The SaaS Investment Landscape

Apr 27, 2007 by Matt Ammerman

Although many in the SaaS-choir have long since been sold on SaaS, it seems that venture capitalists are finally joining us.  Existing firms are padding their portfolios with SaaS companies.  More interesting, though, is the fact that firms are forming with core strategies focused on SaaS investment.  Why is this?  Perhaps the most definitive evidence comes from market research as illustrated in Phil Wainewright’s most recent article “Resistance fades as SaaS goes mainstream”.  Bullet points like ‘Adoption is surging‘, ‘Resistance is fading‘, and ‘Deployments are multiplying‘ instill great confidence in the minds of financiers. That’s right, as investors see more research from sources such as Gartner and Saugatuck indicating that SaaS is viable and sustainable, it becomes a much prettier investment picture.

As always, the proof is in the proverbial pudding:

Warren Weis from Foundation Capital says “Software as a service is clearly a very interesting area because of the ease of selling into these types of environments where users can use it without a big IT implementation … We have about 11 of these types of (SaaS) investments and they’re doing very well… we’re looking for new investments in that area.”

Jeff Horing from Insight Venture Partners says ”SaaS offers a more predictable revenue stream and lower research and development expenses to software vendors than packaged software products.”  He continues, “Overall, if you can build a successful company it’s a much better business model than license sales.”

Horing says he and other investors at his firm are skeptical about growth for companies looking to make their mark by selling enterprise software applications, as opposed to those that market the SaaS model.

VCs have had time to watch the progress of early SaaS companies.  They’ve seen stability and better yet, growth.  Evidence is found in the performance of these four SaaS companies over the past two years (CRM, RNOW, VOCS, and SVVS):

 
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It’s no wonder SaaS companies whet the VC community’s collective appetite. IPO valuations of SaaS companies such as SalesForce.com, NetSuite and RightNow Technologies have come in as high as 10X revenue (although not the general case)!  Now there’s a nice exit.

Obviously, SaaS investments come with considerations, both positive and negative.

The Pros

• Demand from the enterprise IT community
• Predictable and stable revenue
• Predictable cashflow and growth
• The market for SaaS is expected to grow to 25% of all new business software by 2011 (Gartner)
• SaaS is an easier sell than traditional packaged software
• See Wainewright’s article for more.

The Cons

• A longer time to achieve cashflow positive (longer development times and amortized revenue model)
• Higher startup capital requirements

What do you think? Are you looking to invest in SaaS companies? Are you planning any SaaS deployments within your organization? What’s holding your back? We would love to know your thoughts, share them though comments!

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SaaSCon Recap

Apr 23, 2007 by Matt Ammerman

Last week was SaaSCon 2007, the definitive conference for B2B Software as a Service (not to be confused with Web 2.0, or Enterprise 2.0, or Office 2.0).  The conference was at the Santa Clara Convention Center Tuesday and Wednesday.  For those that attended, the conference offered a wide spectrum of keynotes and workshops revolving around all aspects of SaaS – from SaaS revenue modeling to application architecture.  Sinclair has already mentioned an interesting analogy conjured up by Treb Ryan from OpSource.  Gianpaolo Carraro and Eugenio Pace from Microsoft’s SaaS team gave a detailed architecture overview of their Litware HR sample SaaS application.  Also of note, Apprenda unveiled details about its forthcoming SaaS platform, SaaSGrid.  Because we were busy at the Apprenda booth meeting hundreds of SaaSCon attendees, we had trouble finding the wherewithall to blog during the event in any consistent fashion.  Therefore, for those of you that were not in attendance, I’d like to offer an aggregation of others’ blog content about SaaSCon 2007:

Adventurista – SaaSCon recap

Marty’s Blog – Death By A Thousand Duck Bites

Dave Terrar (Business Two Zero)

(Note that in Dave’s post, he expresses a disappointment with the lack of blogging coming from the actualy event.  Dave, I agree.  And I’m sorry.)

Jeff Kaplan gives probably the most thorough roundup of SaaSCon on his blog.

Lee Thé from Application Development Trends provides a great analysis of some of the core offerings that were on display at SaaSCon, including Apprenda’s SaaSGrid platform.

These are a few of the interesting recaps from SaaSCon 2007.  There sure was a lot of information packed into a two day conference.  Perhaps too much (SaaSCon organizers – 3 days next time maybe?).  If you were there, and have written about the event please feel free to post links in the comments.  Do the same if you’ve found more blogging out of SaaSCon that I haven’t linked to here.  Thanks!

 *UPDATE* – Eric from Marty’s Blog wrote a great article yesterday that is born out of some of the concerns that smaller ISVs may have when exploring the larger enablement platform technologies.  These concerns – such as platform companies that introduce functionality that threatens their own ecosystem players – came up at SaaSCon frequently.

 

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Explaining SaaS Trust and SaaS Platforms Metaphorically

Apr 23, 2007 by Sinclair Schuller

Although SaaS is in and of itself of a unique and powerful model of software delivery, there is much to learn from industry’s that have produced either perfect or imperfect parallels. When I say ‘perfect’ I mean one with a distribution concept that provides a metaphor for SaaS, while ‘imperfect’ is more akin to an industry that has a similar psyche or has equivalent emotional requirements. During SaaSCon, I heard many metaphors and similes tossed about to help clarify what various aspects of SaaS are. Two particularly caught my attention – one was provided by Treb Ryan, CEO of OpSource, while the other came up during the keynote panel I participated in.

