By Tony Knopp, CEO & Co-Founder of InviteManager, which makes planning your client entertainment easy.
Building an enterprise SaaS is a challenging proposition. Doing so with a services business attached can be even more interesting. Here are seven things we’ve learned about building, raising money for, and growing an enterprise SaaS with a hybrid services revenue model.
- There are no absolutes: Despite what you’ll hear out “in the market” services are not dead, they don’t kill your valuation, and they are not an albatross around your companies neck.
We have three revenue streams: Recurring software license fees (~98% gross margin (GM), affiliate fees (96% GM), and fulfillment services fees (~11% GM). In raising our Series A and B, we saw every kind of valuation you can imagine:
- A times total revenue
- B times MRR + C times affiliate + D times services
- E times MRR with everything else at zero
- Even a “we love your tech and hate your market. We’ll pay you F for the business and the tech and use the tech for another business of ours”
- Cash Is King: A strong services element can get your company to a healthy recurring software number and profitability with less raised capital. Building an enterprise SaaS organization is expensive, especially with longer sales cycles like ours (60+ days). Cash on the books early in a lower margin services offering can be used to fund software growth while building a huge revenue backlog.
- Cash always comes with a cost: Your accountant/CFO may love your services business, but many investors will be more skeptical up front as they prefer simple revenue streams. Be prepared to spend the majority of your capital raise process exploring and explaining your services business to potential partners. A good services business as a compliment to your SaaS will be well received.
- Services can help SaaS metrics: Great services which support your customers lead to MRR expansion and reduced churn. Preferably, your product is sticky on its own and difficult to replace once implemented (our renewal rate is 99.7% with net negative churn). Services can make your offering even stickier and add the human element as a positive when done right. As your services are proved out, you can roll the costs into a larger MRR package.
- Stay the course: You’ll be told you’re wrong. A lot. VC’s, board members, networking pals, blogs, twitter, they’ll all tell you never to offer services as they have bad multiples and chase off investors. Do what’s best for your business and your customers, the investors and partners will come.
- Incentivize & educate: Your exec team, investors, and veterans usually know all revenue is not created or valued equally. Your team, however, likely doesn’t. Take the time to educate your team on how you make money, the benefits of recurring revenue, and why their incentive packages reward revenue streams differently.
- Learn to say No!: When you’re good at what you do customers will ask you to do more. It’s easy to get off course for a big services contract offering cash up front. If the services don’t advance your core growth goal, however, say no and move on quickly. Yes, it’s cash up front, but it’s far too expensive to your business if it’s taking resources away from the bhag. Even if “just for a little bit”….it’s not worth it.
(Cross-posted @ SaaStr)