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SaaS Economics - Part 1: The SaaS Cash Flow Trough

SaaS Economics - Part 1: The SaaS Cash Flow Trough
This post provides SaaS entrepreneurs with an Excel spreadsheet model and graphs that show the cash flow trough that happens to SaaS, or other subscription/recurring revenue businesses that use a sales organization. These kinds of SaaS businesses face a cash flow problem in the early days, because they have to invest up front in sales and marketing expenses to acquire customers, and only get payments from those customers over a delayed period of time. I refer to this phenomenon as the the SaaS Cash Flow Trough. The model also compares the cash flows of businesses that charge monthly to those that are able to charge their customers for a year’s payment in advance. The greatest value from this post will come from downloading the model and inputting your own variables. The Excel Spreadsheet and associated PowerPoint file can be downloaded by clicking here. Part 2 of this series can be found here: SaaS Economics – Part 2: Scaling the Business. Where is this applicable The Cash Flow Trough Related:  Financial Planning for Saas

Financial planning for SaaS startups A few people who read my recent post about financial planning asked if I could provide an example for a good financial plan, so I'd like to post one here. The plan is very similar to the one that I created in the very early days at Zendesk and re-used a few times in the meantime, but I had to make a few adjustments to make it more generic. It's a simple plan for an early-stage SaaS startup with a low-touch sales model – a company which markets a SaaS solution via its website, offers a 30 day free trial, gets most of its trial users organically and through online marketing and converts them into paying customer with very little human interaction. Therefore the key drivers of my imaginary startup are organic growth rate, marketing budget and customer acquisition costs, conversion rate, ARPU and churn rate. If you have a SaaS startup with a higher-touch sales model where revenue growth is largely driven by sales headcount, the plan needs to be modified accordingly.

Startups and financial models for SAAS companies The other day I met with an entrepreneur I was advising as he prepared to raise his next round of funding. In the meeting, he wanted me to narrow in and focus on his financial model. Financial models for startups are important from a big picture perspective, but I never like to get mired in the full details as things always change in the early stages. Given my experience with SAAS based companies like GoToMyPC (Citrix Online now) and LivePerson (Nasdaq: LPSN), we also spent some time discussing key financial metrics for SAAS businesses that he should pay attention to as he ramped up his business. Financial planning for SaaS Startups: Q&A with Christoph Janz I quit my day job with my friend Igor I started a new company called elastic.io, a solution that helps people connect cloud API’s without programming. One of the major hurdles we faced when starting our company was how to do the financial planning for our SaaS startup. Since we thought this might be useful for other entrepreneurs, I wanted to share with you what we learned. Financial planning for Saas resources There are multiple resources that you simply HAVE to read before doing any financial planning for SaaS. After that I would recommend Christoph Janz‘ blog. In March 2012, Christoph published a couple of blog posts about financial planning for SaaS, which we studied intensely. This sample financial plan is pretty detailed and you can read it on Christoph’s blog, so I won’t go into it again, but after we studied it, we still had a few unanswered questions about it. Is a cheaper SaaS product always easier to sell? Unfortunately, according to Christoph, this is just not true.

How to estimate Lifetime Value; Sample cohort analysis In many businesses, repeat purchase behavior is a key driver of value. Many companies track % of repeat purchases as a key business metric. This is useful in steady state, but can sometimes be quite misleading if the company is showing substantial growth. By definition, growth implies many first time customers, and the mix of these new customers can distort the view into how much repeat purchase behavior is actually occuring. I prefer to try to analyze repeat pruchase behavior, and hence, estimate lifetime value, by doing cohort analysis. I’ve uploaded a spreadsheet with a sample cohort analysis, using representative but dummy data to illustrate how to do this. In this particular example, I look at a hypothetical subscription business. By averaging across the cohorts, you can get an average retention rate at the end of one month, two months and so on. If you see a pattern like this, you can extrapolate forward using the same month-on-month attrition across several years.

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