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Hubspot has filed for an IPO. Redpoint VC, Tom Tunguz, analyzes their S-1 in this post.

  • JB

    Joseph Bentzel

    almost 6 years ago #

    Hubspot is actually more efficient than publicly traded Marketo in terms of sales/marketing spend to achieve revenue.

    As a percentage of SUBSCRIPTION revenue, Marketo burns 76% on sales/marketing spend as of their latest 10Q.

    As a percentage of SUBSCRIPTION revenue (the truly important metric vs total revenue which includes human integration/consulting services), Hubspot burns slightly less than 70%.

    Here's why, and what Tunguz missed (from the Hubspot S1). I quote.

    Large and Growing Agency Partner Program. More than 1,900 marketing agency partners worldwide help us to promote the vision of the inbound experience, efficiently reach new mid-market businesses at scale and provide our mutual customers with more diverse and higher-touch services.

    This is why their spend is lower as a percentage of revenue, i.e. they capitalize on robust partnering for customer acquisition.

    In relation to Sean's question below, I'm of the view that the issue is not so much higher average revenue per customer....per se..... it's the efficiency of customer acquisition and future leverage.

    For example, Microsoft used to publish studies in their platform growth phase where they showed that for every dollar of incoming Microsoft revenue, their partners realized between $8 and $17---an amazing form of leverage. This is what I call a 'platformula', i.e. the relationship between a platform's adoption and the partner incentives they have to drive partner revenue creation (and hence lower S/M spend over time).

    Additionally, I think it's a mistake to compare 'SaaS apples to SaaS oranges' and think it's going to yield a big aha moment. For example, Hubspot is many times more efficient today than Box and Box would love to get to ratios like these. Both are 'SaaS' but with very different economic and go to market models.

    The lesson for direct SaaS companies here is huge. If you can add a partner strategy that lets you scale and lower your cost of S/M relative to revenue, you're going to be in overall better shape.

    So is the lesson for inbound growth hackers equally huge. Growth cuts both ways. Growth of the top line---good. Growth of the marketing/sales spend---not so good.

    FYI link below, my 'maverick' critique of VC firm Andreessen Horowitz' Scott Kupor on SaaS economics titled 'Software is Eating the Income Statement'.

    https://medium.com/@Platformula1/software-is-eating-the-income-statement-a148cc31d0b7

    • LM

      Lincoln Murphy

      almost 6 years ago #

      I think one of the most important things @platformula1 said - beyond the great insights into this specific issue - is "it’s a mistake to compare ‘SaaS apples to SaaS oranges'" ... SaaS is a business model (architecture)... not even a type of company. Not sure it ever was, but especially today... SaaS, frankly, means very little now.

      Many "SaaS" companies today look very much like enterprise software companies - large sales orgs complete with multi-year contracts, only it's for their subscriptions - except their software is on the web.

      Comparing those with self-service, high-volume SaaS companies, even B2B - if not a complete mistake, can certainly lead you down the wrong path.

    • MB

      Morgan Brown

      almost 6 years ago #

      Awesome insight @platformula1 - thanks for weighing in!

      • JB

        Joseph Bentzel

        almost 6 years ago #

        MB: Thanks for the kind words and back at you on the insight front.

        Relative to SaaS economics, growth & marketing I've personally found the best school to be regular immersion in the 10Qs (quarterly reports) of Salesforce, which has a very long operating history and a lot of data to work with.

        Salesforce, while continuing to lose money on a GAAP basis and consistently holding steady at around 51% sales/marketing spend as percentage of top line revenue--- is now very serious about partner-based revenue diversification---not just their original direct sales model. Their 'Saleforce1 and Other (mobile developers and/or Heroku PaaS) revenue line appears to be growing nicely and adding a new platform dimension to their business. This is the kind of thing today's startups can do right out of the gate in various ways. Be well.

  • SE

    Sean Ellis

    almost 6 years ago #

    One thing that jumped out at me from the article is that Hubspot has very low revenue per customer compared to publicly traded SaaS companies. You could view this as a positive thing - they aren't at risk of losing a couple of major customers. Or you can view it as a negative thing - it's hard to sustain growth with average revenue per customer of $7752.

