Other Key Factors
It is important to be aware of other factors that will need to be considered:

• Contracting - One year rolling contracts with a high renewal rate are the most common type of subscription used in the U.S., although three-year contracts have the benefit of providing longer contract visibility, more sales focus and stronger customer buy-in. On the flipside, there is anecdotal evidence that three-year contracts have lower renewal rates, as the contract end is more likely to coincide with a natural software upgrade or change cycle at the customer.
• Focus on bookings - Sales metrics and incentive plans need to be adjusted to incentivise operational sales velocity. Sales executives should be focused on increasing MRR (Monthly Recurring Revenue) through monthly booking targets. The growing MRR base is the primary driver of equity value for SaaS businesses.
• Sales model change - The transition can be hard on sales people. They need to move from "hunting" to "farming" and not all will be able to make the transition. This can be partially addressed through compensation, but it also requires a shift in job motivation from "winning big deals" to "land and expand" which means making sure customers are happy year after year. Splitting sales (new client acquisition) from account management (existing customers) is often a key to success here.
• Sales productivity and incentives - Sales compensation needs to be tied to targets related to bookings, MMR, retention and useage. In the SaaS model, vendors have the ability to monitor continuous client usage of the application and can therefore diagnose a problem account often before the client realizes it. This requires vendors to motivate customer-facing reps to be aware of customer useage, and to anticipate and act on these metrics, both to ensure customer satisfaction and to exploit upsell and cross-sell opportunities.
• New analytic services - In some SaaS segments, it makes sense to aggregate anonymised data from customers' use of your application and turn it into an information service that can be upsold to existing customers. [example?] Customers can get significant benefits from benchmarking themselves anonymously against their peers. Such services can increase the stickiness of the SaaS application and increase the cost of customers switching to another vendor.

Be Comprehensive
When you make the transition to a recurring revenue model, try to get as many customers as possible to switch. While some clients will resist and will continue with a license model, it is important to make these exceptions and to limit it to the most important, often the largest, purchasers. In order to benefit from the valuation premium given to SaaS businesses, recurring revenues need to account for a majority of revenues. Only then will you gain the forward revenue visibility and value of cost-effectively scaling your operations. Furthermore, sales and marketing will be much more effective if focused on one model versus straddling both.

It Works
While the shift in the business model is daunting, it is achievable for most software companies. Using the above approaches, founders can minimize the obstacles and streamline the transition. Having a majority of your customers on a recurring revenue model in 6 months may seem like an impossible task, but we have seen it implemented successfully. With this approach, a doubling or tripling in company valuation is within reach for many software companies.


Javier Rojas is a Managing Director of Kennet Partners in Silicon Valley and Maximilian Bleyleben is a Managing Director of Kennet Partners in London. Kennet provides growth equity capital to bootstrapped companies in the US and in Europe. Kennet focuses on capital efficient businesses with annual revenues of $5M to $50M. Kennet works with founders to build high value outcomes and preserve equity value through capital efficient growth strategies.

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