Finance & Operations

Do You Know How to Build a Profitable SaaS Business?

September 28, 2010

The few souls out there that actually read my blog know that I am quite passionate about capital efficiency and profitable distribution models. In fact, that is one of our mantras here at OpenView Venture Partners.

Last week I read a brilliant post by Joel York about SAAS Metrics: Guide To SaaS Financial Performance. Joel’s post lays out all the formulas and goals you need to track to build a capital efficient, high growth and profitable SaaS business. A must read!

My favorites of Joel’s Rules of Thumb on the second page:

  • Churn Kills Growth: it may be an obvious statement, but I can’t tell you how many times I have seen companies neglect their churn. There’s such a focus on new customer acquisition in expansion stage companies, that it’s very easy to take the eye off of existing customers.
  • Customer acquisition growth must outpace churn: again, an obvious statement, but not always easy to do.
  • Company profitability follows customer break-even: a hugely important metric to focus on. A good rule of thumb: break even on your distribution costs within 12 months and break even on the total costs within 18 months.
  • High growth delays profitability: at least, it delays cash profitability. This is why SaaS companies tend to rely on equity financing for growth. One way to mitigate the severity is by selling one year licenses and collect cash upfront and watch your accounts receivables like a hawk. 
  • Upgrades and up-selling accelerates profitability: YES! Sell more to you existing customers before you acquire new ones. By focusing on selling more to existing customers, you will certainly focus on reducing churn. And selling to existing customers is much cheaper than selling to new ones.
  • Here’s a rundown of what I have blogged on this topic in the past:

    These are the fundamentals of building a high growth, capital efficient business. These fundamentals tend to manifest themselves to CEOs of start-ups primarily because their companies tend to be cash constrained. But when these CEOs raise VC growth capital, I often find that the money ends up providing a cushion which takes the CEO’s eyes off of the economics. We at OpenView have made it our mission to help our companies be highly focused on their operational dashboards.

The Chief Executive Officer

Firas was previously a venture capitalist at Openview. He has returned to his operational roots and now works as The Chief Executive Officer of Everteam and is also the Founder of <a href="">nsquared advisory</a>. Previously, he helped launch a VC fund, start and grow a successful software company and also served time as an obscenely expensive consultant, where he helped multi-billion-dollar companies get their operations back on track.