Technofile Europe

The top eCommerce KPIs

2009-12-18T16:11:12+00:00

Speaking of KPIs, our favourite eCommerce guru Michael Ross just published a really useful article on the best KPIs for eCommerce companies.

What I like about Michael's approach is that it brings together best practice from the worlds of online marketing and offline retailing.

It is all too easy for eCommerce startups to think purely in Internet terms: traffic, conversion, CPO by channel. Many -- if not most -- of these companies are run by young entrepreneurs without any traditional retail experience. That is (mostly) to their advantage, as they try to disrupt traditional retail. But that doesn't mean they can't learn from the highly optimised, analytical world of old retail.

That is why Michael preaches concepts like 'Lost Profit per Order' and 'Return on Inventory' as being key to eCommerce success. Read the article for more, including some basic rules to follow to make sure your custom KPIs are really useful.

Great stuff.

Which KPIs matter in B2B customer acquisition?

2009-12-09T11:37:37+00:00

I just came across a really useful primer on KPIs for SaaS companies here (thanks John Coldicutt at Fizzback for the link). It's a piece by Joel York linking KPIs to the B2B customer acquisition process.

There is no shortage of sources online for customer acquisition KPIs, mostly designed for the consumer Internet, although we are starting to see more science around B2B customer acquisition too. What I like about Joel York's post is that it applies the language of process optimisation (bottlenecks, resources, critical paths, etc) to figuring out which KPIs matter to your business.

This is much more useful to B2B companies who understand their processes, but have struggled to fit square KPIs from the consumer Web into round process holes.

Profiling the most capital-efficient entrepreneurs

2009-12-03T17:32:51+00:00

My partner Javier Rojas has published another post in his 'Return leaders' series on SandHill.com, interviewing the founder of BlueLithium about how he built his company on only $11m of venture capital to an eventual exit of $300m.

I love this interview series -- especially in this recessionary environment -- because it is entirely focused on how to create equity value with a minimum of external capital. Javier has tracked down the most successful bootstrapped entrepreneurs, and drilled them about how they kept their businesses capital-efficient, how they timed eventual venture financings, and how they maximised equity value at exit.

This collection of interviews is gradually becoming a practitioner's guide to capital-efficient entrepreneurship:

So what's wrong with this picture? Well, there is only one European entrepreneur so far (Jon Craton). I know there are more.

The usual suspects come to mind -- Bernard Liautaud of Business Objects, John O'Connell of Staffware, et al. If you can think of other examples of 'return leaders' who built successful businesses on little capital, do let me know. I'm sure I can lean on Javier to interview them ;-)

At last, book reviews for entrepreneurs

2009-11-19T10:40:14+00:00

After much pestering by his friends and colleagues, my partner Javier Rojas has taken the plunge and started writing a blog: Seeking Growth. My guess is it will quickly become an invaluable resource for bootstrapping (and capital-raising!) entrepreneurs.

I don't know anyone who devours books on business, history, philosophy and futurology quite so avidly as Javier does. For his blog he promises to review the best of these, and to comment on the topics he has been obsessing about for 20 years: technology deals and entrepreneurship.

As digital book distribution takes hold and Kindles multiply like rabbits, it is becoming ever harder to choose good books. And given that most of us allocate precious little time to reading, we don't want to waste it by getting halfway through a book that turns out to be crap.

Traditional Sunday newspapers are fine for reviews of new novels, history books and the occasional pop economics tome, but the longer tail of business books remains largely unreviewed. Not only that, but if you've ever picked one up on the fly you know that quality is all over the map.

Javier has been bending our ears for years with weekly expositions and insights gleaned from new books, interviews with successful entrepreneurs, and hard-won experiences with his portfolio companies. His enthusiasm, positivism and problem-solving approach are both infectious and effective. Now a broader audience will get to see the world through his eyes.

Welcome to the blogosphere Javier!

