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If the average Venture Capitalist was asked to run a startup, would he/she be successful?

YES. The average VC would do a good job as CEO of a startup.

NO. VC's are investors, not operating executives, and would mess things up if they tried to run a business day to day.

CEO Spotlight: Todd Gardner, SaaS Capital Inc.

By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search

The Software as a Service (SaaS) model has never been hotter, growing at 43% annually. But the shift to a pay-as-you-go model that customers love means that software companies are no longer able to collect millions of dollars in up front licensing fees. Enter SaaS Capital, a company focused on helping software companies fix their cash-flow problems - as long as they're in the SaaS game.

Angel Mehta: SaaS Capital seems to have carved out a niche that’s developed as a result of the move to the ASP business model. Is the business growing the way you anticipated it would?

Todd Gardner: The migration to SaaS has been faster than we anticipated, so much so that the issue we are concerned with now is that SaaS may get over-hyped and all the venture capitalists may pick up the market for SaaS companies beyond where it should go in the near term. That said, the market for SaaS and the migration to the business model have been fantastic for us so far.

Angel Mehta: The model has some trouble for vendors though…which is presumably what you’re trying to address. Tell me about that.

Todd Gardner: There are some cash-flow traps you need to think about. In the enterprise model you know you’ve sold the product and issued invoices and you will get a million dollars in the door in the next 30 days; that’s great cash-flow. In the SaaS model, you sign a million dollar deal, but since it’s a three-year contract, you get a check for twenty-five grand instead of a million. How do you pay your sales guys or hire more developers with twenty-five grand. SaaS is very good and predictable…eventually.

Angel Mehta: But not up front.

Todd Gardner: Right. You certainly get to a place where you realize the importance of the SaaS model and at least financially, this is a highly recurring, highly predictable revenue stream where you don’t have to sell a deal on the last day of the quarter to make the quarter and make payroll or hit your numbers for Wall Street…but in-between as you migrate to that model or you ramp-it from scratch, the cash-flow dynamics of that migration and growth curve are tough. That’s where we come in.

Angel Mehta: I read a blog recently that IT professionals have a mass resistance to SaaS deals and that this is essentially based on this fear of not owning and having complete control over the applications. Do you see this fear with any of the companies that you back?

Todd Gardner: I don’t think that it would be completely contradictory to see SaaS adoption growing on onehand, yet IT professional sitting in a Fortune

500 business not being that excited about it. A lot of traditional software vendors have gone through IT, or at least engaged with them to a high degree to sell a CRM system or to sell an ERP system. Most of the SaaS businesses, however, do not primarily engage with IT. They engage directly with the business user…the people that use the application. I think IT needs to find its role within that.

There’s been an evolution. Earlier, the SaaS sales people used to duck when an IT guy came down the hallway. But now I think they recognize the role for IT to play, the only difference being it’s not the same role that it used to be. So there will definitely be some push back and resistance.

But SaaS is going to be a big part of the landscape for sure. Take CRM systems, which I used to deploy as a consultant. It used to take millions of dollars and tons of consultants and a long time to customize and tweak. The more we customized, the better for us. But the SaaS folks are compressing six months and six million dollars into, in some cases, six days, which lets people get up and running on an application just so much faster. Part of it is because they’re hosted and part of it’s just because it’s designed better. It’s designed to be more like Google and Yahoo instead of some green screen, less intuitive app. I don’t know if that answers your question but the specific data point around the IT folks, though, that’s not contradictory to me.

Angel Mehta: Do you think this is a threat or represents a sea change in the career prospects for IT people? I read another article about how increasingly the skills that are required by people involved in deploying SaaS applications are completely different, that it’s much more about the high level application and the business process than it is about the entry layer stack.

Todd Gardner: I’m on the financial side of supporting the SaaS businesses, but certainly that makes sense. Much less effort will be focused on supporting the “stack”, and a lot more effort on picking the right vendors and managing them and their solutions. For the IT consultants I think SaaS is clearly a bad thing. You just need less consulting with a SaaS application. You can do configurations a lot more easily than 10 years ago when you were re-writing code per customer, and then a second thing is I think the customers have bought-into the idea its good to get 80% of the value out of the box and not do 92 customizations to make it perfectly fit the business.

