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):
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.
- 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.
- 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!