Ideally, a mixture of growth and profitability would be nice. We...

Ideally, a mixture of growth and profitability would be nice. We seem to agree on NEA's future path, except on the issue of what point on the growth-profitability spectrum is optimal, which would differ from person to person.

I was involved in the development of a SaaS business, and it took four or so years to become profitable, and thereafter it soon became very profitable. I think you will find that experience an interesting story that is relevant to NEA and SaaS generally, so here goes.

In the 1970s, before the acronym SaaS was coined, I joined a computer service bureau. The firms' norm was to sell application services based on prewritten software modules that needed minor tinkering for each customer. Each new customer paid a set-up fee, and agreed to a 3-year contract. The software used long files divided into set fields, which impeded flexibility, and though a small programming change could handle a new customer's requirements, it meant each customer used a unique set of program files, and had to be managed by people familiar with the application programs, and who had sufficient programming experience to tinker with the logic, and understand how earlier programmers had tinkered with it.

I was involved in introducing a new service that required building an application suite that allowed all customers for that application to use a common suite of programs, and multiple customers could be bundled into common periodic batch runs, thus lowering the cost of computer operators and computer time. At a relatively low cost we hired a few installing and service management staff with no programming skills to manage the application, and so the ratio of that cost to revenue was very low. Because it cost so little to install new customers, we did not charge a set-up fee. Partly for the same reason, we did not contractually bind customers to any term – we relied on retaining customers by the quality and value of what we delivered. We also hired less computer-savvy sales staff on a 50% lower commission rate than was usual for our other business, and the time lapse to close a sale was very short, some on the first sales call.

Strangely, a significant success sprung from re-engineering the software about three years later. I overheard the words “many short records” in the banter between two men nearby about a visit one of them had made to a small software house in England. Those three words were enough for me to advocate the complete rewriting of the application to reduce internal: data keying;; computer operating and report dispatching mistakes that bugged us. Although the re-engineering was justified on inward looking considerations, the new architecture made introducing new features easy, which helped marketing, service upgrades and customer retention – an unintended but huge bonus.

Within a decade this service became the firm's major money spinner. The customers who had subscribed on a non-committal basis were still with us, except a single-digit few who withdrew for reasons like ceasing business, or being integrated into larger firms that had facilities to handle the service we provided. The programmer who built the second version of the software obtained another role, but for a thousand dollars or so a year that we slung to him on an piece-meal basis, he introduced the updates and changes that we needed. Our major competitor required a team of programmers to manage its system, which was much more rigid.