A VC in Vacationland

Managing Start-Ups: Useful SAAS Software Metrics(what Investors are Looking for)

cliffs notes (Photo credit: Shreyans Bhansali)

So you are building a successful SAAS software company and are looking for new investments. Congratulations!

What are key metrics sophisticated investors are looking for to justify a growth capital investment? One of my companies has been exploring this with leading venture investors. Here's the Cliff Notes summary:

50% growth

50% Gross Margin

50% Services (a 1:1 attach rate)

That's not to say you cannot be funded under these metrics, but expect a direct correlation between how close you are to these metrics and the proffered valuation by the potential investors.

The SaaS Gold Mine in Supply Chain Software?

The continued success of on demand software models, especially the big push by Oracle and SAP into these spaces, makes us venture guys push up the valuations on our SaaS investments.  But the hidden value in SaaS environments, and one not shared by all on demand software, is in the data collected and managed by many SaaS software providers, especially in the supply chain space. The tech blog cognoscenti are already lauding the idea, but few of them give us many ideas of how this might apply to the supply chain world. Well, let's let the tiger out of the bag.

Procuri in the sourcing space, Apriso in manufacturing execution, Datatrac in courier/express carrier management, Redtail Solutions in retailer sourcing management and Lean Logistics in the transportation execution space (to name a few) all own the data they collect to manage their respective processes in running supply chains. The data sources represented include primary vendor, manufacturer and carrier transaction files, as well as EDI and RFID environments. All this data is generally outside the firewalls of user companies and not available from a single source at present.

Is the value of the data currently reflected in the valuations of these companies?  The answer is : not yet.  The reason is that the companies that own the data have yet to monetize the value of information contained in these sources to their customers.  There are three possible uses of the information:

1. Execution--providing better and actionable real time data to ensure transactions complete successfully.
2. Benchmarking--evaluating supplier costs by industry and region, transportation costs by lane, transit times and delivery performance, to name a very few applications.
3. Strategic Analysis--evaluating trends in procuring and prices of components by region, availability of back hauls, manufacturing lead times by industry and carrier performance in retail delivery are a few of the many analyses that could be performed.

For reasons of confidentiality, I have not gone into detail on how these SaaS providers are planning to monetize their content.  Suffice it to say that the process involves the development of significant data mining capabilities as well as making sure that individual client data and information is well protected in the analysis and reporting process.

During 2007, supply chain SaaS providers will begin to test the market with their clients on willingness to pay for new information gleaned from aggregated transactions data.  Also, they are beginning the process of designing and testing methods for mining and reporting the data from their files.

Issues remain about willingness to pay for the new information and also whether the clients have the in house ability and tools to work with the new data.  A number of clients have commissioned SaaS providers in supply chain to do special studies on their own and on aggregated data to, for example, evaluate possible warehouse locations (availability of carrier, outbound rates, etc. by possible site).  This is an important first step in the process of using more real time information from the SaaS data bases to manage supply chain operations.

A number of non supply chain SaaS vendors who own and manage large data bases are beginning to set up "research groups" to monetize this data.  Taleo Research and Monster Intelligence are data mining the HR space using all their job and candidate databases to evaluate trends in salaries by job and region, for example.  Perhaps the supply chain guys can learn a thing or two from them.

Supply Chain Innovators: New Vine Logistics & MooBella

A few weeks ago, I posted a note asking where are the supply chain entrepreneurs? In this post, I would like to introduce two innovative supply chain companies--  New Vine Logistics and MooBella.  They indulge two of my passions--fine wine and fine ice cream.  Both have brought significant innovation to industry supply chains.  Unfortunately, I only have shares in New Vine Logistics.

New Vine Logistics is our latest investment in Supply Chain Ventures Fund II.  Anyone who has tried to source fine wines from California or Oregon when living outside those states knows what a hassle it is to obtain Kistler, Pahlmeyer, Peter Michael, Silver Oak, Ridge, Screaming Eagle, etc., etc. direct from the vineyard.  For years, the powerful distributor lobbies held the small consumer in their grip, releasing fine wines only to their best customers and friends.  If you lived in Maine as I do, forget getting any fine wines in any store.  Then along came last year's Supreme Court ruling which struck down some laws prohibiting direct from winery to consumer shipments (read: get the distributors out of fine wine sales and shipping) and consumers in most states (but not Maine as yet, but that's another story) can now have fine wines shipped directly to their homes or businesses.

New Vine Logistics is riding the crest of this innovative supply chain wave, having over 150 California premium wine producers as customers.  Mailing list sales to consumers are the fastest growing and most profitable (the wineries sell to you at retail and keep the distributor's portion) part of high end winery business.  New Vine Logistics stores the product in their warehouse, fulfills orders from the mailing list, pays all relevant state taxes and does all the legal paperwork for the states.  A small, high end California winery would have a very difficult and expensive time establishing shipping deals with the 44 or so states that currently allow direct shipments to consumers.  New Vine does all the work for them via an outsourcing contract.  They are also looking to begin direct shipping of premium wines to high end restaurants across the U.S.  Restaurants typically have large wine inventories foisted on them by the distributors.  Premium wines are sold on a first-come, first-serve basis so that buying cases at a time is required.  New Vine is exploring  overnight replenishment of fine wines to top restaurants, reducing inventory costs and improving overall selections.