Why SaaS sales productivity is collapsing

2009-11-04T15:36:00+00:00

Philippe Botteri has put together an interesting analysis of his 13-member index of public SaaS companies (see here for the full spreadsheet). Essentially he has applied the same sales productivity metrics we use to evaluate private SaaS companies to public companies and charted their evolution over time.

The resulting graph provides a stark picture of the recession's impact on these companies: an 85% decline in the productivity ratio (incremental gross profit / sales & marketing cost), which is now running at 0.10 vs a target of 1.00. These companies are struggling to add new customer revenue and are surviving primarily on their existing recurring revenue base.

The rate and scale of the productivity decline are telling, but the absolute ratios should be taken with a grain of salt.

First, this way of calculating sales productivity does not take into account the actual lifetime value of a customer, which can differ greatly depending on the churn rate. Very sticky SaaS apps can have churn rates as low as 10%. This means that the average customer has a life of 9-10 years. But many SaaS apps have churn rates approaching 30% or higher (especially in the current environment), implying a life of 3-4 years. Obviously you can afford spend a lot more on sales to capture a 10-year customer than a 3-year customer, so for some vendors the target ratio should be lower than 1.00, for others it should be higher.

Second, it would be a mistake to conclude that SaaS vendors should reduce sales headcount by a lot in the short-term to bring the ratio back into line. The extremely low productivity reflects the fact that the bulk of the sales force that propelled growth in the good days is still there, costing the company money, while actual new sales have slowed dramatically. The great benefit of the recurring revenue model is that such an overhang can be supported for a while, until markets recover (at least for most vendors). In the traditional licence sales model cuts would have to come a lot sooner.

Third, perhaps the biggest challenge for SaaS companies (hidden in this data) is the continuous, permanent change in the way software products are distributed, which is reflected in lower average sale prices. The components of the SaaS application and infrastructure stack are being commoditised from the bottom up. Witness what Zoho is doing to Salesforce, or what Google Analytics did to the web analytics applications industry, or what services like SugarSync are doing to the backup and recovery solutions market.

Last week Microsoft announced a 33% reduction in prices for some of its SaaS products, to better compete with Google Apps and others.

SaaS vendors may feel that their sales productivity will return to normal once the economic recovery is underway. That would be a mistake. What they will find is that their sales model has become permanently too expensive for the revenues generated. What seemed like an efficient direct sales force should now be telesales; what was a great telesales machine should now be a self-service e-commerce site; and perhaps what was an effective online e-commerce channel should now be a full-blown freemium lead generation programme.

Selling SaaS already has a lot less in common with selling enterprise software than it does with selling B2C web services. Increasingly business applications are not sold to companies at all, but to business users, also known as consumers. SaaS companies -- especially the ones we can now comfortably call 'legacy' eg Salesforce.com -- will need to master that consumer distribution model in order to survive.

The hunt for growth is on

2009-10-29T14:14:08+00:00

The news that GSI Commerce has acquired private shopping club Rue La La for $350m has put the small but excitable world of European shopping clubs and their investors into a tizzy. The concept of members-only short-duration sales online was a European invention, and the largest players in the category remain European -- a rare exception to US dominance of Internet business models. And yet the first shot of M&A was fired within the US.

This deal gives some comfort to the many European VCs who have placed bets with vendors over here. One of the big unknowns they all faced at the time of their investment is what the ultimate capital markets value of these businesses would be. The pessimistic view is that these are lowish gross margin businesses that would eventually trade like mature online retailers of branded goods, eg around 1x revenues. Amazon's acquisition of Zappos for just under or just over 1x revenues (depending on whether you net off returns) earlier this year seemed to confirm this view. (If you like transaction forensics is your cup of tea, here is a good analysis of the Amazon/Zappos deal).

But this view does not take account of the extraordinary growth rates the buying clubs are experiencing. Rue La La is on an annualised revenue run-rate (based on Q3) of $112m, and is said to be forecasting $230m revenues next year. This resembles the 2006-2007 trajectory of market leader Vente-Privee, and puts Rue La La only slightly ahead of the runners-up in Europe, including BuyVIP and Brands4Friends. So now we know what growth is worth in this market: over 3x run-rate revenues.

