Keeping it SaaS-y: Valuations for SaaS Companies

We’re into August, which means savvy entrepreneurs are thinking about the fall… and Funding. If you’re working on a cool new Software-as-a-Service (SaaS) product, it’s a pretty special time to raise money. Check out the latest Valuations data from the folks at PWC (…).Bottom-line: software funding grew 36% to $1.6B in Q1 2012 vs. Q1 2011, while most other sectors shrunk.  Go get yours.

But how should you think about valuation? What is “market” for high growth SaaS companies?

Well, here’s one way to think about it:

SaaS Valuations Grouped by Growth Rate & Margin

In short, high growth (30% per year or more) and high margin (65% or more) businesses trade at a big premium. How much of a premium? 7 times your NTM (next 12 months) sales, vs. 4-5 times NTM sales for “regular” SaaS businesses.

Your business (and founder shares) could be worth 40-75% more if you are in that top right category.

Duh right?!? But it raises an important question every founder should care about – how do I get there and what are the signposts?

Some “SaaScid Tests” to live by:

All 3 tests relate to sustainable, high revenue growth:

  • If  LTV > 3X CAC, every dollar of sales & marketing spend builds  strong, sustainable revenue backlog, assuring future growth.
  • If months to recover CAC < 12, you  are capital efficient (less fundraising and dilution!) and can use your  own cashflows to fund your CAC
  • Low churn = higher starting point for next years revenue = higher growth rate

If you manage your pricing and your sales & marketing model to these benchmarks, you will enjoy strong profitability. And if you have profitability, you can pursue growth because the customer economics scale.

Oh, and if you’re hitting those benchmarks, we should talk!


Only the Best – Why Startups Should Recruit Aggressively from Colleges and Why Most of Them Don’t

This is a guest post from my colleague Ajay Agarwal, stud-entrepreneur-turned-VC, who is a big believer in the power of fresh college grads to make a dramatic impact at start-ups. His views really resonated with me (where would I be if someone didn't take a big bet on a fresh college grad?), so I wanted to share.

Startups, Startups Hiring, Hiring Standards, Engineering Recruiting, Startup Recruiting, Is there an engineering talent shortage in Silicon Valley?

Only The Best

Prior to joining Bain Capital Ventures, I spent 8 years at Trilogy
which was founded by Joe Liemandt, a Stanford dropout and brilliant entrepreneur. I first met Joe in 1988 when he and I and a few others worked on a startup (pre-Trilogy) during my sophomore year and his junior year at Stanford. While Trilogy was a very successful company (it scaled to $300M in revenue), most people don’t know much about the company because Joe kept it private and decided to not sell or take it public. However, anyone who was a CS or Engineering Major in college in the mid to late 90s knows Trilogy because of its legendary college recruiting process, dubbed “only the best”. Whether it was the BMW giveaways on campus, the weekends in Vegas or at Joe’s cabin in Deer Valley, or the raucous “sell weekends” on 6th street in Austin, the Trilogy campus recruiting program was nothing short of memorable.

Joe was a big believer in only hiring “Kids”. At Trilogy’s peak, we
hired more than 300 college kids into a company of less than 1000 people total. Because of the heavy focus on college hiring, the average age of the company was less than 25 years old and we had very few “adults” or experienced hires. The benefits of hiring from college are pretty obvious, but Trilogy took it to an extreme and at such scale it was a competitive advantage for the company.

Why College Kids Rock

No sense of impossible
Recruits straight out of college have no experience and as a result,
they have no idea what is possible or impossible. They can look at any problem with a fresh perspective and bring unvarnished and unjaded creativity and sheer force of will to a challenge. I recall a time when our head of marketing and PR, Krista, who was a couple years out of Stanford, was asked by Joe to get Trilogy on the cover of Forbes Magazine. She didn’t respond with all the “rational” reasons why this was a silly goal, why it wasn’t do-able, or why the press is fickle. Instead, she made it happen. Four months after agreeing to the goal, she got Trilogy on the front cover of Forbes. It became the stuff of folklore and legend at Trilogy and reinforced Joe’s belief in The Kids.

