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Rule of 111?

October 15, 2004

Bain Capital Ventures has published a great summary of their research into successful software companies. If you are in the software business read it immediately. It hit on many of the themes of this blog.

Quality of customer value proposition is the key to any business. This can only be discovered working with customers.

Don’t scale the salesforce until you have a repeatable process.

But it includes a couple of additional insights – Price to profitability from day one. Of course, you can only do this if you have a strong value proposition.

Successful software companies follow the rule of 126. $100 million in revenue, 20% EBIT margins in 6 years. Of course they are looking at licensing companies. I wonder how many of the companies who made it to 126 crashed and burned a few years later due to the licensing models. My guess – most of them. Can you even build a $100 million licensing company in the world of open source?

I would like to see a similar metric for software as a service companies. As I look at this universe I don’t see any 126 companies. Salesforce.com is a six year old company on a $120 million run rate. RightNow is a 9 year old company on a $50m run rate, but they had a very slow ramp. They are both GAAP break even or about 10% EBIT if you throw in deferred revenue. Yet they trade at 15x and 9x run rate revenue respectively, so wall street sees their prospects as pretty good. The rule of 111 – $100m, 10% EBIT, in 10 years?

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