This SaaS Metrics blog post looks at the high level goals of a SaaS business and drills down layer by layer to expose the key metrics that will help drive success. The post provides a considerable amount of detailed information that should be of great assistance to anyone running, or looking start, a SaaS business.

Metrics for metric’s sake are not very useful, so the goal of the post is to provide a detailed look at what management must focus on to drive a successful SaaS business. For each metric, the post also looks at what is actionable.

The post starts by looking at the high level goals of a SaaS business: Profitability, Cash, Growth and Market Share, and drills down into the component parts that drive each of these. Key metrics that are covered include cost of customer acquisition (CAC), lifetime value of the customer (LTV), months to recover CAC, Churn, sales funnel metrics, etc.

The coverage of what metrics are needed is comprehensive and detailed.

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Success. Success. Failure. Success. Failure.

That’s it, that’s my story. It’s been my heartbeat. I’m a Serial Entrepreneur with a 60% track record, which is comforting, except that I’m coming off my latest failure at Helpstream. 60% is way in excess of what most any VC ever gets….

I am fond of saying you learn a lot more from failure than success. Call it a consolation prize, but I do learn a lot from the failures, though I also learn from the successes. Since I am just off a Failure, clearly I have not yet amassed enough learnings to have a perfect picture of how to navigate the treacherous waters a startup sails on to success. Hence there are new learnings to be discussed. The Helpstream Learnings Series

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After being an entrepreneur for most of my adult life, I’ve now been a part-time angel investor for 5 years and a full-time venture capitalist for the past 9 months. During that time, I’ve come to appreciate the real value that great venture capitalists provide: amazing informational awareness, comprehensive business networks, providing brand cover for companies so that they can recruit and raise more money effectively, and more.

Still, some VCs do things that I really don’t like. This post is for them.

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Why do angel investors exist?

Before answering these questions, it’s useful to ask and answer a related question: why are there angels and why have they become more prominent in the last 10 years? After all, doesn’t the definition of venture capital include all of the activities that angels perform?

The answer lies in the history of technology companies and the differences between how they were built 30 years ago and how they are built now.

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This discussion comes up time and time again in the eternal SaaS vs On-Premises debate. The SaaS guys (yup, that’s me) wax eloquently about all the advantages of SaaS only to have the On-Prem guys shoot us down by proclaiming SaaS companies aren’t real businesses because they can’t make a profit. The thing is, it just ain’t so.

The latest bout of this I had was amongst my Enterprise Irregulars blogging group, and comes in the aftermath of Sapphire (SAP’s User Conference), which always brings out a lot of discussions like this. Our discussion got started through Michael Krigsman’s excellent post on SAP’s continued commitment to their SaaS product, Business by Design. As Michael points out:

The economic differences between delivering software via SaaS and on-premise methods are substantial, with profound implications for how software companies optimize internal operations.

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It happens all the time. I’m meeting with an entrepreneur, who is telling me about a really innovative product idea for a consumer website. And I’m liking it. We’re going back and forth on product ideas. And before I know it, we’re approaching the end of our meeting. I then ask them, “So, how are you going to acquire customers.” And that’s when it happens…The most disappointing answer is when they say “Oh, we’ll just make it viral.” As if….

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In the emerging sector of Software as a Service, one of the biggest challenges for many of the top CEOs is the lack of successful role-model businesses. There are still only a handful of public pure-play SaaS businesses, and thus the body of “best practices” is very limited. Ironically, on top of this, one of the hardest things veteran software CEOs have to do when they start to run a SaaS company is to forget much of what they know about running a software company.

As we worked with our SaaS portfolio companies, it became apparent that savvy SaaS companies were following a new set of rules – most of which didn’t apply in the traditional software world, and many of which they were making up in real-time. We then set out to capture the new “best practices” of the on-demand model.

To pull these insights together, Bessemer studied over a hundred SaaS companies – both pure-plays and hybrids – and recently hosted an invitation- only SaaS CEO Summit to compare perspectives and discuss the findings. Many of the insights gained during this research and these discussions are condensed into the following list of ten new “laws” which help to govern the success of SaaS companies.

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Josh James, CEO of Omniture (a Hummer Winblad portfolio company), gave an inspiring talk on building a SaaS company last week at the Opsource summit….

The key metric that Omniture used to decide how much gas to pour on the fire was the Magic Number.

The Magic Number

The magic number (“MN”) is a metric that can be used to tell you the health of your company from the perspective of growing monthly recurring revenue (“MRR”). It is a common mode metric to compare companies MRR scaled by sales and marketing spend. The MN provides insight into the effectiveness of previous quarter Sales and Marketing spend on MRR growth. Your MN will be penalized if the spend is wasted (bad marketing, bad sales execution), if your churn is high or if the market has issues (saturation, competitive forces). It also has a very high correlation with Q/Q growth rates so in general, high Magic Numbers are good.

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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.

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In February 2010 Fred Wilson, a New York based tech investor, spoke at the annual Future of Web Apps Miami conference. His talk, clocking in at just under 30 minutes, looks at his top 10 principles for creating a successful web app. A full transcript is available in the original post.

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