    Curious if anyone has opinions on this. Should SaaS companies always push for a high average revenue per customer?

    • JS

      Jordan Skole

      almost 6 years ago #

      I just came her to comment on this. It seems crazy to me that after 7 years CAC > ARPU.

      Personally I like to see ARPU climbing as they move up market, however I would expect ongoing support costs (which I am assuming are included in this CAC calculation) to decrease as they moved up market.

    • LM

      Lincoln Murphy

      almost 6 years ago #

      I would say that increasing ARPC over time is definitely the goal, and you rarely do that by moving down-market.

      That said, this isn't just to drive up ARPC to generate more revenue and margin... but to benefit from what happens when you have higher ARPC, which are two main things generally.

      1) ARPC growth among existing customers generally leads to lower churn (which is excessive; they only have ~83% revenue retention; great companies are > 100%) not simply because those who pay more will stay longer, but because those who pay more over time are usually more invested *beyond* the dollars they pay.

      2) Aggregate ARPC growth across all customers generally comes from building a more diversified customer base - often by moving up-market - rather than simply raising prices on existing customers.

      I was surprised to see that ARPC for Hubspot has gone up in the past few years; in my (albeit limited) experience with Hubspot from the customer side, it seemed they were moving down-market. I remember a couple of years ago seeing > $10k/year pricing anytime I'd talk to someone using it... just an anecdote.

      • JB

        Joseph Bentzel

        almost 6 years ago #

        LM: In radical agreement with you on your Number 1. You nailed it around the customer stickiness thing, i.e. customers being 'all in' or invested in a product around their internal processes, the data, possibly some integrations (or even SaaS customizations) as a huge driver of rising revenue per customer.

        On your Number 2 I would swap out the word 'diversified' (diversified customer base) and use the term you guys at Gainsight have popularized---customer success, i.e. successful customer base (relative to the given product). You're the expert on this one but it would seem there's probably some new mix of metrics in addition to revenue that when fully captured and bundled together describe 'ASPC' or 'average success per customer' Sure it's subjective for different customer types but at the end of the day there's probably a big correlation between rising 'customer success' and rising average revenue.

        The only thing I would throw into the mix is the price competition factor as a curve ball in the whole ARPC discussion. For example, when you see folks like Google, AWS and MS commoditizing a market like filesharing and how it forces Box/Dropbox folks to shift their focus to high value verticals, it's clear the only way to sustain ARPC and grow it in the face of that is to 'move up the market' as you indicate---and then we're back into the sales/marketing spend issue and/or my 'upstream' mantra---i.e. deep partnering of some type with an alpha player to gain permissioned access to their base.

        Be well.

        • LM

          Lincoln Murphy

          almost 6 years ago #

          Yeah, comparing pricing - even where you have direct, in-category competitors using the same sales & support model - can be convoluted and ultimately less-than-helpful.

          I like what you say about Customer Success @platformula1 - though I guess I should preface everything I say with "Customer Success should be your main focus..."

          To your point, we talk about Customer Health Scores at Gainsight - a mix of qualitative and quantitative data - that indicates the likelihood that customers will grow, stay, or churn (with some level of nuance between those).

          You can certainly look at this in aggregate, as a roll-up across all customers, and in fact, we're seeing more investors/boards wanting to see this type of data along with the more typical SaaS metrics.

          However, just like most roll-up, aggregate metrics, they aren't truly actionable at that level, so I always recommend looking at Customer Health - and any key SaaS metric, really - on a cohort basis.

          So I'd actually look at Customer Health for each segment of that "diversified" customer base to see which are my healthiest customers (the most likely to grow) and which are the least healthy, and use that to help shape how we move forward.

          It may not be the end-all, be-all in the decision on what customers to go after (healthy doesn't directly mean most profitable, for instance), but clearly, if a certain customer segment isn't healthy (has high churn with a cause that's beyond my control), maybe I don't want to actively go after more customers like that, right?

          • JB

            Joseph Bentzel

            almost 6 years ago #

            Really like the 'Customer Health Score' thing. And also your application of the idea across discrete segments.

            Think it will have a big impact on how SaaS (and XaaS) companies of all types operate in the future.

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