Building an Ambitious SaaS Company: Taleo CEO Michael Gregoire (Part 7)

SM: I wonder how Louis was able to fund the company in 1999. I talked to a lot of SaaS company CEOs and all of them were turned down by the VCs. Yesterday, I was having lunch with Philippe Courtot, who you may know, is the CEO of Qualys. They do security as SaaS, and did $40M last year. Philippe Courtot had to personally buy out Bessemer (David Cowan) with $7.5M in cash to be able to keep executing on a SaaS model.

[I ended up asking the question of Louis himself, and here’s his response:

Louis: We raised three rounds of financing in the history of Taleo. The A round was done privately with our own money and a local Canadian VC Telesystem who had invested in my former software company. Six months into the company’s existence, early in 2000, we raised US $10M led by Omnicom in New York. It is true that most VCs on Sand Hill Road had turned us down as they were not convinced that a) CIOs of large companies would buy into the ASP (Application Service Provider) model, and b) that there was room for a best of breed HCM (Human Capital Management) play …

Our thesis was that the Internet was maturing fast in terms of performance and security, we could articulate a financially compelling value proposition for our solutions and more broadly HCM, and we had already proven the model with significant orders from Hewlett-Packard and 2 other larger companies. We did have more success on the East Coast.

Revenue in 2000 went up to $2.8M in subscription, but we exited the year at around $8M run rate, so growing very fast. By then the model had been demonstrated. In January 2001 we raised $25.5M lead by Bain Capital Ventures. The story was compelling and we had multiple offers; albeit our biggest issue was that we were raising a significant amount at the worst possible time, right after the huge market crash of April 2000, a time when no VC deals were getting done.

The key for us to raising money was our ability to demonstrate extremely well the financial return using a customer lifetime value model vs. our cost for selling and maintaining a customer over time.

Raising money is one of the hardest thing to do, especially for a software company that can only forecast breakeven around the $70M to $100M mark. In our case we had to demonstrate three things:

– that the ASP model was a much better model and that the future of the Internet (in 2000) would support it;

– that the larger players could not attack this model easily because they could not manage the transition to a longer term return recurring revenue model;

– that our economic model made sense and would provide a high value creation return for the shareholders.

That is what we did … and Bain made 8 times its money within 4 years … ! ]

SM: How much did Taleo spend to get to the pre-IPO stage? MG: Probably about $60M total.

SM: You took over the company right before its IPO, and the value proposition was talent management. What type of market landscape were you playing in at this stage?
MG: I still think we are in a nascent market. Most of the talent management systems are primarily first generation replacements with a lot of plain resume tracker systems, and what we have evolved into is a more broad, strategic view type of system.

We are now evolving into the next biggest thing in talent management – a unified talent management strategy. The whole concept of having all of your recruiting and recruiting processes in tune and tied with your performance management system is new. Both of those are multi-billion dollar markets growing at 17% compounded annually. We feel really confident that we are a market leader in the nascent stage of a very large market.

This segment is part 7 in the series : Building an Ambitious SaaS Company: Taleo CEO Michael Gregoire
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