“Kayak and similar companies blitzkrieg you with popups for one reason: to place tracking cookies in your browser. From your perspective, the Expedia.com window is an infuriating popup. From Expedia.com’s perspective, however, Kayak has sent them some referral traffic. If you visit Expedia.com and make a purchase in the next month or so, Kayak will get an affiliate fee because of the cookie it placed in your browser.”—The SEO Dominance of RetailMeNot
After working at Microsoft, founding Spindle, and toiling in the salt mines of local and social search for many a year, I know a bit about people ‘discovering nearby’ via their phones. Unfortunately, I’ve come to realize it’s a exceedingly difficult space. Given the number of people that have…
“The emerging problems highlight another challenge: bridging the “Grand Canyon,” as Mr. Lazer calls it, between “social scientists who aren’t computationally talented and computer scientists who aren’t social-scientifically talented.” As universities are set up now, he says, “it would be very weird” for a computer scientist to teach courses to social-science doctoral students, or for a social scientist to teach research methods to information-science students. Both, he says, should be happening.”—
The Agent-based modeling Sociology course I took while getting my CS graduate degree was awesome. Ended up publishing a paper based on the simulation we built that studied the effects of different social network topologies on the spread of fads.
One of the key metrics we encourage our SaaS portfolio companies at Flybridge to be focused on is the magic number. Sure growth rate and lifetime value and customer acquisition costs and churn are all important but the magic number is magic for a good reason: it gives a great sense for how much sales and marketing spend are driving monthly recurring revenue growth. In other words, it summarizes a number of metrics in a single number. If you’re not familiar with the metric, made famous by Josh James, take a read here to get up to speed.
Our praise of the magic number often translates to religion at our SaaS portfolio companies. In one particular company, after implementing magic number reporting and discovering it to be 1.9, a sales manager cold emailed James to share his excitement. James responded “Hire more reps then” and introed the company to his CTO at Domo (who went on to become a customer).
While we get to apply this metric to our portfolio companies - most of our SaaS companies report it on a quarterly basis - it’s sometimes fun to apply the same lens to other companies. With Box filing their S1 earlier this week, we wondered what sort of numbers they have been seeing. The quick: not such magic ones.
As we go through this, remember that James’ rule of thumb:
[I]f you are below 0.75 then step back and look at your business, if you are above 0.75 then start pouring on the gas for growth because your business is primed to leverage spend into growth. If you are anywhere above 1.5 call me immediately.
Revenue and Sales and Marketing
Finding the numbers to calculate the magic number by quarter for Box based on their S1 filing is pretty straight forward: just go to the Quarterly Results of Operations section, find the revenues and sales and marketing costs by quarter and use James’ magic number equation (QRev[X] - Qrev[X-1]) * 4 / ExpSM [X-1]. That leaves the following:
Now this is slightly imprecise in that it looks only at new revenue growth not new annual contract value growth in a given quarter, a more true way of calculating the magic number, but it’s the best we can do with the data reported. Given James’ rule of thumb, ever quarter since the quarter ending 7/31/12 has been one worthy of stepping back from, not one worth pouring gas on.
The issue with the calculations above is that they do not take into account what Box counts as Sales and Marketing expenses. Normally this line would contain just expenses associated with the various functions but, in Box’s case, there is more to the story. Box offers free trials of their product and the Sales and Marketing section of the S1 gives a hint of how Box accounts for the expenses associated with the free trials:
Sales and marketing expense also consists of datacenter and customer support costs related to providing our cloud-based services to our free users
Being true to James’ calculations, it’s not really fair to burden the magic number with the cost of datacenter and customer support expenses so, for the benefit of Box, let’s back these out. It’s impossible to be precise here since the company doesn’t break these items out individually but we can use a note in the filing to guessestimate:
Sales and marketing increased by $72.0 million, or 73%, during the year ended January 31, 2014 compared to the year ended January 31, 2013. The increase was primarily due to an increase of $45.5 million in employee and related costs, including higher commission expenses of $16.0 million, driven by headcount growth from 374 employees as of January 31, 2013 to 513 employees as of January 31, 2014, and higher sales, an increase of $12.6 million in datacenter and customer support costs to support free users, an increase of $6.4 million in allocated overhead costs, and an increase of $2.8 million in travel-related costs.