Crazy work ethic
Trilogy’s college recruits had no life outside of Trilogy. They didn’t
have commitments at home, they didn’t have mortgages, they didn’t have any obligations. As a result, the Trilogy recruits were regularly there at work past midnight – in fact, many of them enjoyed it – this was the life they loved and were used to in college (staying up all night working on some code) – now they were getting paid to do the same thing with smart people around them. Not all of these hours were necessarily highly productive, but the work ethic was ridiculous.

Out of the Box Thinkers
Some of Trilogy’s best ideas and innovations came from our college hires. They were smart and talented. They just graduated from college- a fantastic environment where people are encouraged to study across disciplines, where they are thrown in dorms with people from all walks of life, and they spend four plus years absorbing ideas, debating the meaning of life, and trying to improve the state of the world. They are taught to question authority and take nothing at face value. Contrast that with a typical corporate environment, even that of a medium to
large tech company, where teams are more functionalized, roles are more specialized, and decisions are more hierarchical. The Trilogy Kids, while inexperienced, were not sullied by traditional corporate process or thinking. They still had the mindset one has in college when they arrived. This perspective and approach led to amazing innovation at Trilogy, including pcOrder, which spun off and became a $1B market cap company. Other new products like our marketing configurator or commission applications generated over $100 million of revenue. Entire new geographies, like our European division was launched and run by a Trilogy college hire.

Insanely strong culture
Every great startup that becomes an iconic company has a strong company culture. This company culture is what sustains a startup during difficult times and is what is celebrated during times of success. College recruits are a big contributor to company culture. These recruits come from campus environments where every Saturday they paint their faces and wear their school colors….environments where they cheer on ridiculous mascots like a dancing tree or a blue devil. College kids love the rituals and symbols that come with being part of a freshman class or dorm or college organization. These same rituals at Trilogy were celebrated with amazing intensity whether it was the friday party on the patio, the weekend vegas trips, or the toga party at the Hawaii retreat. Could you imagine how different a college football game would
be if there were no college students in the stands and only the alums and boosters? This is what Trilogy would have been like without the college hires. Our culture would not have been nearly the same.

Why don’t more startups recruit from college at scale?

These are all obvious benefits of hiring from college. Big tech
companies in the 90s like Microsoft were heavily focused on college recruiting. Similarly, the big tech companies of this era, Google and Facebook, aggressively recruit from college. Many startups may target a local college for a handful of hires or look to add 1-2 folks from the alma mater of the founder. However, very few startups recruit from college at scale the way Trilogy did it in the 90s. Why is that?

Cost, Time, Resources

On campus recruiting is expensive and time consuming. College fairs and college recruiting events are big ticket items. It can cost over $20,000 to participate in a formal job fair or similar event. In addition, the cost of flights and interviews on campus add up quickly. Now multiply this by 5 or 10 campuses and you quickly have a $500k investment to recruit from college, which makes a scaled campus recruiting program prohibitive. Plus, college recruiting requires an enormous investment of time – info sessions, on campus interviews, sell weekends, and new hire training typically involve a team of dedicated individuals plus significant time from the founders who already have too much on their plate. However, most of our startup founders wish they could hire more engineers directly from college. And all of our founders, especially those in NYC and the Valley, feel that technical hiring is their number one challenge right now….

Introducing Startup Academy
It is in response to this challenge that we at Bain Capital Ventures are announcing the launch of the Startup Academy – a program run and staffed by our firm that is designed to identify some of the best technical graduates in the country and pair them with exciting startups in our portfolio. The goal of the Startup Academy is to provide startup opportunities for college grads and place them in a network with other recent grads who are working in startups. We think the work experience of being in a startup right after college, combined with being in a network with other recent grads who are also in startups, creates a fertile ground to develop the next generation of entrepreneurs. Not to mention, it provides enormous benefits to our portfolio companies. In this initial year, we are targeting a dozen campuses across the country and will be focusing on full time technical hires. Over time, we will look to expand the number of campuses and also include interns and non technical hires also. Here is the link with more information: http://www.baincapitalventures.c…

Thanks to Joe, Jeff, Alexa and the entire college recruiting team at
Trilogy for being the inspiration for Startup Academy. And an extra
special thanks to DR for being an advisor to our initiative.

Ajay Agarwal

Trilogy University – 1995. “Only the best”

Post on Quora

An Empirical Look at “Creeping” on Social Networks

Disclaimer: no personally identifiable data was used for this research. We had anonymous clickstream data. Also, this is not a scathing expose. Let’s have a sense of humor.

