The interview with Steve Singh has been hugely popular.  As CEO of Concur, Steve is a real mover and shaker in the SaaS world, and he’s also one of the rare few who can talk candidly about what it’s like to transition a conventional ISV to SaaS.  For my next SaaS interview, I thought I’d move to the other end of the spectrum and talk to another very dynamic CEO.  Chris Cabrera founded a brand new SaaS company called Xactly about 2 1/2 years ago.  He can speak to what it takes to start a new SaaS company and why you’d even want to try.  I like talking to companies at unusual inflection points (transition from conventional ISV to starting a brand new company) because they’ve been through some fires and learned valuable lessons.  What follows are the valuable lessons Chris can pass along for others who want to start new SaaS companies.

As always in these interviews, my remarks are parenthetical, any good ideas are those of Chris, and any foolishness is my responsibility alone.

What’s your basic elevator pitch to customers?

Chris:  People need to understand that automating comp is cool and has great benefits all by itself.  Automating manual processes and driving the salesforce is powerful.  But, the real long-term benefit is the underlying data created as a result of automating the compensation process.  It’s the most accurate data in the company.  Our vision at Xactly is providing tools for Sales Ops and Finance that sit on top of that data.  Modeling, analytics, and so on.  There will be much more in the future.  People don’t realize this is available and that’s the real value when they’re just automating their Excel spreadsheets.  The strategic wow is in the data.  Everything we sold, who sold it, who bought it, channels, discounts, which products sold with other products.  And the data is accurate enough that CFO’s will believe it.  That’s not true of SFA data entered by sales reps.  When the data just sits in Excel, nobody can get to it to realize how powerful it really is.

Bob: (I’ve lived this story, so I know just what Chris is talking about.  When I was at Callidus, we used to see a two stage adoption.  First customers would “pave the cowpaths” by automating existing processes.  Shortly after that, they’d come back to Callidus looking for help mining the data.  They’d suddenly discovered they had the answers to a whole variety of questions and that the data was more accurate and stable than any other source in their company.)

How is your product sold?  By seat/month?  Other metric?

Chris:  It’s hard to think of anything in SaaS as traditional, but we sell according to the traditional SaaS model by seat: payee, sales rep, manager, or anyone else who is being paid or needs to look at the data.  Our monthly fee is $50/ mo/payee for the basic service plus more for other modules.  We’re able to look at a payee as anyone in the company, even entities like dealers.  We see up to maybe $100/mo from some customers who want all the bells and whistles.

Bob:  (That’s a pretty similar price point to what Salesforce.com has established, and the strategy of adding modules to extract greater share of wallet is also similar.)

How many customers and how many seats have you sold?

Chris:  We’re still private, but we’re over 100 customers with 200-300 subscribers per seat.  We’re very aware this is more seats per customer than most SaaS players.  We’re moving up market faster because of the value of this application. It’s so high that companies for years have paid millions to solve this.  We were able to go right to the meatiest part of the market because the ROI is measured in months.

When I look at some of the S1’s for companies that are great SaaS players, they have to sell 4-6 deals for every one that we sell, so we can put a little more attention to our customers.

Bob:  (The quality of the problem that’s being solved speaks directly to retention and reduction of churn as well.  Moving to more seats also helps reduce the amount of churn.  When you’re paying just a few salespeople, an Excel spreadsheet is pretty easy.  When you’re paying over 200, the spreadsheet becomes cumbersome and inaccurate.  I also take Chris’ point that more seats lets them invest more in a customer.  This translates to more service, a deeper product, and the ability to invest a bit more in the sales cycle to attract such customers.  This all contributes to the strong growth Xactly has seen.)

What stage is Xactly at?

Chris:  We’re in our third year and we’ve had 3 rounds, so we’re a later stage startrup.  We’re within 12 months of profitability, and we’re very financially stable.  As companies go, we’re not a toddler, but we’re still an adolescent.  We pay $100’s of millions in compensation, so customers and prospects don’t see us as a risky proposition.

Bob:  (It looks to me like the pace of adoption for SaaS is picking up, and Xactly has timed their entry well to benefit from that trend.  I don’t think you could’ve gotten a SaaS company to profitability in 4 years when the SaaS movement started.)

Starting Up

You came from Callidus, a conventional Enterprise ISV. What crystallized the decision to go SaaS in your mind?

Chris:  What was great about Callidus is we built a fantastic product and a great company on the backs of some of the world’s greatest companies like Allstate, DirectTV and BofA.  They paid us millions to solve this problem.  It became clear to me that with the advent of multitenancy and SaaS that not just the largest companies, but large and midsized companies could also benefit.  There are 10’s of thousands of these instead of a few hundred global companies, and there needed to be a company to go after that market.  I tried to convince Callidus to go there, but failed, so I started off on my own.

In fairness, no company I’m aware of has done both.  It’s very hard.  Callidus’ decision to stay a conventional ISV serving big companies is the right one, but I also think it was right for me to build a ground up SaaS company.

Bob:  (SaaS is well known for its ability to move further down market and hence harness a much bigger opportunity base than big enterprise plays.  We’ll get with Callidus and get their perspective on this as well.)

