Mark MacLeod, General Partner, Real Ventures, discusses four tips of how to succeed with a Software-as-a-Service (SaaS) start-up. Real Ventures is a Montreal based venture capital and private equity partnership that specializes in early-stage investments in web, mobile, software, digital media, social and casual gaming. The majority of its investments are at the seed level, between conceptualization and the validation of the business model. Funded companies include Fabric Technologies and MConcierge Systems. Typical funding rounds are below $500K with $1M being at the higher-end.
Key take-aways from Mark MacLeod’s discussion on SaaS revenue models include the following key points:
- Stakeholders and investors prefer recurring billing over one-time licenses – Investors in SaaS start-ups and seed investment rounds prefer recurring revenue models, as this approach reduces risk by providing greater revenue forecast accuracy. For customers, being able to forecast monthly costs makes recurring billing the most popular model on SaaS today. Mark also mentions how this fuels the dynamic of operating expense (OPEX) versus capital expense (CAPEX) budgeting on the part of customers. He makes the point that investors like the recurring revenue model because the lifetime value of customers can be more accurately tracked.
- Be data driven – The best-managed SaaS start-ups rely heavily on standard metrics and many of their own unique measures of performance to better understand and predict revenue and costs. Mark contends that all SaaS start-ups need to be data-driven to not only understand their existing customers, but also see how their levels of use and satisfaction are influencing potential new customers. The best SaaS start-ups measure every aspect of application use and customer experience. These in-house custom analytics are a competitive advantage for any SaaS start-up, as these application-specific metrics can provide insights for further product development and customer loyalty programs.
- Pricing decisions are the most complex to make– The greater the hard benefits in terms of measurable, recurring cost reduction or revenue generation, the greater the price that can be charged, according to Mark’s experiences funding SaaS start-ups. He also mentions the cost of a direct sales force, market position, and relative benefits delivered as factors in making a pricing decision.
- Always go for customer prepay options when possible – Prepayment is critical for a SaaS start-up, not only for cash flow but more importantly because it shows that customers trust the application to deliver value over the long-term. It is a great proxy for how much value a customer sees in the application over time.