TechPulse 360

Speaking at last night’s SDForum‘s town hall event on venture capital investment in software startups, venture capitalists from Morgenthaler and Shasta Ventures want to see software-as-a-service (SaaS) or enterprise Cloud computing startups reach $10 million in sales before considering investing in it.

“What we’ve learn over the last 5 years is that SaaS companies take a lot longer to get profitable that what most VCs plan on. And a lot of these SaaS companies can hit $10 million in revenues and then they hit a ceiling. And so we’ll go very early stage in a few things but things like SaaS where we learned that lessons through the years – unless there’s an extreme hockey stick ramp – we’ll wait until they hit that [$10 million] mark,” explains Morgenthaler Ventures principal, Rebecca Lynn.

And to further make her point, Lynn adds:

“There’s just a lot of expense to get that momentum going. But if we see something as compelling as Salesforce that is taking off like wildfire and virally adopted, that would be an exception. in general, what we’ve seen in SaaS is that they could be very good companies but is sort of a slug up to a certain point.”

However, cloud startups can break that $10 million ceiling by having quick sales cycle, as Shasta Ventures, Evan Liang explains:

“What we’ve seen about this $10 million ceiling is wether or not that company can be very crisp in their value proposition and have a very repeatable sale process. It seems that if you have a great founder, he can personally bring himself to a certain revenue, but if you can’t build that sustainable, scalable salesforce that’s when they hit the wall.”

For Shai Goldman, who co-manages Silicon Valley Bank Capital‘s Venture Exchange program, the cloud startups that are doing well do telesales and use a lot of self-service features to accelerate the sales cycle rather than having a lot of salespeople out there trying to sale one company at a time. “I’ve seen companies with $1 million revenue run-rate, meaning you have to hit a $100,000 in revenue or so and growing, and at that point they can raise a series A,” said Goldman.