What was the fundraising like?  What do VC’s look for in a SaaS business plan?

Chris:  Raising money is never easy, but the temperature for SaaS among the VC’s is hot.  They love to hear about this model.  Having said that, they’re looking for companies to have real value as a stand-alone company.  Xaclty had the SaaS model, but they recognized we were going for the mid market and not mom and pop.  Thirdly, the VC’s liked the amount of domain knowledge we had from this space—more than 35 years in the management team alone.  This made our financing fairly quick.  In the B and C rounds we had 4 to 5 term sheets each time.

Bob: (Chris has done a good job strategizing about how to position his rounds.  Each round could see some element of risk eliminated from the company, which helps confirm for the VC’s that a company is on a good trajectory.)

What do you tell someone to get them to join Xactly?

Chris:  What attracts people is that we’re building a fun company that solves a real business problem.  When candidates see the quality of customers we have and what they’ll pay for the service, it speaks volumes.  The cultural side is the fun factor.  Our little company with just over 100 employees knows how to have fun building a company.

Bob:  (As you wander around the Xactly headquarters, you get a real feel for this.  They’re in the old Knight-Ridder Internet buildling downtown.  It’s a wonderful potpourri of very old building meets cutting edge tech, and the decor tastefully and playfully exposes that dichotomy.  You can really feel the energy from the place.  Ironically, it is directly across the street from competitor Callidus, but maybe that’s all part of the plan too!)

What were your biggest fears about SaaS, and how did they turn out?

Chris:  I had two fears:

1.  Customers paying monthly for the service.  Could we really make a cash flow business on that? It turned out we don’t have any monthly customers, most pay us at least 1 year and often 2 to 3 years in advance.  That was an unexpected windfall.

2. Could we really sell upstream, or would we be stuck with mom and pop.  I didn’t want to wait 5-7 years the way salesforce did to move up.  We’ve proven we can close customers with 1000-2000 payees right out of the gate, so the fear was groundless, but at the time there was no way to tell.

What about Steve Singh’s contention, which I uncovered in my interview, that such payment terms are going to change? 

Chris:  It depends on the size of the customer.  Larger customer are disinterested in a monthly check, they don’t want the extra paperwork.  With that said, for smaller ticket items and smaller size customers I could see it.

What really surprised you as you got more into the SaaS model that you hadn’t anticipated?

Chris:  I’ve been pleasantly surprised that customers are less concerned about the security aspects than I thought they would be.  When we started the company 3 years ago, 2 of 10 sales calls security would come up, and now its 2 out of 100 sales calls. It just goes to show how rapidly SaaS has been adopted.

Bob:  (Chris makes an excellent point that security concerns are a bellwether for SaaS adoption.)

Do you think SaaS is an inevitable bridge that every ISV has to cross in some form or fashion?

Chris:  I really do.  I’m conflicted because as I sit here I believe there are certain apps that aren’t the best suited to SaaS.  There may be a place on-premises for those.  In the same breath, if I think 10 years out, I can’t envision any company wanting to buy on-premise for anything.  In 10 years it will all be SaaS.

Bob:  (As more and more computing moves into the cloud, there will be fewer barriers to moving it all to the cloud.  Steve Singh feels a quickening in the SaaS world and says we’ll all start to see the signs soon.  If the pace accelerates further, and we see signs from both interviews that it is getting easier all the time to sell SaaS, it will make for some interesting times!)

Any other advice for those who would start a SaaS business?

Chris:  It’s funny, I was invited to host a Garage to Glory breakout session at Dreamforce.  The room was full of entrepreneurs.  I told them to make sure you don’t do a SaaS product just because you can.  Imagine an aerosol can that sprays toothpaste.  Just because you can do it doesn’t mean it’s a good idea.  So many of the SaaS companies I hear about have an idea in search of a market.  Find something that really has value and then create a product that delivers that value.

Secondly, trust your instincts.  When you start a company today, there is no shortage of advice.  We’ve made it a point to go against the advice in many cases.  It seemed like we violated all of Guy Kawasaki’s Art of the Start (our company name started with X!) guidelines.  We went with our gut.   There are so many opinions out there that you have to trust your instincts.

Lastly, don’t go it alone!  Why not hook your wagon to AppExchange and get better reach.

Bob:  (Speaking of not going it alone, in the next installment Chris has some very innovative ways of thinking about partnering in the SaaS world.)

Who are the SaaS companies you look up to?

Chris:  Clearly Salesforce.  I also really like RightNow, Concur, and SuccessFactors.  Concur is the only successful transplant.  That’s a great story.  SuccesFactors is just going out on their S1 so I’m watching the market response to their metrics.

Bob:  (With profitability 12 months away, it’s clearly time for Chris to start watching metrics around the next step!).

Next Interview Installment

We got Chris Cabrera’s thoughts on starting up a SaaS company, in the next installment, I want to share his innovative thoughts on partnering, sales and marketing for SaaS.  Be sure to click the “subscribe” link at the top left of the blog page so  you don’t miss out on these future posts!