don't underfund your saas business don't underfund your saas
Post on 21-Oct-2014
510 views
DESCRIPTION
TRANSCRIPT
Don’t Underfund Your SaaS Business
Don’t Underfund Your SaaS Business
Todd Gardner, CEOSaaS Capital, inc.
SaaS Economics | 04.04.08
Agenda
SaaS Capital Overview
Cash Difference: SaaS vs. Perpetual Models
5 Sources of Capital Available to SaaS Businesses
How a SaaS Capital Loan Package Works
Getting Started with SaaS Capital
SaaS Capital Overview
Introducing SaaS Capital
Focused solely on meeting the needs of SaaS companies
Offer credit facilities between $1 and $8 Million
Facilities tailored to the SaaS model in availability and repayment
Offices in Cincinnati and Boston
SaaS vs. Perpetual Models
Cash Burn: SaaS vs. Perpetual Model
Monthly payments instead of up-front license fees increase the capital required to build a software company by 50% to 100%
Monthly payments instead of up-front license fees increase the capital required to build a software company by 50% to 100%
millions
SaaS Pre-IPO equity
Company Pre-IPO equity(millions) Year
NetSuite $125 2007
Ominture $54 2006
Dealer Track $80 2005
Kenexa $71 2005
Black Board $130 2004
Salesforce.com $88 2004
RightNow $ 31 2004
Average amount of venture capital raised prior to IPO was $83 million. Average amount of venture capital raised prior to IPO was $83 million.
SaaS Financial Implications
Costs measured as a % of revenue are skewed for SaaS • Develop a clear and consistent “bookings” definition
When should a SaaS model be profitable? • Depends on the size of the prize • As low as $3 million (growth constrained) • $10 million is possible (sustainable growth)• But cases where $50 million should be unprofitable
Renewal Rate• Single most important metric in the business. 95% vs. 85%
is night and day financially
Cash Requirements of SaaS
Net-net: some components of the SaaS model may be lower cost, but nothing offsets the large deferral of up-front cash.
Net-net: some components of the SaaS model may be lower cost, but nothing offsets the large deferral of up-front cash.
Real business applications still require sales people and customer service people who all want to be paid
Good SaaS businesses require a good product which requires developers who also want to be paid
Pure multi-tenant infrastructure might be less expensive at scale, but not dramatically so
Some customers will pay you a year in advance. Good start, but still much less then 100% up-front
5 Capital Sources Available to SaaS Businesses
1. Customers
Get 1st year in advance
Ideal option if you can do it
No equity dilution
Very good during “rocket-ship”growth
Easier said than done
May hurt growth and cause lost deals (hidden cost)
Adds variability to cash-flow
2. Outside Equity
No scheduled re-payment terms
Large amount of funds available
Value-added investors
“Value added” investors
Expensive if successful
Loss of control
Lengthy process
The less outside equity, the better for everyone. No one likes Series D!
The less outside equity, the better for everyone. No one likes Series D!
3. Traditional Lenders (Banks)
Many options
Established and well-known approach to sourcing capital
Least expensive – normally(Consider all fees and warrants)
Not much availability
Balance sheet covenants(Need to have money to borrow it)
Primarily good for short-term AR “smoothing”
They like GAAP assets
4. Venture Lending
Typically closes quick(At the time of an equity event)
Might extend cash runway
Available ONLY when you are flush with cash (inefficient)
Loans get smaller over time even as the business grows
Dilutive
Modestly extends cash runway
5. SaaS Capital Lending
More availability: 3X Banks (borrowing base is future cash receipts)
Availability grows with business(negative amortization)
No equity dilution
No balance sheet covenants
Current interest rate higher than banks - (currently 13% to 15%)
Payments funneled through a lock-box
How a SaaS Capital Credit Facility Works
Credit Facilities Between $1 M – $8 M
Availability of borrowing-base driven by:• unbilled future SaaS contract value (30% to 50% advance)
• a multiple of recurring revenue (3-5 times monthly)
Revolving credit facility under which individual term loans can be drawn based on availability. • 30 to 36 month amortization
Facility grows as you book more business, renew business, and re-pay the notes which have been drawn
Questions?