This reflect a broader trend in the technology and Internet markets as the US emerges from recession and the rest of the world muddles through it. Growth is at a premium, and the tech industry -- cash-rich as it is relative to other industries -- will increasingly seek to convert cash into growth. Cisco's recent acquisition of security managed services firm ScanSafe for $183m is another prime example. Scansafe's revenues in 2008 were said to be just $23m, but supposedly doubling year on year.

For a venture capital industry hungry for exits from aging portfolios this is a spot of good news. But clearly it is those companies that can return to growth quickest in the recovery who will be first in line.

Cashing out founders

2009-09-03T18:52:40+01:00

Mark Suster (Build-Online/Koral/GRP) has a good post on why it's reasonable for founders to take some cash out in later-stage financing rounds. Mark has more experience of running heavily VC-backed companies than most people, in both Europe and the US, and gets both sides of this particular debate.

I totally agree with Mark and I think his 'strawman rules' for working out how much founders should be allowed to cash out and under what circumstances are very useful. The only comment I would question is whether Mark Zuckerberg deserves $20m, but then thankfully that dilemma doesn't come up too often.

Mark's key observation is that in considering partial liquidity for founders, both investor and founder need to take into account the main objective: to align incentives. This requires evaluating not only how much value the founder has created in the business already, but also his current financial position, cash taken out in the past, and the need for appropriate lock-in on the founders' remaining equity.

As the growth equity investing model develops in Europe, more founders will seek partial liquidity. Nearly every investment we make involves some measure of cashing out existing shareholders, so we work hard to get this balance right.

Building great sales teams

2009-08-09T09:59:00+01:00

Dharmesh Shah had a really good post a couple of days ago about building sales teams in startups, which is frankly applicable in growth companies too.

Of his 14 points, the ones I would highlight for more mature businesses are 9,10, and 12 (understand your sales economics) and 5 and 7 (keep incentives simple and aligned with customer satisfaction).

An extension of his 2nd point (don't hire a VP Sales first) is that you probably need fewer sales managers than you think. It is particularly true in Europe -- where technology sales management is a less developed skill than in the US -- that one good sales manager can make a huge difference, while 3 mediocre ones can be very expensive bureaucracy.

"Investment market alive & well" (!) - Interview @ Red Herring Europe

2009-08-04T13:42:03+01:00

Viktoria at Tiburon TV must have quite a backlog of interviews to post on her blog! Here is the video of our meeting at the Red Herring Europe 100 conference in Berlin back in April. It's a good summary of our views on the investment climate, the quality of European entrepreneurship, bootstrapping tips, and Kennet's most recent investments. Let's hope my predictions aren't too far off the mark... ;-)

Thanks Viktoria!

T-Shirts for vinyl

2009-06-26T13:20:09+01:00

My favourite t-shirt from International T-shirt Day in Berlin last weekend:

See the full photo-stream here.

A first conversation about getting beyond SEM

2009-06-25T12:47:47+01:00

We had a great turnout at Monday's inaugural networking event for online marketeers, which we rather unimaginatively called Beyond SEM. What struck me was the openness with which the 8 presenting companies shared their good and bad experiences with different online marketing techniques. With 45 people in rather cramped surroundings, good networking was inevitable!

The most exciting categories of online businesses were represented: fashion eCommerce (Koodos, BuyVIP, Inspirational Stores), mass customisation/ crowdsourcing (Spreadshirt, MOO, Glasses Direct, Crowdstorm), other e-tailing (Warehouse Express, Swoopo, Astley Clarke), ticketing (Seatwave), travel (isango, dealchecker), entertainment (LoveFilm, GameDuell, WeeWorld), online marketplaces (Price Minister), consumer services (MyDeco, moveme.com, RatedPeople, Qype, Zoopla, Wonga), and enterprise SaaS/services companies like KDS, NTRglobal, FRSglobal, TradingPartners, Fizzback, eCourier and ShipServ.