If you assume that all the expenses grew at the same rate from 2013 to 2014 (and this is a pretty big assumption but really the only one that can be used), you can roughly calculate what percent of sales and marketing expenses go towards each line item:
If you apply this same rule of thumb to the reported Sales and Marketing expenses and back out the 19% costs associated with free customers, you arrive at the following:
Better (because the sales and marketing expenses have been adjusted downwards) but still far from great. So how do these compare with some other enterprise SaaS public companies? The answer: not so well.
The magic number isn’t the end all be all for SaaS metrics but it’s a very useful one. It doesn’t take into account things that may benefit Box’s business such as longer than average lifetime values and increasing customer values over time, but it’s an important metric nonetheless. The magic number analysis in Box’s case suggests that the company is spending money faster yet growing slower than comparable public SaaS companies - essentially throwing cash at growing top line revenue with decelerating results. If one of the Flybridge portfolio companies demonstrated these magic numbers, especially on a downward decline, we’d be wondering if it made sense to keep pouring fuel on the fire. We’ll see if the public market will wonder this as well.
Sigh. One of these days, tech reporting will understand how SaaS business models work. The net loss doesn’t matter, and the $99M spent on sales & marketing doesn’t matter if they turn those sales & marketing dollars into profit through the annual recurring subscription revenue. LTV, baby.
From the S-1:
To provide an understanding of our customer economics, we analyzed the customers we acquired in fiscal year 2010, which we will refer to as the 2010 Cohort. In fiscal year 2010, we recognized $2.8 million in revenue and incurred variable costs that resulted in a negative contribution margin for the 2010 Cohort. In fiscal year 2014, we recognized $14.4 million in revenue from the 2010 Cohort, representing a compound annual revenue growth rate of 69.2%, and incurred variable costs that resulted in a positive contribution margin of 34% from the 2010 Cohort.
As of January 31, 2014, the 2010 Cohort had increased its total annual contract value (ACV) by 42% from the prior fiscal year end. A substantial portion of the increase in ACV from the 2010 Cohort was driven by three customers who significantly increased their deployment of our solution in our fiscal fourth quarter ended January 31, 2014. While the upsells to these customers substantially increased the total ACV of the 2010 Cohort, they decreased the contribution margin from the 2010 Cohort because we did not recognize meaningful revenue from these upsells in fiscal year 2014, but we expensed a substantial amount of the associated sales and marketing costs. Specifically, these three upsells contributed $0.2 million in revenue and represented 40% of new ACV booked from the 2010 Cohort in fiscal year 2014. If we were to exclude the fiscal year 2014 revenue and variable costs associated with these three customer upsells, we would have recognized $14.2 million in revenue from the adjusted 2010 Cohort representing a compound annual revenue growth rate of 68.7% and incurred variable costs that would have resulted in a positive contribution margin of 49% from the adjusted 2010 Cohort.
The big news yesterday (at least for my mom, my dad, Amanda and The Beast) was that I was promoted to General Partner at Flybridge. I have had an incredible 6 years at Flybridge and am thankful every day that I get to work in such an incredible industry with such an amazing team. My partners…
1) congrats!! You deserve every bit of this.
2) how did I not know you were on tumblr?? Following.
“Holacracy always smelled to me like a naive reaction to bureaucracy, without really understanding how and why bureaucracies end up like they do. It also has this implicit disdain for people in organizations who are responsible for the softer skills that keep things running smoothly. You know, things like communication, empathy, human resources management, etc. I see these skills getting devalued in the tech world all the time. If you can’t build shit you’re not worth anything.”—
Raffi Khatchadourian on the race to make fusion power a reality:
Years from now—maybe in a decade, maybe sooner—if all goes according to plan, the most complex machine ever built will be switched on in an Alpine forest in the South of France. The machine, called the International Thermonuclear Experimental Reactor, or ITER, will stand a hundred feet tall, and it will weigh twenty-three thousand tons—more than twice the weight of the Eiffel Tower. At its core, densely packed high-precision equipment will encase a cavernous vacuum chamber, in which a super-hot cloud of heavy hydrogen will rotate faster than the speed of sound, twisting like a strand of DNA as it circulates. The cloud will be scorched by electric current (a surge so forceful that it will make lightning seem like a tiny arc of static electricity), and bombarded by concentrated waves of radiation. Beams of uncharged particles—the energy in them so great it could vaporize a car in seconds—will pour into the chamber, adding tremendous heat. In this way, the circulating hydrogen will become ionized, and achieve temperatures exceeding two hundred million degrees Celsius—more than ten times as hot as the sun at its blazing core.
