From English Prof to Tech Startup CEO: Steve Adams of Sabrix (Part 9)

SM: I actually think managed services are a trend the market has not quite started to understand. I think SaaS is going to start evolving towards a managed service powered by SaaS infrastructure. The reason for this is domain expertise.

SA: It is either industry expertise or some other form of domain expertise wrapped around the delivery method which will provide the next set of great opportunities for people in the SaaS space.

SM: How does the P&L structure compare between SaaS and a managed service?

SA: You know, I am shocked because from both a gross and an operating margin perspective we enjoy the same kinds of margins that we did in our traditional software business. A lot of that has to do with the amount of the process that we have automated. Scaling is in the technology, not in human beings. We still have our traditional on-premise business, which has the financial metrics of enterprise software where the target margins are in the 70%+ range. We are finding a similar set of margins on the managed tax side.

Because we are in a protected niche, there are not 12 other companies in the Valley funded to do the same thing. I don’t have to spend $1 of sales and marketing for every $1 of revenue, which is one of the tough parts of SaaS. When you layer on all of the other costs it gets tough to be profitable. The margins of our business, with our protected niche, means we can get to profitability without having thousands of customers.

SM: Are you profitable?

SA: Not yet. Our enterprise business would have been profitable without the investment we made in the managed tax service. Our target date for profitability is the end of 2009.

SM: What would be the steady state P&L? Will you maintain 70% gross margin?

SA: I think it might even be a little higher. Our operating margin will be 8-10%.

SM: How did you manage the financing of this company? When you arrived on the scene, was money in the bank or did you have to raise another round?

SA: The first round was in April of 2000. They had burned through most of the money before I arrived. In the process with my investors I talked about needing enough inside money to have 12 months of runways. They did an inside round, which was absolutely critical. Once we hit the milestones we did an external round in the first half of 2003, which is when Trinity joined us, and we closed that round in 60 days. We have continued to do up rounds since. The series D round was to fund the managed tax service initiative.

SM: Are you set now, or do you need more money?

SA: We have more money at the first half than we did entering this year, or entering 2007. The company has performed well and we have worked hard to be good stewards of cash. We did not do everything flawlessly, but we have always been good stewards of cash. We had a spend strategy that is based on achieving milestones and then releasing money to spend.

SM: Is this a company that is likely to go public in the next three years?

SA: I would agree with your time frame. If you had asked me that question in 2005 I would have said we would have continued to build value and it would have been an attractive acquisition target. When we added the managed tax service last year and validated the size and market opportunity, we realized we could build a standalone business that could make an IPO. That being said, I think we are now an even more attractive acquisition candidate.

SM: The whole outsourcing business needs to look at SaaS to get to managed service.

SA: It is a huge enabler. The only reason I get my margins is because of software automation. If you are a services company it is hard to get into the mindset required to be a product company. If you are a product company it is hard to build the DNA to be a services company. It is the same thing with BPO companies. If your DNA says ‘solve this through labor or wage arbitrage’, that is how you solve it. Now you can solve the same thing through automation and enjoy the same benefits. I agree with you, I think that is what the BPO guys need to be looking at.

SM: Great! I think it is a really interesting business. It is good nobody is paying attention, just stay focused and keep building.

This segment is part 9 in the series : From English Prof to Tech Startup CEO: Steve Adams of Sabrix
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