Watch this video:

(courtesy of my college a Capella group)

Tawanda Sibanda and I set out to understand how non-friends interact on a major social network. Our hypothesis was simple: “creeping”

What is “Creeping”? From Urban Dictionary: Following what is going on in someone’s life by watching their status messages on Instant Messengers such as MSN, and their updates to their social networking profiles on websites like Facebook or MySpace.

We were hoping our hypothesis was wrong. False. In short, the vast majority of non-friend interactions are anonymous viewing of photos and profiles. The culprits? Men aged 23-50 viewing women aged 18-30.

How do people interact when they are not friends?

Non-friends use Social Networks for “creeping”
Out of our dataset of 7,152 interactions, 2,219 (31%) are between users who are not friends. Of those, 2,169 (98%) are Info Views, i.e., actions that allow the viewer to collect information about another user without their knowledge, such as viewing photos or profiles. Those Info Views include 1,436 photo views (65% of non-friend interactions), 632 profile views (28%) and 101 views of the target’s social network (5%). In short, there is a lot of passive “creeping” behavior.

Who are the Creepers?

By gender: 2:1 odds it’s a male
Out of 2,186 non-friend interactions where gender is known, men initiated 1,463, or 67%. In short, in our data set, men are 2X more likely to ping strangers than women.Interestingly, overt gestures like messaging or poking are 6X more likely to be initiated by men than women – men initiated 36 such gestures, vs. only 6 for women. Obviously there could sampling error with such small numbers.

By age: Men aged between 31-50 are most likely to engage in “creeping” (specifically of women age 30 years or younger)
“Creeper” behavior here is defined as actions that allow a user to gather information about another user (who is NOT a friend), usually without the target’s explicit knowledge. This includes viewing the target’s friend list, photos or profile, and searching for the target’s profile. The data shows that men aged 23-30 contribute the most “creeping” interactions (32%).

We also computed the percentage of interactions from each age group that involved “creeping”.

Essentially men aged 31-50 are more likely to “creep” than men of other ages (48% of interactions for that age group vs. 40% for the next highest age group, men aged 23-30). In contrast, and perhaps surprisingly, women over 50 are most likely to engage in such behavior (and even more likely than men in the same age group).

To better understand the most active creepers (men aged 31-50 and women over 50), we looked at the gender of their targets.

So men aged 31-50 are predominantly viewing women they do not know, whereas women over 50 are viewing both men and women in relatively equal proportions. The behavior of the women over 50 seems benign. Perhaps they are truly looking to meet new friends, or searching for old friends.

We drilled further into the characteristics of the women being viewed by men aged 31-50. The answer: they look at women aged 23-30. Slightly creepier finding: 30% of their interactions are with women 22 years old and younger!

Does any of this behavior lead to new friendships?
Both genders rarely add people they are “creeping” to their networks.
193 of 3,960 male interactions (4.87%) correspond to adding of friends vs. 116 out of 3,103 female interactions (3.7%). Men are slightly more likely to engage in adding people to their network than women, but the differences are small and, in fact, women have a higher average number of friends (301) vs. men (256).

Interestingly, when you look at the composition of people being added by men vs. women the difference is startling. 79.8% of the time men are adding women to their friends network. In contrast, women only add men to their friends network 40.5% of the time.

Some Good News: “Creeping” behavior is by a small subset of men
We were a little disturbed by our findings, so we started looking for a silver lining. One hypothesis was that a power law / 80:20 rule might be behind the “creeping” clicks. So we checked. It turns out about 39% of the men in the dataset account for 100% of male interactions with non-friends, and 20% account for 87% of the behavior.

So what does it all mean?

  1. Not much—this sounds like real life
  2. Women should probably spend a little time going through their privacy settings (particularly for pictures)
  3. A major social network is not an environment where people go to genuinely look for new friends / find dates. Start-up dating sites rejoice!

Post on Quora

Can Quora “cross the chasm”?

Last month, Tawanda Sibanda and I decided to analyze community engagement on Quora, as part of research with Misiek Piskorski. We all love Quora, and were trying to understand whether it could become a mainstream resource.