Angel Mehta: You were at one point a venture capital investor. How does your day-to-day experience differ at SaaS Capital from what it was at Blue Chip? How does your methodology differ from your approach to evaluating deals?

Todd Gardner: We’re able to assess opportunities much more quickly now because we’re so focused. We picked one kind of business model and try to know all the ins and outs of that business model. We’re looking for companies that are in the growth phase that have good prospects and need capital, but we’re not looking to make five times our money or ten times our money. The best thing that can happen to us is they repay their loans. Since there’s no equity component to our debt facilities, we’re not focused on trying to find “rock stars”. We’re trying to find somebody who is growing and will be successful but need not be tracking toward an IPO.

Angel Mehta: Is your business, then, at risk of consolidation within the SaaS market?

Todd Gardner: Yes, though I would say that’s a five-year concern, but I haven’t seen massive consolidation in the software world yet and so I don’t think that the SaaS model is going to accelerate or decelerate the number of software vendors. Probably today it’s accelerated because there’re SaaS versions of the old perpetual model but we see so much more opportunity today than we can get our arms around that’s not something that concerns us. We’d like to be the lender of choice of the acquirers and, in fact, our product is very good for acquisitions.

Angel Mehta: So what round of financing should entrepreneurs look to you for?

Todd Gardner: We might be a good replacement for Series B, or C, or D, right, where you’ve got the company up and running, you’ve got a product, you’ve got customers, you’ve got some critical mass of recurring revenue but, because of the business model and the dynamics I explained before about when you bring on a customer, very little of that is cash. You still have an on-going working capital need and instead of using equity to fill that need; we’re an alternative to that because equity is an expensive way to finance working capital.

Angel Mehta: What advice would you have for entrepreneurs based on the work you’ve done in this area collecting best practices and not so best practices?

Todd Gardner: We have interfaced with 100 or so SaaS companies in the last few months and it seems the guys who are doing best are the ones who have continued to invest in their product and who are using the web to drive real innovation. Hosting an old traditional software application and calling it SaaS is very much a short-term solution. I’m not sure that is much of an insight, but its certainly true. We believe it’s hard to sustain both the perpetual and SaaS model and if your transitioning from one model to another, you better do it fast and with great purpose.

Another topic SaaS vendors must be ready to address is vendor viability. If a SaaS vendor goes belly-up, the end user is in really bad shape compared to the old perpetual model where the user was running the app in their own data center. The end user now needs to find source code, re-build the app from scratch, and then go try and find their data somewhere.

Part of the benefit of a software vendor being a customer of SaaS Capital is if the software company becomes financially unable to continue to provide service, we can step-in and provide the services on their behalf. Hence, we become part of the operational backstop for those vendors and I would argue it’s nine times better to have us come in and maintain the application in its current environment than for a Fortune 500 company to try to recreate the application based on some escrowed code.

Angel Mehta: What are SaaS Capital’s business priorities this year and next? What are the things that you have to get done in order to meet your own growth targets as an entrepreneur?

Todd Gardner: We will try to put ten million dollars worth of loans out by the end of this year, and thirty million next year. To accomplish that, we need to do the normal things around sales and marketing. We are hiring folks on both coasts as we speak to help us accomplish that.

We have a tremendous product tailored just for SaaS companies. It provides our borrowers with much more leverage then a bank, has zero equity dilution, and is structured to have zero/negative amortization. It really is a great product. We just need to get in front of companies to explain how it works.

Angel Mehta: What is the ideal borrower profile?

Todd Gardner: Good gross margins, high renewal rates, and over $3.5 million in recurring revenue. Not much more complicated then that. Longer-term contracts are also nice and we do look at customer concentration and growth rates as well.

Todd Gardner is Founder and CEO of SaaS Capital. Prior to SaaS Capital, he spent twelve years focusing on software investing within Blue Chip Venture Company, a leading Midwestern venture firm with $600 million under management. As a partner, Todd invested primarily in software companies where he was fortunate to deliver a 100% success rate even during a challenging investment cycle. He developed and led several investment syndicates in financings of $10 to $25 million and executed over 40 total equity rounds. For interview feedback, you can contact Todd at tgardner@saas-capital.com 

Angel Mehta is Managing Director of Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies and lead investor in
www.softwaresalesjobs.com, the # 1 site for software sales jobs. Angel can be reached for feedback at amehta@sterlinghoffman.net  

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