MooBella is trying to change the way premium ice cream is manufactured and delivered to consumers.  The current supply chain is as follows:  Ben & Jerry slave over making their ice cream in Vermont.  The ice cream is then shipped to distributors all over the U.S.  Most is then directly shipped to big supermarket chains. The remainder is shipped to secondary distributors who deliver to smaller convenience stores, etc.  Overall, it is not a very efficient or cheap cold chain delivery operation.  The bottom line is that we have to go searching for our favorite ice cream in a local store.  Well, what if you brought the ice cream plant to the consumer?

That is exactly the innovative supply chain model that MooBella is trying to implement--a vending machine that manufactures the ice cream on-site, in 96 varieties from 12 different flavors, with three mix-ins (yum) in about 45 seconds.  And you can either have premium or low-carb ice cream.  Sounds like a winner to Dave, but then again, I do like my ice cream. For the moment, the only two places one can get what some have called the "world's best engineered ice cream" is the Union Court dining area at Boston University and at Children's Hospital in Boston.  Does it compare well with Ben & Jerry's?  I cannot tell you yet, because I have not tasted it.  But a number of my ice cream loving friends pronounce it very good. I also like the "on demand" aspect of the delivery process, perhaps they should have a flavor called SaaS, soft serve as a service?

The vending machine has as much technology as your average laptop, including an AMD 1.2 GHz processor.  The processing power is needed to run the food product database--key manager of the mixing process. The machine and computer must also manage multiple ingredient temperatures from ambient to freezing.  The basic ice cream mix does not require temperature controlled delivery, meaning that FedEx or UPS can drop it off at the machine site days in advance, further reducing supply chain costs. The "assembly" process is also simplified: The base mix is pumped in, aerated, flavored, flash frozen, scraped off a freezing surface, turned into a scoop, popped into a container and delivered in under 45 seconds.  Oh, they have 14 patents on the technology, so don't bother to buy one and disassemble it for the IP.

It's nice to see supply chain innovators taking old, inefficient supply chains and reinventing them for the 21st century.  If you know of similar innovators, send me a note.  I'm always interested in the new, new thing.  Now if we could find a better way of having gourmet meals delivered to the coast of Maine....

Finding the Big No

A fellow board member and friend of mine, Randall Pittman, Chairman of Chatham Capital Corporation and Forest Health Services, has an interesting piece of advice useful in many situations facing entrepreneurs.  At critical junctures in deals, whether selling or buying companies or products and services, he urges his teams to "find the Big No" and be able to deal with it.  What he means is that every deal has at least one major issue that needs to be resolved before the deal can be done, and that you better find and resolve those issues early in the process, or risk having to unfavorably renegotiate, or at worst, lose the deal.

For example, in the on-demand software space, the Big No is often from the CIO, who, late in the sales game, may announce that the company does not want any critical data or applications to reside outside their firewall.  For the sales team working with that client, getting to the CIO early and making sure he is comfortable with the SaaS environment is the best way of avoiding the Big No.

Early in my consulting career, I was working on the proposed Santa Fe/Southern Pacific rail merger. After years of research, we were finally in front of the (now defunct) Interstate Commerce Commission to present our evidence.  We had, we thought, huge amounts of data showing that the merger was not anti-competitive and should be approved.  The top lawyer presenting the case from Sidley & Austin was wrapping up his presentation, when one of the commissioners pointed to a map showing the mainlines of the two railroads and asked how could the Commission ever approve a merger of two railroads whose track systems so closely paralleled each other.  The Big No reared its ugly head, and our head lawyer gave a poor answer to an obvious question, dooming the merger.  A very embarrassing moment for the consultants and lawyers, and an expensive lesson for the railroads who had spent millions preparing for the merger hearings.

Finding the Big No in a deal situation may not be an easy task. Here are a few ways that I have used in the past to ferret out major issues early in a deal:

• Critical Issues Analysis--have your team make a list of possible objectors and their objections up front in the deal process, along with an action plan to ensure that they are addressed before they become a deal killer.
• Evaluate Past Behaviors--some people like to store Big No's like chipmunks hide seeds for later use.  Their behavior, while not always predictable, can be observed by how they react in other situations. Ask around your company (or your deal sponsors if you are selling into another company) to determine if any executives exhibit this behavior and what are their usual hot buttons.  Past objections by executives often repeat themselves in new situations, or at least give you insights into a potential range of issues that may be raised.
• Ask--an obvious, but often overlooked approach, is to just ask key players if they have major objections to the deal.  They may ultimately behave like the chipmunk above, but at least you tried.