Citrix Online – a SAAS powerhouse

Everyone knows that hindsight is 20/20.  Back in 2003 when we were deciding whether or not to sell Expertcity (GoToMyPC and GoToMeeting) to Citrix or continue fighting the fight and attempt to take the company public 1 year later, it was quite a gut-wrenching decision.  Ultimately we decided that the risk/reward ratio to sell at that time was better than going for the public offering.  As it turns out, we all did quite well and it is great to see that a few years later that Expertcity (now known as Citrix Online) is continuing to drive the numbers that we believed we could do.  When most people think of the poster children of SAAS, they think of, WebX, and RIghtNow.  As Phil Wainewright of ZDNet mentions in his blog, let’s not forget about the powerhouse that is now Citrix Online.  According to Phil Wainewright:

Acquired as Expertcity in February 2004, the Citrix Online division is an on-demand giant in its own right, with trailing twelve month (TTM) revenues of $121.6 million to June 30th this year. That makes it even bigger than the number 2 on-demand CRM vendor RightNow Technologies, which reported a TTM of $99.3 million for the same period, and more than a third the size of web conferencing leader WebEx, with a TTM of $343.7 million (for comparison, on-demand poster child posted $396.6 million TTM with its latest results).

Even more impressive is the fact that the company grew from $35mm in revenue from the end of 2003 to around $121mm in revenue 3 years later – not too shabby for an on-demand play going after the SMB market.  In addition, at the time of the sale, the company had raised around $30mm in financing but still had $16mm on the balance sheet when the transaction was completed.  So it is hard to argue that the SAAS model if done right can be capital efficient and offer tremendous growth opportunities.  In my mind, there are two ways to look at SAAS offerings – vertical market applications or horizontal plays.  Of course the challenge is that many vertical market app plays may not be big enough and the horizontal plays have probably been done already and are quite competitive.  All that being said, I am still quite interested in looking at companies offering a SAAS platform for Prosumers and SMBs.  If you have any of these types of companies that you want to show me, I am all ears.  I love the model and numbers like this show that the SMB market is really ready for these types of offerings.  As Brett Caine, head of Citrix Online says:

"Companies such as Citrix Online and and lots of others are starting to demonstrate in a very real way that companies of all sizes are able to use services to meet their needs in a cost-effective manner," Caine told me. "I think SMB has fully embraced the services model. There’s no doubt about that. Companies of all sizes have started to seriously embrace the software-as-a-service model."

I know I am preaching to the choir as none of this is new, but I must admit that the growth is pretty impressive.  As you know, SAAS will only get stronger as broadband penetration increases, as our wireless devices gain more processing power and better connectivity, and as the tools to access, share, and deliver timely data get even more powerful and easier to implement (think AJAX, enterprise mashups, lightweight integration with other apps, RSS for simple data delivery).

Going back to the earlier point on deciding to hold and go public or to sell at that time, with perfect information it is easy to conclude that we should have held on to the company and continued building it up.  However the decision is not that easy as there was lots of uncertainy at the time – we were only a two trick pony at the time and had not launched GoToMeeting and did not know how successful it would be, we did not have a sales channel to leverage like a Citrix, the IPO window was virtually shut for 2 years and we did not know when and how big you had to be for it to open (Google was one of the few Internet companies to go out in 2004), our growth rate was slowing while our subscriber churn was slowly increasing from just the remote access product, and the price was quite attractive.  Once again you can always question your decisions looking back with perfect knowledge but I can honestly say that everyone still feels that we chose the right path given what we knew in 2003.

Why cash is king

Oftentimes I am asked what my plan for exit is when I invest in a company.  Sure I have a plan when I invest, but it is impossible to predict the future.  The best plan in my mind is to make sure that any company we invest in has a tremendous market opportunity with a real business model and high operating margins that can eventually generate real cash flow.  As an entrepreneur, it is important to invest for the long term and not make short term decisions because you think you will be acquired (see an earlier post – Companies are bought and not sold).  Ultimately what will give you the best chance for success is focusing on the things that you can control – building a real business with a real economic model that can generate cash from internal operations vs. through external financing.  Yes, this is easier said than done, but when this happens you can do things like Bob Parsons, CEO of GoDaddy, recently did (via Techmeme)- pull his IPO.  As he discusses in his blog post:

Why I decided to pull our IPO filing.
You might ask, why, if Go Daddy’s situation has never been better, did I decide to pull our IPO filing? There are three reasons for doing so:

1. Market conditions
2. The Quiet Period
3. We don’t have to go public

Market Conditions.
The state of the stock market for an IPO is as uncertain as it could be. In fact, the USA Today published an article that IPO stands for “Investor Pain Overload.”   This is due, in large part, to the overall "bearishness" in the market.

