It's a Smule World After All

Having realized a 30X gain on my 1997 investment in Tumbleweed, I'm delighted to be incubating Jeff Smith's next venture, Sonic Mule. After taking Tumbleweed public, Jeff retreated to Stanford in pursuit of his doctorate in classical music; he then joined Bessemer as an EIR, where he conceived Sonic Mule (aka Smule). Jeff recruited Ge Wang (Stanford) and Perry Cook (Princeton) -- two of the world's the most prominent professors in computer-music integration and the inventors of Chuck, an open source language that processes and renders sound in real time.

When Jeff's team isn't cleaning out Bessemer's kitchen, they're churning out ass-kicking Chuck-on-iPhone (CHiP) apps. Sonic Lighter (now in the Campaign edition), Sonic Vox (read Apple's review), and Sonic Boom all exceeded our sales projections -- check out the Sonic Lighter's adoption curve in the video below (this is the coolest board update I've ever gotten).



Today Sonic Mule is releasing their latest and greatest app yet-- the Ocarrina. This is the first fully functional and expressive iPhone musical instrument. A true Occarina, it responds to breath, fingerings, and position. It is easy to learn but allows for nuance and mastery. And you can navigate the globe to listen in on Occarina performances around the world. Check out the video and then buy Ocarina for 99 cents.



And this one's for Legend of Zelda fans...


Update: "Smule has done it again," according to This Is How You Build a Great iPhone App at TechCrunch.

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The Prospects for SaaS

On Thursday night Bessemer's SaaS practice team Byron Deeter and Philippe Botteri hosted a CFO dinner at John Bentley's in Redwood City, where we discussed the prospects for SaaS in the context of a global recession. My squash gnocchi was delectable, but the portion size was stingy (a sign of the times). Fifteen CFO's participated, about half of whom work at Bessemer portfolio SaaS companies (Cornerstone On Demand, Intacct. Lifelock, LinkedIn, OneStop, Perimeter and Retail Solutions).

The mood could best be described as cautiously pessimistic. Despite hypergrowth in the SaaS industry, the outlook for 2009 is sobering. Among the 13 public SaaS companies, the multiple of enterprise value over current year sales has dropped from 6.6 one year ago to 2.2 today, shaving 60% off market caps year to date. Obviously the market expects growth rates to fall dramatically. SaaS companies grew on average 48% in 2008 but in 2009 Omniture will lead the pack with only 14% growth, according to Goldman Sachs uber analyst Sasa Zorovic, who joined us for the dinner. (Yes, Goldman's SaaS analyst is really named Sasa.)

With slower growth and expensive capital, SaaS companies need to adjust expenses to optimize for cash efficiency, not growth. It's especially important now to assess the profitability of new business, which is tricky in SaaS companies. For each customer, the inflows are the time-discounted billings including expected upsells to the point of expected churn. The outflows equal the sum of upfront sales costs and the time-discounted cost of service delivery and any sales cost for renewals and upsells.

Although we're planning for the worst,  we at Bessemer still believe that the shift to SaaS represents the most important secular shift in enterprise computing since the advent of client-server. The SaaS value proposition of reducing capital expenses as well as total cost of ownership should ring even louder as corporate budgets come under pressure. That's why we predict the downfall of software companies whose addiction to license revenue discourage them from embracing SaaS...

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