MRR, ARR, upsell, churn – there are so many metrics to track and analyze in maintaining the financial health of your growing Software-as-a-Service business. Luckily, you don’t have to sort through the numbers alone. Daniel Miller is the VP of Finance and the General Manager of the Software Vertical at NetSuite, with more than 25 years of professional finance and accounting experience. He is the former SVP and CFO of Nexant and began his career as a senior accountant at Deloitte & Touche – so he’s very comfortable diving into the finances.
Miller is not only an expert on tracking the financial metrics that matter; he’s also a resource for how to maintain healthy and growing revenue for a SaaS business on a massive scale. InsightSquared got a chance to talk with Miller about how startups and bigger SaaS companies like NetSuite differ financially, how to handle huge numbers of SaaS transactions, and how to get your company’s finances in shape for your investors and for Wall Street.
1. At NetSuite, you’re both the VP of Finance and General Manager of the Software Vertical. How do you split your time between those two roles, and how do your skills in one area help you in the other?
I spend about 25% of my time financial-focused internally on NetSuite Inc., and then 75% of my time as the General Manager. The reason we structured the role that way is because a whole bunch of our software customers ask us one very simple question: “How does NetSuite do it?” We are growing organically at a significant rate, as you can see from our quarterly earnings announcements.
I head up our steering committee, which has one major objective: taking NetSuite from roughly a half a billion dollar recurring business in 2014 to a billion dollar business and beyond. The steering committee is in place to make sure we are successful in scaling our business, and that’s what our customers are looking for. We believe when a customer joins the NetSuite fold, we should share our best practices and help them scale – not just have them use our software to manage operations and customer relations, but their whole business overall.
2. NetSuite is one of the biggest SaaS success stories out there. How are the finances of SaaS companies unique from other, more traditional business models? What are some of the unique financial challenges that SaaS companies face?
As you might imagine, the answer is quite different for an early-stage SaaS company than a company at our stage. At an early stage, you’re probably focused on getting cash up front so you don’t have to raise money from investors and dilute ownership for the founding team. Early on, it’s tough to analyze a metric like churn, because the volumes are so small that it’s almost impossible to figure out what they mean. The other extreme is a company like NetSuite or Salesforce, where what drives the stock price is almost always one thing: bookings or calculated billings. But wherever you’re at – early or late stage – SaaS is really all about driving recurring revenue. Figure out:
- The highest lifetime value of the customer
- Drive down churn
- Drive up upsell
- Drive down downsell
There are a host of other metrics in there, but honestly when you boil it all down, it’s all about ARR (Annual Recurring Revenue).
There are a couple of things about SaaS that I think are unique. From a finance perspective, you can take a longer term view and not be as subject to the traditional, historical software sales model where you have to discount everything at the end of the quarter to hit a number. Things like change in ARR are very important and we watch it closely, but we’re not going to make investment decisions off of such a short-term metric. What we’re building at NetSuite is a long-term business – if we make our customers happy, they’re not going to go away. They’re going to keep paying us for their annual subscription. That’s the single biggest thing about a SaaS company – you can take a longer term view of business results.
3. What are the key finance metrics that you believe every company should be tracking, but many companies often miss?
When I talk to companies, and when we’re not talking about the traditional set of SaaS metrics, we really spend less time talking about ARR and derivatives of those, and really spend more time talking about creating demand. On the marketing side, how are we driving demand and how are we building the sales funnel? What is the cost of customer acquisition and how can we drive it down? It’s important to look earlier in the process and understand what our sales funnel is focused on. You want to know if you’re segmenting the market in an appropriate way to achieve overall outcomes in either a booking or increased ARR. At the end of the day, you have to drive demand. That was a focus before SaaS, and will continue to be a focus.
4. How do you work with the CEO and VP of Sales to track these metrics? Where do you tend to butt heads or challenge each other?
Challenges can arise if there isn’t alignment on the priorities and how to achieve the desired outcomes. But even with that, resources are always going to be in demand so partnership with the business leaders is critical. The challenge in marketing, for example, is we’ve got a lot of “children to feed” if you will. Whether we are investing in driving demand or raising awareness for a new tool, you have a finite amount of money and resources and you have various stakeholders who think have different views of what’s important. Driving the agreement or alignment on where to make those investments is always a challenge. Everyone has their own opinions – a sales guys is going to have a very different opinion than me or marketing. Driving that alignment gets back to good old-fashioned planning and spending time in a room together. Everyone understands the tradeoffs, so let’s figure out how to optimize the equation. I would say that happens in any business; it’s not unique to SaaS.
