Salesforce, on the other hand, is a pure, read on-demand multi-tenant, SaaS play and enjoys a $4BN market cap, $472m in run rate revenue, and a 8.5x price/sales ratio.
As entrepreneurs architect start-up software companies, it is worth asking the following question: how much of Salesforce's 70% multiple premium is a function of the purity of their software delivery and pricing model?
When questioned why he supports so many delivery options, Rightnow's CEO, Greg Gianforte, answers that he sells the customers what they want. If they want on premise, fine. If they want their own instance of the application on-demand, fine. If the want multi-tenant on demand, fine.
While there is no question that being customer driven is a sound business trait, the complication arises when saying "yes" to customer demands introduces systematic weaknesses into your operating model. These weaknesses tend to frustrate the ability to realize economies in development, pricing, development, and sales force training.
Many of the bootstrapped start-ups that I meet with face this exact challenge - how can you say no to a customer when you need to make payroll? Why not agree to sell customer B what they want, even if it is inconsistent with what we sold customer A?
Where is the fine line between being customer driven and being a custom development shop building one-off products?
The economics of multi-tenant software are well understood:
- lower research and development costs (eliminate the need to support multiple code bases, custom patches and the need to port the software across multiple hardware and O/S stacks)
- lower support costs (eliminate on-premise one-off configuration complexities that complicate root cause analysis, eliminate need to support old versions of the product)
- lower sales costs (standard pricing and delivery options vs complex pricing lists)
At Hummer Winblad we are sympathetic to companies who perform "unnatural acts," ie deviations from their model, to win business. Teams, however, must be very careful that in pleasing customers they don't alienate investors who question the wisdom and sustainability of impure operating models.
All revenue is not created equally, and I posit that "good" revenue that reinforces efficiencies and the scalability trumps absolutely higher revenue. For start-ups, purity is a virtue worth aspiring to.