About UCI Applied Innovation: UCI Applied Innovation is a dynamic, innovative central platform for the UCI campus, entrepreneurs, inventors, the business community and investors to collaborate and move UCI research from lab to market. About the Cove @ UCI: To accelerate collaboration by better connecting innovation partners in Orange County, UCI Applied Innovation created the Cove, a physical, state-of-the-art hub for entrepreneurs to gather and navigate the resources available both on and off campus. The Cove is headquarters for UCI Applied Innovation, as well as houses several ecosystem partners including incubators, accelerators, angel investors, venture capitalists, mentors and legal experts. Follow us on social media: Facebook: @UCICove Twitter: @UCICove Instagram: @UCICove LinkedIn: @UCIAppliedInnovation For more information: cove@uci.edu http://innovation.uci.edu/

1. Building a SaaS Business
UCI – August 11th, 2017
Fernando Okumura
1
All rights reserved. This material may not be reproduced or distributed, in whole or in part, without prior written permission of the author

2. Information sources:
2
forentrepreneurs.com (David Skok)
saastr.com (Jason Lemkin)
others

3. Agenda
1. Stages of a SaaS business
2. SaaS economics
3. Key metrics for a SaaS business
3

4. There are 3 stages in a young SaaS business life
- Know where the company is and focus 100% on its milestone -
Conserve Cash Invest Aggressively
Search for Scalable Sales Model
12
Scaling the Business
13• Common mistake: hiring a lot of sales
people or a very experienced VP of Sales
too early > compromise the founder’s
ability to fine tune the product/model.
• Sell directly to the customer. Then hire 2
reps (or test self-service). Do the math,
make sure you can be profitable, and then,
only then, scale.
Common mistake: can’t shift the
mindset to aggressive investing.
Specially critical in a land grab
situation. Hire proven VP of sales here.
4
11
Search for Product-Market fit
Common mistake:
Getting investors
who do not
understand this can
take 1 month or 4+
years

5. 3 tips that can help you in the Product-Market Fit stage
- This is easiest stage to get wrong -
Search for Product-Market Fit
11
5
“When a great team meets a lousy
market, market wins. When a lousy
team meets a great market, market
wins…” (Andy Rachleff)
Tip 1: if you want to swing for the fence,
pick a great market (and timing)
Tip 2: work through the customer
development process
• “Myth #1: Product market fit is
always a discrete, big bang event
• Myth #2: It’s patently obvious when
you have product/market fit …”
(Ben Horowitz)
“Serendipity plays a role in finding
product/market fit but the process to
get to serendipity is incredibly
consistent…” (Andy Rachleff)
Use Steve Blank’s (or similar) process:
start with a hypothesis, test it in the real
world, prove it, move on or iterate
Tip 3: remember Product-Market fit is
not enough
Message Audience
Pricing
Distribution
Channels
Product

6. Revenue per client determines the channel you can afford
- If you cannot afford the channel you need, you are in trouble -
Search for Scalable Sales Model
12
6
Sales complexity
Self-service Inside sales External sales
DistributionCost
What channel will you needed and
how much will it cost?
Internal sales force illustrative example
• 3 demos/day = 60 demos/month = 720 demos/year
100 new clients / year
14% closing rate
• Sales Rep compensation = $100k / year
$300k / year
3x to make ends meet
• $3k/year = $250/month > churn > $300/month

7. Scaling the Business
Sales leadership is key to scale the business
- Wrong sales director can set you back a year or more -
7
13
When to hire a sales director?
• Until $1-2M, it must be you. Start selling yourself,
then hire 2-5 reps. Look for passion for sales,
curiosity and entrepreneurial spirit.
• The main point here is accelerate you to Product-
Market fit and create a repeatable process (more
so than simply sell)
• Before $1-2M: hard to afford good sales director
What is the sales director’s job at this stage?
1. Recruit. You need 8-12 great reps to triple your
revenues in the next 12 months
2. Improve team’s performance (deal size, closing
rates and so on)
3. Sell him/herself (note this is the last one)
How to select a sales director? Do not hire if:
• Has not successfully hired and ramped reps selling an
average contract value (ACV) similar to yours
• Cannot immediately bring 2-4 great sales reps in first 2
weeks (ask who he/she would bring in the interview).
Great VPs always have hardcore followers.
If you hire the wrong sales director, fix it FAST:
• A VPS costs ~$300k. If he/she is good, increases
revenue/lead by 20% in first 3 months, and you are at $1-
2M, he/she pays for himself quickly. $300k is a lot.
• Costs key team morale and future upgrades and referrals
• Red flags when new VPS:
 does not hire, fire and promote in first few days
 does not increase revenue/lead in 1st sales cycles
 “we need to build pipeline”, “sales cycles getting
longer”, “leads are bad”. Do not believe in excuses, do
not wait 6 months to fix it!