It will essentially be a miniature star. Yes, the kind found in space.
Well, at least theoretically:
What will happen when ITER is turned on? The answer, as with all experiments, is something of a mystery, since no one has yet produced a plasma that is hot and dense and durable enough to heat itself. Will such a thing be more difficult to contain, or will it possess an unforeseen equilibrium?
This reads like complete science fiction, but it’s very real. The billions spent — and the billions yet to be spent — by several governments will prove it.
Stuff like this is exciting but also makes me worry we’re all gonna die horribly by man-made blackhole or something.
“If you’re graduating this spring and starting a career in tech, I’ve got one piece of advice: go work at a midstage startup (I’ll define that as B/C rounds of financing – eg Twilio, Stripe, Airbnb, Warby). Here’s why:”—
Preferably someone whip smart, responsive, great communicator who wants to eventually become a product manager with my mentorship. General Assembly is a really special place and I promise the role will be intellectually challenging and stimulating.
I am generally not a big fan of strategies that involve pursuing business A now in order to pursue B in the future. I tend to believe that you should go for B right away. For example, if you are planning to disrupt textbooks I would likely prefer a strategy that figures out how to peer produce those instead of one that first tries to make the renting and exchange of existing textbooks more efficient. Why? Because there are few businesses that have pulled off the “A now, B later” trick — most everyone simply gets stuck in business A. Netflix is one the few that pulled it off. They first shipped DVDs and now successfully stream (even Netflix they almost botched the transition).
Two possible justifications come to mind for the “A now, B later” strategy. The first is technological progress. When Netflix got started, streaming was not yet a truly viable option. The second one is behavior change. When Amazon first got going, buying online was enough of a change for people. It would have been too much to also ask them to do so in a marketplace and so Amazon chose the commerce format. Bezos smartly picked books where an online store had big advantages over a brick and mortar one.
This latter justification seems particularly relevant when looking at healthcare opportunities. After many years of content sites a la WebMD we are now seeing a great many startups that want to actually provide care. This ranges from medical Q&A sites all the way to telemedicine applications on mobile phones. Going to the computer or your phone for a consult rather than a flesh-and-blood doctor is a big behavior change. That suggests that an Amazon like strategy where you start with commerce and only introduce a marketplace later may be the winning model.
So what would a commerce model a la Amazon look like in healthcare? It would be a branded service that provides diagnosis, prescription and if necessary referral. The service would use some combination of texting, possibly video chats / image uploads, and use of existing lab networks (eg for blood analysis). The logical entry point would either be primary care in its entirety or a large specialty such as dermatology. I believe the right service could quickly grow large, especially if it can be priced in a way where insurance reimbursement becomes a secondary consideration. The subsequent marketplace would be for cases that require a specialist or treatment other than prescriptions.
I am curious to hear from others whether they buy this argument about a commerce model coming first or think we will go straight to a marketplace. Also, if you know of any startups pursuing the commerce model please let me know.
General Assembly is doing both commerce (our own courses) and marketplace (our community taught workshops) at the same time. The workshops aren’t pure marketplace though, as we have some involvement with content and marketing, but there is a path to pure marketplace. You can’t go straight to marketplace in education because consumers have high expectations of quality and transformative impact, so you need to maintain editorial and curricular oversight. Otherwise you end up like Udemy or Skillshare, which have had trouble scaling.
Warren Buffett’s 2013 letter to shareholders is fascinating.