The evening also confirmed our thesis that -- even among B2C Internet companies -- there is a wide range of experience and sophistication with online customer acquisition tools: from managing hundreds of thousands of keywords in SEM campaigns, to experimenting with Facebook widgets, to scalably generating good quality content to drive SEO traffic.

I can't share the slide-decks with you, but here is a sample of the range of methods tried by participants and their variable outcomes:

The challenges all these companies face are similar:

Declining effectiveness of traditional lead gen
Dependence on Google
Too much data, not enough proven ROIs
Proliferation of new media
So many levers – from keyword pricing to post-click optimisation

I think it's crucial for European marketing professionals to exchange ideas more freely so that we can accelerate learning and avoid re-inventing the wheel as often as possible. This is particularly important for those companies competing globally, since they face competition from US Internet companies that are often (though not always) ahead of the game.

My original plan was to get some Internet companies over from the US, in order to share practices from both sides of the pond. That didn't work out this time, but is something we will work on for future events.

We also learned that it's difficult to combine B2B and B2C in the same event, even if the front-end of customer acquisition (online marketing) is similar. I have no doubt that our B2B companies learned from the hard-core consumer-focused marketeers, but the lessons going the other way were far fewer. This may reflect where the B2C companies are in terms of their market lifecycle -- most remain focused mainly on customer acquisition and less on retention and the consumer equivalent of account management. The exceptions to this were the larger businesses like LoveFilm and Warehouse Express, who have made an impressive science out of nurturing consumer accounts over the long-term.

A big thanks both to the VCs who sponsored the event, opened their portfolios and encouraged their companies to participate (Accel, Advent, Atlas, DFJ Esprit, Wellington) and to the battle-hardened experts who joined the discussion: Robin Klein, William Reeve, Michael Ross and Jamie Jaggard.

What next for this forum? There was fairly universal agreement that it's worth running something like this on a more regular basis. The event really only scratched the surface of the many questions raised:

How do we use widgets and other means to drive profitable traffic from social media?
How do we 'industrialise' the creation of content that drives SEO traffic so that this activity scales better?
How do we reduce the time and effort it takes to build an effective, scalable affiliate programme?
How do we combine offline and online campaigns in a measurable, effective way?
How do we apply lead gen methods like affiliate networks and social media marketing in a B2B context?
What is the best way to link email marketing with web analytics to get a 360^o view of the consumer every time he visits?

Over the coming weeks we'll cook up ideas about tackling these questions in more focused events so that we can bring this crew together again. Do send me your suggestions, ideas, quibbles. And I promise we'll increase the square footage per head to enable more expansive thinking!

Can VCs reinvent themselves?

2009-06-18T12:09:09+01:00

I nearly missed it, but Peter Rip of CrossLink Capital wrote a very thoughtful article on the future of venture capital for BusinessWeek back in April.

He basically demonstrates how the traditional venture capital model of the 1990s -- with its reliance on very large 'hits' -- no longer works. This is something we've known in Europe for many years, but he makes a case that even in Silicon Valley, VCs now need to learn how to generate returns from a more balanced approach to risk.

In Peter's view, VCs should take a page from private equity's playbook, learning how to handle valuation, exit timing and funding risk, in addition to the traditional focus on markets, innovation and team.

In other words, VCs need to manage their investments as much for the downside and middle-exit scenario, as for the big upside. This is really what traditional growth equity investing has always been about, and it's clear that in the current environment the growth equity niche is growing into a more established asset class.

But I really like Peter's suggestion that even early-stage investing can take a more measured approach to risk to reduce the variability of outcomes. By focusing as much on capital useage, valuation, timing of follow-on financing and timing of markets, VCs can increase the number of 3x returns while still having a shot at the occasional 20x.

What Peter does not mention in his article is the importance of capital efficiency. A lot of the middle-exit risk VCs take is the result of overcapitalising companies, which depresses returns precisely in the most likely range of outcomes, ie exits of $80-120m (see Why you have to build companies for less). By focusing more on core metrics early on and controlling cash useage VCs (and the founders they back) retain more options to make a positive return.