Treb had used the banking simile (which has been used before, but I think it highlights the psychological end user/provider nuances quite well) as an imperfect parallel, likening the psychological and trust issues experienced by SaaS providers to those experienced by the banking industry in its early days. He asked the question (I’m paraphrasing) “Do you feel safer with your money under your mattress or in the bank?” Granted, most of us would answer “in the bank”. However, at one time many people felt that putting money in the bank was unsafe – after all, who better to trust with your money than yourself? Someone could burglarize the bank, your money is mixed in with everyone else’s, etc. Once the populous got over the “trust” issues, a complete reversal happened. People recognized that money in the bank was far safer than keeping it at home – and so was born the massive industry we call banking. SaaS poses many of the same trust and security questions, and very much like banking, will prove to be the better model. Now, I’m not saying that “since it happened over there, it’ll happen over here” but it is easy to see that trust issues are by no means insurmountable, and arguably, if trust can be established with money and other liquid equity, I’m sure it can be established with software and data.

During the keynote panel, a question was asked by an audience member that I ended up fielding (again, paraphrased) – “Do SaaS platforms parallel the telco industry where value is controlled across the entire stack by the telco, or is it closer to the electrical grid where value is at the appliance level, which taps into the distributed power.” The question posed a perfect parallel because of the nature of electricity distribution. My response to it was that the electrical grid provides the best parallel for SaaS platforms – SaaS platforms are responsible for providing the foundational aspects of service delivery and management (i.e. “power grid”) while each application defines the actual value to the end user (where an application is much like an appliance). For example, if I toast bread, my derived value, although powered by electricity, is provided by the toaster oven. When a user uses a SaaS application built on a platform like SaaSGrid, the end user value is provided by the application. So where does the SaaS platform fit in? Well, your toaster comes with a power cord – an interface that encapsulates certain expectation. That power cord and any corresponding regulatory mechanics tap into the electrical delivery grid to make toasting bread possible. With respect to telco’s, value (in present form) is generally introduced by the telco and no-one else. Cell networks tend to be closed, and new functionality is introduced by the telco itself. That parallel is not valid – at least not with SaaSGrid; a platform’s goals should not be to monolithically provide value to the end user, but rather to provide all necessary delivery mechanics to the SaaS provider. SaaS providers – the appliance manufacturer’s – know what their respective customer’s want, and can deliver appropriately. The most important thing to realize in all of this is that most toaster’s do not come with their own power sources;-)

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Build vs. Buy and Economies of Scale

Apr 19, 2007 by Matt Ammerman

When formulating the architectural foundation for a SaaS application, ISVs will inevitably encounter the age old build vs. buy decision.  SaaS enablement is hot right now, giving vendors a plethora of options on the buy side. 

Nick Carr has an interesting argument in support of the buy scenario – specifically urging vendors to buy into a horizontally aligned platform serving multiple vendor-instigated verticals because issues arising with subscriber usage and economies of scale.  The example Nick gives is Intuit’s TurboTax online, explaining how the service from this system ground to a snail’s pace because of the mad rush of Americans filing taxes earlier this week. 

A similar example would be the usage peaks that a CRM application will experience at the end of each quarter as sales are tied up at a frenzied pace.

As an ISV, if you need to provide high availability service but that service is prone to suffer unusual high peak times, having ‘anticipatory’ hardware lying in wait can be quite cost prohibitive.  So what’s the solution?  As in most cases, aggregation of resources leads to economies of scale.  Platforms provide that aggregation, normalizing the usage spikes across many vertically-aligned vendor applications.  As Nick puts it, the only way to do this is by sharing the resources with other companies that also need high availability service but whose peak times are different than yours.  It is simply a matter of economies of scale, and platforms are able to achieve these economies through mass aggregation of requirements and management of resources.

Platforms like Apex and SaaSGrid aggregate infrastructure requirements, and taking the solution a step further by providing guarantees of service at any point in time without ISVs explicitly having to build out an infrastructure or request a larger slice of the computing pie during high volume times (unlike an MSP scenario).

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Live from SaaSCon 2007

Apr 17, 2007 by Matt Ammerman

Hello from sunny Santa Clara.  We’re at SaaSCon 2007 at the Santa Clara Convention Center today and tomorrow.  From the looks of the exhibit floor and the sound of the early keynotes this morning  there is plenty of opinion and information floating around. An interesting keynote was the ”Evaluating SaaS Infrastructure” keynote which described the challenges of providing SaaS applications from a “behind the curtain” vantage point.  More on that later.

The exhibition floor is poised to open up for the first of three showcase sessions in about fifteen minutes.  Apprenda is located at booth 410, and don’t forget Apprenda CEO Sinclair Schuller will be on the ‘Understanding Platforms and Ecosystems’ keynote panel tomorrow morning. 

We’ll be blogging as often as possible during the event.  If you’re in the Santa Clara area, hope to see you here!

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