Consider the situation from a global perspective and follow it all the way to Wall Street.
We have war and escalating hostilities throughout the Middle East, with no end in sight. Oil prices are skyrocketing. Tech stocks, in particular, are once again taking a beating on Wall Street, due in part to some investment banks cutting their ratings on the U.S. technology sector. Rising interest rates have played a key factor. Their steady rise over recent months has put adverse pressure on stocks overall.

In a bit of irony, last week when the SEC informed us our filing was accepted as being ready-to-go, market conditions were a terrible mess. In fact, inflation worries, say analysts, are bleeding into the tech sector. For all these reasons, I liken the timing of us getting the ‘green light’ to a person being told his car is in perfect condition just before it’s about to be driven into a wall.

I don’t expect market conditions to correct themselves for sometime.
I feel we owe it to ourselves to withdraw our filing until better and more stable times arrive

What if you were a cash cow and nobody noticed?
This seems like an excellent time to address an issue that has bugged me since the moment we filed our S-1.

After we did our filing, I was surprised that not one journalist took the time to look at our cash flow statement to report our actual results. Instead, each and every one of them hastily reported that Go Daddy filed to do an IPO and that we had never turned a profit. Not one of them took the time to look at our cash flow statements to see that we generated significant operating cash flow during each reporting period.

The accounting method we are required to use.
Because sells domain name registrations, we are required to use an accounting method that is ultra conservative.

So one of the principal reasons that Bob lists for pulling is that he doesn’t have to go public because his company is a cash cow.  When you print cash like GoDaddy, you can control your own destiny.  While the company doesn’t look profitable on an income statement perspective because GAAP requires GoDaddy to recognize a domain name registration over the effective period of registration, GoDaddy is in a wonderful cash position because it collects the cash upfront when someone buys the domain.  This is quite similar to a lot of SAAS oriented businesses that may sign up customers for one year contracts and collect the cash today but recognize the revenue over the life of the contract.  When these types of companies grow quickly GAAP numbers may not tell the full story.  And as I am sure many entrepreneurs know, you can’t spend GAAP Net Income but you can spend cash.  As Bob Parson summarizes:

To date, Go Daddy has been completely self-funded –we have been cash flow positive since October 2001, and – whether anyone has noticed or not — continue to generate healthy cash flow from operations. We’ll manage just fine without the IPO money — thank you.

When in doubt, remember cash is king.

The myth of the Rock Star CEO

Attraction to fame is part of our culture.  There are dozens of magazines, tv shows, and websites devoted too all things celebrity.  This attraction to fame also extends to the business and tech world as well – bringing a household name to your company can instantly elevate the perceived status of your business.  All that being said, I personally have a serious problem when anything related to fame creeps into personnel decisions for an early stage company.  Too often, when doing a search for a CEO, I have heard the term "rock star" thrown about from many a venture capitalist and entrepreneur.  I need a "rock star" CEO that can take us to the next level and bring instant credibility to my company.  Trust me, I am all for bringing in a "rock star" executive to run a business but in my mind it all comes down to what one’s definition of a "rock star" is.  Is your "rock star" a big name and cover boy on a magazine, key note speaker at many a conference, and a person who happened to catch the Internet wave at the right time and translated that into tremendous financial success?  Or is your "rock star" someone that is appropriate for your business, meets all of the job specs in your CEO target profile, possesses leadership skills and experience working at large and small companies helping launch new products into new markets successfully, and has the hunger and passion to work at your company.? If that candidate happens to meet both definitions of "rock star", then you are in great shape.  However, if you are making a decision more because of the candidate’s big name than you better think twice.  I am not going to go into a full dialogue on the hiring process but I suggest seeing an earlier post where I discuss that coming up with the job specification or target profile is one of the most important things to do before emabarking on any search.  Once again, the point I am making here is to not make a hiring decision just on the name of a person but to do it for all of the right reasons.  A friend in LA once told me that one of the keys to success in his business was to not get starfu**ed. I suggest the same when it comes to hiring your next CEO or key executive.  You are probably better off hiring the CEO who has lots to prove and who is going to be the next "rock star" than one who already is.