Like Kennet, Peter's fund sat out the post-bubble market of 2001-2003, making few investments. Unlike Kennet, his conclusion is now to move into adjacent markets (cleantech) and focus on selective early-stage investments. This is because a rise in later-stage valuations (driven by VCs looking for deals closer IPO) has created a price bubble.

I agree that too many VCs are making bets on the near-term IPO queue, but I also believe there are plenty of capital-efficient, appropriately priced investment opportunities in mature growth companies. The key is to find these entrepreneur-led businesses (which typically do not need to raise capital), and to have an investment proposition specifically adapted to their needs. This is why growth equity is so different frmo late-stage VC.

Green can save you money?

2009-05-15T17:22:31+01:00

Green IT conferences are proliferating, like Green IT '09 which just took place in London. (Where are the slideshare presentations? Where is the video footage? For tech industry event organisers the guys at Tech:Touchstone seem to be in the dark ages...)

Sorry for that mini-rant.

Let's hope the green IT initiatives don't become casualties of the recession. Thinking about green IT is good.

Unlike industrial green initiatives, succesfully improving the 'green' credentials of IT usually results in cost savings. For example, companies clearly have a strong financial incentive to reduce the energy consumption of data centres. Similarly, using video conferencing and remote support tools reduces travel costs and carbon footprint all at once.

If you're attending the Cloud Computing expo in Prague next week, please check out the session on Green SaaS being given by Lluis Font, the CEO of NTRglobal (disclosure: Kennet portfolio company). Lluis is a great evangeliser of green computing, and he has some surprisingly simple ideas on how companies can save money and be greener at the same time.

I won't be able to attend, but I'm looking forward to hearing from you all about the event!

What cyberwar?

2009-05-01T12:35:47+01:00

I've got a real issue with the breathless, paranoid tone of a lot of media coverage lately. The combination of the 24-hour news cycle and too many news outlets, amplified by P2P communications methods like Twitter, is generating too much panic and too little analysis and reflection.

I confess I sometimes miss the way we watched news 20 years ago, gathered as a family at 8pm for the one evening news programme, which presented 24 hours of digested, verified, analysed news for our consideration.

We're seeing the exaggerated effects of this play out in spades with coverage of the swine flu, and (especially in US broadcast media) even with the smallest of stories. Witness the over-the-top reaction of news anchors to Arlen Specter's leaving the Republican Party (best summarised by Jon Stewart here).

In future posts I'd like to explore further some of the negative effects this excessive media hype has on government policy making in particular, and whether anything can be done about it. In the meantime, thanks to The Economist for exposing one particular story as being the result of a political turf war rather than a real global threat: the recent reports of serious cybersecurity attacks on US infrastructure.

We all read the news stories about Chinese hackers' breaching the US electricity grid and several national agency computer networks. There was something faintly hard to believe about the sudden panic. Now it turns out that this story was leaked, and hyped, by intelligence agencies fighting for control over cybersecurity. Read the detail here.

It's an appalling abuse of the viral power of today's media, and makes it difficult for any of us to tell real dangers from fiction. Let's hope that more of the supposedly serious media (like The Economist) improve their record of exposing these stories, preferably before they go into hype-mode.

Good support for bootstrapping @GeeknRolla

2009-04-29T18:33:45+01:00

Over lunch today, Nic was complimenting one of the current crop of great bootstrapped entrepreneurs William Reeve (LoveFilm, Graze, Zoopla). As it happens Will gave a presentation on our favourite topic at last week's GeeknRolla conference.

I wasn't there but my colleague Mike said it was a very useable presentation, full of practical advice (and real-world examples) on managing your cash flows and scaling your business while in bootstrap mode. I especially like his approach to funding yourself by improving your working capital cycle. The presentation is embedded below for your viewing pleasure:

Geek n Rolla: WReeve Bootstrapping, Scaling and Cashflow

View more presentations from wreeve.