SaaS startups look to monthly revenue models to spark growth
FileFacets offers software that helps customers manage their information, but rather than install it, it pays Microsoft to run it in the cloud, then charges clients a monthly fee to access it.
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Chris Perram never imagined himself as a software entrepreneur. He started out in 2000 as a management information consultant, helping companies manage the mounds of digital information piling up on hundreds of hard drives. Now, he’s chief executive of his own software company, FileFacets and recently raised $4 million in funding, is managing a network of global resellers and admits he’s learning it all as he goes along.
FileFacets is a software as a service, or SaaS, company that offers a product that helps customers manage their information. However, the company doesn’t install it. Instead, it pays Microsoft to run its software using its Azure cloud computing service, and then charges clients a monthly fee to access it via their browsers.
Monthly recurring revenue, or MRR, is a model that has spawned several Canadian success stories, including Toronto-based Freshbooks and Vancouver’s Hootsuite.
Perram is a graduate of L-SPARK, an Ottawa-based accelerator for SaaS companies. Created by investment management firm Wesley Clover and Invest Ottawa, it provides mentorship for SaaS firms, explains Leo Lax, its executive managing director.
“This business model is so attractive because of the democratization of software,” he said. It brings complex software to customers that previously couldn’t afford to license and operate it.
Perram, however, targeted large businesses and government, rather than the small to mid-sized businesses or consumers who tend to buy SaaS. Instead of the $10 a month an SMB might pay for an online bookkeeping system, FileFacets’ customers typically pay between $2,000 and $5,000 a month. They’ll use the service for 32 months on average to help with long-term information management projects, and Perram noted his margins are upward of 95 per cent.
As organizations grow, employees inevitably store documents on the computers at their desk, and will arrange it in their own ways. One person might use a different folder for each year. Another might structure files by project. This creates a fragmented and confusing array of information that is difficult for senior executives to collate and use.
As a consultant, Perram helped managers collect files from across the organization and create company-wide standards for storing it, called taxonomies. He developed his own software tool to make him faster. His consulting firm reached 34 staff with $4 million in services revenue, but it was stagnating.
“We were having a lot of success but it was hard,” he said. Employees were scattered across North America and each project involved travelling to customer sites for extensive meetings. “It was getting to be something that could no longer scale, but we’d built this really cool product.”
In 2013, Perram pivoted the business, cutting the consulting work and concentrating on building a product other consulting firms could use to do the same work.
It was getting to be something that could no longer scale, but we’d built this really cool product
He participated in L-SPARK’s nine-month Accelerator program from October 2015 until this June. Rather than funding, the company provides mentorship and helps entrepreneurs contact potential investors. He grew his recurring revenue to $107,000 a month from $4,000 during his time at the accelerator.
Jane Wang, CEO of Optimity, is another L-SPARK graduate who pivoted to SaaS. In 2013, she launched MyHealthSphere, a mobile health coaching app for consumers. Selling B2C health coaching as an app was difficult because it takes a large investment to tackle the consumer market, she said. “Optimity was a rebrand of MyHealthSphere as it became a corporate wellness provider,” she said.
Optimity sells its service to human resources departments that want to educate employees on good health practices to help lower group health insurance costs. The SaaS service delivers a library of content via a mobile app covering topics ranging from diabetes management to mental health.
Wang was having trouble scaling the business, partly because she didn’t know what aspects of it to measure. L-SPARK invited her to pitch for a place on the Foundation program. “I didn’t really understand the metrics and the rigour that’s needed to make it a profitable business and to scale it,” she said. “They made it scientific.”
She discovered that her sales cycle was too long, and her geographical scope too narrow. She had visions of a Canada-wide business, but hadn’t sold much outside of Toronto. She learned that she was spending too much time visiting companies. She needed to reach them digitally instead.
Optimity set up a sales process that found and targeted specific stakeholders inside companies with 100 to 1,000 employees. It uses online demonstrations to educate them about the service.
Shifting from a technology to a marketing and sales focus is a key part of the SaaS story, Lax said. “Change is now less about the heavy lifting in technology and more about the delivery of the application in a user-friendly cost effective manner.”
The company also segmented its pricing into a lower-cost product, offering it at $2 per member per month, which encourages HR departments to try it out before upgrading to the full $10 package.
These changes helped Wang quadruple revenue between February and October this year. “There’s a science to selling enterprise SaaS,” she said.
Wang finished the Foundation program in June, but went back for more. She started L-SPARK’s Accelerator program in September, and hopes to reach $150,000 in monthly recurring revenue by the time it ends next June.
Change is now less about the heavy lifting in technology and more about the delivery of the application in a user-friendly cost effective manner
Perram has even bigger plans for his $4 million financing. The round was led by Celtic House Venture Partners, which provided $2 million, along with Wesley Clover, which invested $1 million. Chinese firm Green Capital Investments kicked in $500,000, with the remaining $500,000 coming from various small investors.
The money will be used to continue his channel strategy. He’s planning to expand his existing twelve-strong value-added reseller network, and will also target smaller companies with his product, which will see a major new release in January.
“We want to hit $600,000 MRR by December 2017,” he said. He knows he’ll be profitable by then, but isn’t sure when the tipping point will be, so he just hired a chief financial officer to tell him.
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