5. What are some of the most common mistakes people make when trying to build a successful and financially stable SaaS company?
We could spend a long time talking about this. One dimension is that the underlying business strategy really depends on whether you’re a horizontal or vertical SaaS company. If you’re really focused on a horizontal play, like NetSuite, it’s generally going to take a lot more investment to generate demand than a vertical SaaS company. At a vertical company, once you have traction with your target customer segment, it tends to be a simpler exercise after that.
For a horizontal SaaS company, you’re really going after a lot segments in the market and you really have to understand how you’re going to attack this broad market. That’s why we at NetSuite verticalized the business early on, because it allows us to attack the market in a more meaningful way. But we’re an established company, and it took us a long time to get to where we are today. You have to have clarity in terms of how you reach your market. I’ve seen a number of SaaS companies that don’t have the patience or the capital to build a horizontally-focused business and have a hard time addressing such a broad market. I’ve also seen vertical companies that don’t fully understand and target their customer segment.
6. SaaS businesses like NetSuite are very predictable, with a recurring revenue model that allows you to predict revenue fairly accurately quarter by quarter. But that also means it’s tough to make changes. How do you affect change at your company?
It’s a good question. For example, NetSuite provided 2015 revenue guidance in November 2014 and the range was +/-2%! To your point, this is a very small range which is pretty unique to a SaaS business. How it affects NetSuite is that we are more able to take a longer-term horizon to decision-making vs. quarterly resource allocation decisions that many non-recurring business models are subject to. While it takes longer to build up a recurring revenue model, the rewards to shareholders, employees, and customers are significant.
7. Transaction volume is also a challenge for many SaaS companies. How do you create an organized and metrics-driven financial process that can handle a high volume of transactions per month?
This is what we do extremely well. It does rely significantly on the customer and generally speaking, high volume is often part of what they do. For example, many of our software customers at NetSuite are very high-volume B2C and B2B companies – millions of transactions per month. That kind of volume requires an integration with their underlying transactional system or product. NetSuite is obviously a very strong financial product, but the most significant thing is we have a platform, the SuiteCloud platform, that allows for powerful and fast integration for high-volume businesses.
We’re built on a significant technology stack that has the ability to get the data in and out of those proprietary transaction systems built by the customer. There is no way you can do that manually. That’s something NetSuite has built from day one. We’re in the cloud and have our own integrations and integration partners. That’s what our customers require in order to further automate their processes. Take it one step further, now we have the data in there, now we’re a subscription business, how do we charge the credit cards? How do we recognize the revenue ratably for a subscription software business? One of the reasons we’ve built such a significant business is because of our ability to automate this high transaction volume by performing these functions.
8. How has technology changed your role since you started in this field and in a leadership position?
I think the biggest thing is that I manage the business by exception, utilizing NetSuite’s saved search capabilities and alerts to identify and email me when certain events take place. For example, if a pipeline deal close date slips out by a month. We have over 1,000 customers in the software vertical, so it’s unrealistic to monitor every customer all day, every day. While they are all important, I can utilize exception reporting to identify where it is important to spend time with existing accounts. While I’ll always spend time on our most high-profile customers, I now have a way to identify which other existing accounts I need to visit and strategize with.
9. What’s the most dangerous thing you’ve ever done?
When I was in Thailand, I took a 30-foot boat out into the middle of a minor Typhoon to get us to an exotic island. This was in 1993, and when I went there I had no money, so it was either I go or starve – so I went. It was the most frightening experience of my entire life. I was traveling with a friend, she’s a travel guru, and she sat reading a book while we went over these 30-foot waves. The funniest part is there were 25 Japanese tourists on the other side of the boat, and they were all huddled in a mass, screaming at the top of their lungs because they thought they were going to die. I was caught between them and my friend who didn’t think anything of it. I was all by myself thinking, what should I be? Completely frightened or completely calm? But once I got to the island, I was OK.
Daniel Miller is the VP of Finance and the General Manager of the Software Vertical atNetSuite. He formerly worked as the SVP and CFO of Nexant, senior treasury manager for Genentech, Inc. and corporate controller for Extreme Networks, Inc.
Connect with him on LinkedIn.