bessemer Top 10 and with this last one is almost like a summary of the other nine laws. The reality of SaaS-based companies is that the biggest question they have is how to finance the growth and how to ensure that the Committed Monthly Recurring Revenue (CMRR) is going to be enough to fuel the growth and how the company should plan its capital infusion both short-and long-term. Every ISV leader needs to understand the financial drivers of the operations and I wrote about this in my blog entry by referring to the 6C’s of Cloud Finance that Bessemer has defined on their site.
Law #10: Cloudonomics requires that you plan your fuel stops very carefully
What makes a SaaS company so much different to a more traditional software company? To put it bluntly, a SaaS company needs to be better funded when compared to a traditional software company. The funding is not necessarily different when viewing the overall capital need, but funding will be needed specifically during the first few years when the company is building its revenue stream. The reason is obvious when analyzing the financial model.
A SaaS company has to fund the research, development, sales and marketing well upfront without receiving the payback immediately like was possible in the “good old days”. It was not unheard of getting 300k software deals that funded additional development and marketing for a small company but now this money will come gradually and only if the SaaS vendor is able to retain the clients. I did this in the companies I worked with, my colleagues did this and this is why one could build a nice and sustainable software business without having huge amounts of cash. What was needed was a good idea, a couple of good programmers and a product that was sold to a hefty price tag with a traditional licensing model.
Getting a healthy inflow of CMRR transactions is that will keep the company afloat but like Bessemer puts in its blog entry, it could take more than 4+ years to get a SaaS company cash flow positive. Bessemer concludes that SaaS companies typically need multiple rounds of financing and some of the well-known are Netsuite ($126m), Salesforce.com ($61m) and SuccessFactors $45m. These investments are obviously considerable when measured in typical startup scenarios, but the lesson that we can take from them is that regardless of what the ambitions are, the SaaS business model will require more upfront investments when compared with traditional model and that the return of positive cash flow will take more time.
Summary of our findings in respect to Business Model Canvas
Like in my previous blog entries, the objective of this blog was to view the current Bessemer law with Business Model Canvas from Dr. Osterwalder. Like I stated prior in this blog entry, the impact of this Law is dependent on each and every Business Model Canvas building block. However, if we need to pick one or two of these, it would be Revenue Streams (RS) as that dictates how well we run our business from revenue perspective, but also Key Activities (KA) which measures how well we understand and run our core business. It is also very important to understand that SaaS business will change the Channel (C) structure as well. ISVs can’t expect to have similar channel structure as they used to have in the past. Vendors such as Microsoft will open commercial app stores (The Dynamics Marketplace) for its development platforms such as Microsoft Dynamics CRM 2011 that has a landing page to learn more. Similar objectives exist for upcoming Windows Mobile 7 with app store like was reported by MobileCrunch.
The question that each ISV will have is how to utilize these app stores and what kind of impact do they have on the existing channels. In some cases, and typically in quite a few of them, solutions are complex and require system integrators to integrate these solutions to backend systems. In some cases the apps might be lightweight and can be deployed without any external help. Should ISVs in these cases rely purely on its own resources and marketing to end user clients, or should they still try to build a channel? I think it will be a combination of both whereby there is nothing new. Traditional software channels need to see the success of the software vendor, there is no way around it. SaaS will be just another way to deliver the solution and gives a broader exposure to ISVs as the whole world can find it through Internet.
This blog entry concludes my journey of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas. This journey of blog entries has been very educational even for me, as it has included a bunch of research of what is known of these topics and what people have written about it. I do have to admit, that there are so many variables to the SaaS world specifically from a financial perspective that I recommend every manager that is part of any ISV business to spend time around these topics. It is worth the investment and can save you from many mistakes; some of them could be disastrous to you from a financial perspective.