Bottom-line View
Quora’s product design makes it hard for the site to grow beyond tech users. Consider 3 elements that perpetuate Quora’s appeal to its original techie audience (thereby alienating non-techies):

  1. Newsfeed: Unlike Facebook, the Quora feed is not threaded, i.e., every subsequent answer to a popular question gets a separate feed entry. As a result, the entire feed can be dominated by discussion around a single, trending topic (iOS vs. AndroidiPad 2).
  2. Votes: our data suggests that more views = more votes (not surprising). Therefore, given the newsfeed design, the only way to get votes / community love is to write about trending topics. For this community, that means writing about major issues in tech/entrepreneurship.
  3. Tech celebrities: users like Reed Hastings and Dustin Moskovitzeasily get more than 50 votes per answer and have massive follower counts. A response by them can dominate a newsfeed.

If you add them up, those 3 elements drive a self-reinforcing focus on tech. If you are non-techie visiting Quora for the first time, you might not find much value. Let’s go into the data….

What we did

Over a sample set of 30 answers, we tracked a variety of metrics to see what would predictive of high community engagement (Votes,Thanks on Quora, etc.). We know this is a small sample. We were just testing the waters!

Sample Input Metrics (data that should be correlated with whether answers would be read) included prior number of answers / votes (across all answers) to the question, prior number views and followers and whether or not the question fell within our areas of expertise

Sample Output Metrics (how the community responded to our answers) included, number of votes / comments, number of views / followers and how our follower count grew after answering.

What we found

Part 1: Choosing the question is half the battle

Using a 2-by-2 matrix below, we found that if we answered popular questions, we were much more likely to receive votes and comments from the community. On average, relative to questions rated Low-Low, answers to questions rated High-High received 3X more votes (2.6 vs 0.9), 4X more comments (0.4 vs 0.1) and 13X more subsequent views. In short, writers are rewarded for talking about things the community cares about, which means tech.

Community Engagement, Mapped to Matrix of Question Popularity

Axes Definitions
Read: Number of views for a question prior to our answer. High defined as greater than 130 views (the median) and Low less than 130.
Write: Number of answers for a question prior to our answer. High defined as greater than 3 answers (the median) and Low less than 3.

To further explore this “head” bias in Quora responses, we plotted the chart below of the cumulative percent of views and votes driven off our 30 answers. In short, 20% of questions drive 87% of total views and 57% of votes.

Cumulative Percent of Votes / Views vs. % of Questions

Part 2: Quality matters, but only if you pick a “sexy” topic
We computed the correlation coefficient between the number of votes an answer received and various metrics from our sample set. Our data says that only two factors are statistically significant in getting votes: thelength of the answer and the change in the number of views.

The importance of length is not surprising.  Anecdotally, we found that writing long, well-thought out answers increases the chance of receiving votes. The statistical significance of the change in views supports the idea that hot topics receive more votes. Being able to predict and answer questions that will have a dramatic rise in Quora viewership is a tactic to securing up-votes.

Part 3: Reputation / Identity matters
Despite our best efforts to write detailed and analytical responses, the highest number of votes we achieved was 11 on a response related to venture capital (my job). On average we received 1.7 votes per answer. To put this in perspective, on average, Reed Hastings writes 19 word answers and receives 109.8 votes (versus our 220 word average).

The chart below provides some examples of Quora “celebrities”. Almost everything they write generates significant activity and further reinforces the site’s bias towards “head” technology or entrepreneurship content.

DISCLAIMER: Tim, Dustin Drew and Reed are rockstars. They obviously deserve the love they get on Quora. We’re just trying to make a point around how that level of attention narrows the focus of the site.

What all of this means

While our sample set of 30 writes is not a very large one, we do think it raises some interesting questions for Quora’s future growth. In its current avatar, it may remain a niche resource serving only the tech community because it has slightly circular logic:

  • The existing user base primarily consists of technophiles, which follows topics related to tech trends / entrepreneurship
  • As a result, the newsfeed algorithmically prioritizes those topics
  • Consequently, newer users also click through to the same content, amplifying votes, answers, and other community engagement within those topics
  • Writers on those topics receive community validation, encouraging similar posts – good responses in other content areas and written by non-tech-celebrities are not rewarded
  • And so the cycle continues

Some food for thought:

  • Could Quora offer more community visibility / status incentives for pioneering new topics?
  • Could we encourage users to vote on answers that are truly helpful, e.g., anonymize a celebrity author until a user votes?

Thoughts welcome – looking forward to the debate.

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