8. Agenda
1. Stages of a SaaS startup
2. SaaS economics
3. Key Metrics for a SaaS business
8

9. 9
SaaS does not become cash flow positive at moment of sale,
which extends financing requirements
-$4,000
$500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500
0 1 2 3 4 5 6 7 8 9 10 11 12
Cash flow from a single client
month
Customer acquisition cost
• Lead generation costs (e.g. SEM, content generation, other
marketing)
• Sales force costs (e.g. recruiting, training, payroll)
• Technology costs (e.g. CRM, telco)
Recurring revenue
ILLUSTRATIVE
-$6,000
-$4,000
-$2,000
$0
$2,000
$4,000
$6,000
$8,000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Cumulative Cash flow from a single client
extended financing

10. 10
Entrepreneurs and investors need to understand SaaS economics
to be able to scale the business with confidence
-$3,000,000
-$2,000,000
-$1,000,000
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Cumulative Net Profit of a SaaS Co.
with sales force
Months
• What do you do when the product
shows market traction?
• You increase investment and
accelerate growth. What happens to
profitability and cash flow?
• In SaaS with a sales force, the more
you invest on growth, the more
negative your profits and cash flow
become in the short-mid-term.
ILLUSTRATIVE

11. 11
ILLUSTRATIVE
0
2
4
6
8
10
12
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
Number of active clients in a cohort
Months
Numberofclients
Months
Beginning
Balance
New
Clients
Churn
(10%)
Ending
Balance
1 0 50 0 50
2 50 50 5 95
3 95 50 10 136
4 136 50 14 172
Understanding client/revenue loss (churn)
is a key success factor in SaaS
44 495 50 50 496
45 496 50 50 496
46 496 50 50 496
47 496 50 50 496
At some point your sales force may be only replacing churned clients, not growing your company.
In addition, your cost/lead will tend to increase as the low hanging fruits become scarcer

12. You must be able to increase average revenue per client to
compensate client churn and keep growing in the longer run
12
Client B:
$2.5k/month
Client A:
$500/month
If we loose Client A, we
have 50% client churn, but
17% revenue churn
If we loose Client B, we
have 50% client churn, but
83% revenue churn
There is a difference between Client Churn and Revenue Churn.
At the end of the day revenue is what really matters.
Client B:
$2.5k/month
Client A:
$500/month
Client B:
$3,5k/month
Month 1 Month 2
Up/Cross selling can more than compensate for client churn
Happy clients buy more (up/cross sell), refer you to their colleagues, and take you with them when they move to another company (lower CAC)

13. You must have a great Client Success Team to sustain growth,
but client success is everyone’s job
- CEO must instill client success throughout the company -
Client
Success
Client Success Team
•- Onboarding
•- Proactive Customer Service
•- Monitoring Red Flags
•- Up/Cross sell
Sales Team
-Do not oversell
-Do not sell to wrong customers
-Make good first impression
Product Team
- Product Reliability (bugs, downtime)
- Product Design/UX
- Response time
Marketing Team
-Marketing to clients (retention marketing), not just
prospects
-Client nurturing (e.g. best practice newsletters,
client events, webinars, case studies, email tracks,
product communications)
Client
Happiness
13

14. Agenda
1. Stages of a SaaS startup
2. SaaS economics
3. Key metrics for a SaaS business
14

15. > 3xLTV CAC
< 12 monthsMonths to
recover CAC
Life Time Value (LTV) vs. Customer Acquisition Cost (CAC) gauges
profitability and Months to Recover CAC, capital requirements
Reference Metrics
• LTV = Average revenue per client x gross margin % x average client lifetime (1/churn)
• CAC = Total Sales & Marketing Expenses / # of new customers
• Months to recover CAC = CAC / Gross Margin of a single monthly fee
• Gross Margin = Revenues – Costs to create revenue (e.g. hosting, licensing, support & maintenance)
15

16. 16
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$30
One of the key metrics you want to follow is
Net Monthly Recurring Revenue (Net MRR) over time
MRR from new clients
Net MRR
Expansion MRR
Churned MRR
MRR Bookings
$000s
MRR from new clients: self explanatory
Net New MRR: New MRR + Expansion MRR – Churned MRR
Expansion MRR: New MRR from existing clients (up/cross sell)
Churned MRR: MRR lost due to churn and downgrades
• MRR alone does not show the
complete picture
• Break down of Net MRR shows
• If bookings are growing
• If we are being able to increase
revenue per client
• How bad churn is
• If you want to know where you are
heading, use this graph

17. Q&A
17

18. End
18