SaaS is one of the most beautiful business models out there. At BVP, we have been extremely bullish on it and have probably one of the largest portfolios of SaaS companies out there. The benefit of this model also hasn’t escaped public investors which can be seen by the BVP cloud index, which tracks 38 public Cloud Computing Companies. The average company in the cloud index now trades at a 7.4x EV/revenue multiple (!).
I am going to publish a series of blog posts about SaaS. Ever since moving back to Israel I was somewhat unimpressed by the quality and quantity of the local SaaS companies I met. It almost seems like we are a few years behind the US market in this space. I guess this is mainly because of the dependency on channels , tendency to sell both on premise and cloud, and the larger capital investment required to scale a SaaS company.
SaaS has tons of benefits both from a product and delivery standpoint and from the nature of the subscription revenue. I think the product and delivery benefits are more obvious so I want to focus on the beauty of the recurring revenue model. The most important aspects of the model are predictability and visibility of revenue. When you begin a new quarter you have a base to start from rather than beginning from zero. After a while you can forecast churn (gross and net) pretty accurately which makes predicting revenue even easier. What comes next is the ability to optimize expenses. Once you have predictability and visibility into revenue you can calculate things like CAC ratio and ramp up or down expenses to match revenue growth. Another key metric you can measure is Customer Lifetime Value (CLTV). This helps you know exactly how much you should spend on customer acquisition and optimize spend well in advance of revenue (which is one of the reasons SaaS companies are EBITDA negative for a long time during growth period). Though the math is straightforward, this concept is not always intuitive and often escapes companies which don’t invest enough in growth. You spend money today to acquire a customer that will pay out only over a few years. However, if you think about it as seeding a plant that will feed you for a long period of time- it makes a lot of sense.
In the next few blog posts I’ll try to discuss questions like how fast should I be growing? how much should I spend on customer acquisition? what’s a good mix for inside sales vs. internet sales vs. field sales? How to build sales commission structure for SaaS? What should be the target gross margin? What metrics do public investors care about?
Building a good recurring revenue business is not rocket science. If you have a good product / technology as often Israeli companies tend to have – there is no reason not to have a great Go To Market strategy to complement it.