Lauren Carlson, an analyst at Marketing Automation Software Guide, recently wrote an article that looks at marketing automation vendors like Marketo and Eloqua who are considering IPOs, their recent venture capital funding, and the type of financial performance they may need to warrant shareholder valuations comparable to publicly-held SaaS companies.
Because PointClear provides outsourced prospect development services—lead generation, lead qualification and lead nurturing—to clients in the technology and SaaS sectors, I was particularly interested in Lauren’s findings on sales and marketing expenses as a percentage of revenue for three publicly-held cloud application companies: Salesforce.com, SuccessFactors and NetSuite.
While Lauren provides 10-year financial data, I excerpted this column of the most recent fiscal year as it was fascinating to see all three companies reporting an identical 48% of revenue committed to sales and marketing expenses.
Curious about how long each has been a public company, I checked on the years in which their stocks were offered: Salesforce.com – 2004; SuccessFactors – 2007; and NetSuite – 2007.
In a sense, three cloud application companies at a combined average of five years after going public are all spending nearly half of their revenue on sales and marketing. Could the reasons why point to similar expense paths for the marketing automation vendors looking at going public?
Sometimes I see 10-K and 10-Q filings long on boilerplate phrasing and short on substance when it comes to explanations for expense categories, but I wanted to see how Salesforce.com, SuccessFactors and NetSuite talked about their sales and marketing expenses. It was interesting to see all three companies use similar descriptions in their SEC filings for both their sales and marketing activity and their market challenges.
Sales and marketing activity
- Selling subscriptions via a direct sales force
- Sales force efforts include field sales and inside sales teams using the phone
- Telesales lead generation supports both field and inside sales
- Continuing expansion of sales efforts means it will continue to be the largest cost
- Sales and marketing headcounts have increased to generate new customers
- The sales cycle may grow longer as larger companies are targeted
- Demand for customization and integration from large customers may increase time and cost to complete sales and divert sales and professional resources
Target market challenges
- Significant market competition from established packaged and on-demand vendors
- Competitors may have greater name recognition, larger budgets and more offerings
- Competitors may have extensive networks of partner integrators and resellers
- Extensive pricing pressure from competing services/products at lower prices
- Customer needs can shift quickly
- Frequent and rapid new competitor product introductions
The two groups of characteristics speak to a question posed in Lauren’s article, “Why do you need that much money to build a software company?” The short answer: intense competition and the requirement for large, ever-expanding direct sales forces to close complex mid-sized and enterprise deals.
It’s likely that many—if not most—of these same expense activities and market challenges will apply to the SaaS marketing automation companies leading up to and after going public. There is something of an irony at work here in that the MA offerings focus on generating inbound leads, and it’s a requirement that MA vendors need to supplant their own functionality with huge investments in outbound lead generation, lead qualification and lead nurturing if they want to achieve enterprise-level, complex sale success.
When I think about other takeaways for the MA companies, their current venture capital partners and their future investors, I come up with another critical question that goes something like this:
As you look at the months leading up to your IPO and the first five years after, you’ll need to plan on spending at least one dollar on sales and marketing for every two dollars you generate in revenue. You’ll need to have a large direct sales force that includes field and inside sales and proactively use outbound calling to generate, qualify and nurture mid-sized and large company leads.
You’ll need to be prepared to face long sales cycles competing with vendors with better name recognition, larger budgets, more offerings, newer offerings and less expensive offerings. And I might add, you’ll need to use outbound to interrupt prospects earlier as many savvy self-educators can be getting 70% of the way through the buying process without talking directly with one of your sales reps.
Given that your competitors are facing the same challenges, deploying the same strategies and spending the same or more on sales and marketing, how are you going to make your sales and marketing more effective in capturing greater share, making your company profitable, and growing value for your funding partners and future investors?
One answer includes applying, tracking and measuring best-practice sales lead management processes. This would include implementing SiriusDecisions’ demand waterfall that defines leads in the following way:
Marketing Qualified Lead (MQL) – Qualified and delivered by marketing
Sales Accepted Lead (SAL) – Reviewed and accepted by sales
Sales Qualified Lead (SQL) – Contacted and further qualified by sales
For companies considering going public and their VCs, I would also suggest these questions: “What percentage of our MQLs are becoming SALs, what percentage of our SALs are becoming SQLs, and, ultimately, what percentage of our MQLs are closing?”
A solid indicator of successful sales and marketing execution is how close the percentages of MQLs to SALs, MQLs to SQLs and MQLs to closed deals get to 100%. In fact, maybe there should be another SEC filing, the 10-SM, that lets investors use these metrics to gauge return on sales and marketing investment at a glance.
Consistently positive outcomes in best-practice metrics like these will be central in separating the winners from the also-rans among those looking at IPOs, as well as among all companies across VCs’ entire portfolios.
By Dan McDade