"We completed two large acquisitions, spending almost $18 billion to purchase all of NV Energy and a major interest in H. J. Heinz. Both companies fit us well and will be prospering a century from now. […] Though the Heinz acquisition has some similarities to a “private equity” transaction, there is a crucial difference: Berkshire never intends to sell a share of the company. What we would like, rather, is to buy more, and that could happen. […] With Heinz, Berkshire now owns 8.5 companies that, were they stand-alone businesses, would be in the Fortune 500. Only 491.5 to go."
Comcast was the first last mile provider to recognize this and move peering from the realm of network engineers to the MBAs and started systematically refusing to upgrade existing private interconnects and in some cases systematically de-peering in other cases. Comcast neatly side-stepped the entire net-neutrality debate by degrading service to everybody who wasn’t willing to pay for a private interconnect. Comcast has had a relatively free hand because their customers are blissfully unaware of the politics of global peering and instead will just go somewhere else when a website is ‘slow’.
This has put a lot of pressure on companies like Amazon who know that a 100ms delay in the order process can result in a 1% decrease in sales. Since private interconnect arrangements aren’t public my guess is a lot of companies have caved and are paying Comcast to peer.
“His new album, “Morning Phase,” is a triumph, possibly because he’s never made a record so focussed. He describes it as both a “healing” and a “reckoning.” For forty-seven minutes, Beck and some of his closest collaborators cast a benevolent spell that refuses to break. The album speaks powerfully and directly, without gimmicks or puns, and it maintains a near-total gentleness. After listening to “Morning Phase” almost fifty times, I can’t find a single thing wrong with it. Even if you listen to popular music all day, every day, you don’t get many albums like this in your lifetime. The relationship between the musician and the listener here is as simple as the outcome is intense: only the artist knows exactly how such an album is made, but only the audience can verify that it is perfect… .”—
At a USV Annual Meeting of their Limited Partners (LPs) many years ago, Biz Stone asked a question during Q&A at the end of the meeting. He asked the partners (then Fred, Brad, and newly minted Albert), do you specifically seek to fund companies that also have a social mission in addition to a…
Omidyar Network does this.
Social good is a great bonus, but I imagine USV didn’t mind the IRR on Zynga either.
There was a good, brief discussion on Twitter tonight about Microsoft Office. Specifically, the fact that it’s 2014, so why the hell is anyone still using it?
To be clear, I know that a lot of people have to use it in their work environment. But that’s more because their office buys it for them and forces them to. It’s a strong method of lock-in that is seemingly still going strong after all these years.
The reality is that there are now more than enough solid-to-better alternatives for much of what Office offers. And some, like Google Docs and now even the Apple iWork suite, are free.1 And so it seems to me that increasingly, Office persists more out of habit (“I don’t know how to do this without Office”) and misguided fear (“what if I need Office for some reason?”) than necessity.
It’s an interesting point: why hasn’t anyone tried to take on Excel from the power user direction? Forget the rest of Office, which is basically irrelevant at this point, and just build a better spreadsheet.
I guess the big issue is that you have to have a pretty long term mindset (and runway) for this to be possible. You can pick up users pretty quickly if you’re selling “this is really easy to use,” but trying to convert that finance person who’s spent year learning to make Excel dance? That’s going to take a while.
The people who have rejected Google Docs as an alternative probably love Pivot Tables.
“Those of us in the traditional academy could have a hand in shaping that future, but doing so will require us to relax our obsessive focus on elite students, institutions, and faculty. It will require us to stop regarding ourselves as irreplaceable occupiers of sacred roles, and start regarding ourselves as people who do several jobs society needs done, only one of which is creating new knowledge. It will also require us to abandon any hope of restoring the Golden Age. It was a nice time, but it wasn’t stable, and it didn’t last, and it’s not coming back. It’s been gone ten years more than it lasted, in fact, and in the time since it ended, we’ve done more damage to our institutions, and our students, and our junior colleagues, by trying to preserve it than we would have by trying to adapt. Arguing that we need to keep the current system going just long enough to get the subsidy the world owes us is really just a way of preserving an arrangement that works well for elites—tenured professors, rich students, endowed institutions—but increasingly badly for everyone else.”—» The End of Higher Education’s Golden Age Clay Shirky (via infoneer-pulse)