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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Vendor Perception of the SaaS Platform Landscape

Mar 28, 2007 by Matt Ammerman

We’ve written quite a bit here about Salesforce’s Apex… and, admittedly, we’ve taken a somewhat critical stance on it.  Questions of identity crisis and ambiguity have boiled down to “Is it a SaaS platform, or a CRM platform? Is there a difference, and does it really matter what they call it as long as it is what I need?”  Frankly, I don’t think Salesforce has done a clear enough job defining what it is, and what it isn’t.  If I simply relied on their homepage description of Apex:  “A ground-breaking platform for customizing and integrating CRM, as well as developing and deploying brand-new applications, ” I might chalk this up to semantics – but understanding how the Apex technology stack works, one gets a better understanding of how closely tied it is to the Salesforce.com application codebase.  This satisfies part one of their description – but the growth of Apex as a SaaS platform vs. CRM platform will rely heavily on how far it can deviate from the Salesforce.com application.  This, of course, remains to be seen.

As SaaSBlogs and pretty much the rest of the SaaS blogging community (SaaSWeek, Phil Wainewright, Jeff Kaplan, among many others) took note of last week, Opsource announced the Optimal OnDemand 2.0 SaaS Platform.  Opsource really caught our attention with this one because of the way Optimal OnDemand 2.0 seems to quell some of our contentions with Salesforce’s Apex platform concept and other ‘niche’ platform concepts to date.  Opsource’s core competencies have been in the hosting infrastructure and provisioning realm, but with OOD2.0 they are introducing value adds further up the stack that fulfill SaaS hosting requirements (read: vendor pain points).  It’s a tremendous boon to the notion that to build robust SaaS applications, vendors will rely on platforms that provide general purpose technological and business value rather than platforms with a bent towards a particular vertical market or spawned from an application codebase. 

The introduction of OOD2.0 is big not only because of its impact, or dent, in relative size to the landscape of SaaS platform offerings, but because of how much it contributes to the growth of the landscape in terms of overall value.  Given that the landscape is, at least for now, shaped by a veritable combination of niche platforms and newer large scope general purpose platforms such as Opsource’s OOD2.0 and Apprenda’s platform offering - which type of platform has more perceived value to the ISV?  For instance, if I aim to build a project management application, should I utilize a proprietary hosting platform that offers a toolset strategically designed for project management applications (perhaps even built from one) but is limiting in terms of scope?  Or do I want to host my application on a general purpose platform that provides multiple tenets of SaaS as a base but does not intend to provide toolsets for strategy-related aspects of the application?

A better question at this stage is whether not this type of question is perceived as one of semantics or of real technical merit.  If you’re currently building a SaaS application, or simply doing research for a future project, I’m interested in learning where your search has taken you across the unfolding landscape, and where you’ve seen the most value in terms of SaaS platform offerings.

 

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Is Salesforce.com’s Apex a Platform?

Feb 6, 2007 by Matt Ammerman

It’s been a few months now since Salesforce.com introduced Apex to the world, and we’ve all had ample time to digest the concept, analyze it, debate about it, and just generally figure out our own positions on the proposition.  One thing’s for sure, the announcement of Apex brought the total level of industry ‘saas platform’ buzz somewhere into the realm of, oh, stratospheric.  Salesforce.com, of course, should be commended for this.  But now here we are roughly five months later and the landscape for SaaS in the enterprise software market, regardless of Apex, has grown and changed drastically.  Platform players have emerged, some having SaaS platform offerings in development long before the Apex announcement.  Some pure play SaaS application vendors are backpedaling to attack the platform need.  Some platforms formed through partnerships between partial solution providers.  Although we may use the term ‘platform’ for them all, there are decidedly different approaches to the concept, even this early in the game.  So now that the field has widened we can frame Apex against a broader notion of SaaS platforms, their requirements, and the different approaches being taken to provide SaaS enablement.  It is time to re-examine our initial response to Apex.  I wonder, is Apex really what SaaS vendors need?  In fact, I dare ask: is it really a platform?

As has been the case before, Salesforce’s own marketing messages have kindled these kinds of questions in my mind.  The kind of questions that make me furrow my brow and think “Just what do they really mean by that?”  Take, for example:

1. George Hu, Salesforce.com’s chief marketing officer said during a keynote speech to an audience of developers: “Go out and create the next Salesforce.com” 
2. A press release dated Jan 16 of this year reads “With Apex, Anyone Can Create the Next Salesforce.com ”
3. And you know I’m not going to leave this one out: Speaking to an audience of customers, CEO Marc Benioff said “We want you to be the next Salesforce.com” 

Sure it seems like a kind-hearted message with success written all over it, and it is undeniably unified in its presentation.  But now couple that mantra with the technological implementation that is Apex and here is where the meat of my questions arise.  According to their own Apex landing page, Salesforce.com wants you to create the next Salesforce.com using the ”same tools that salesforce.com’s own development team uses to build” [salesforce.com].  Besides being a lot of Salesforce.com’s in one sentence, this seems like a cleverly veiled way of saying “we’ll let you build the next Salesforce.com, but no better.  And we’ll keep you from doing this by giving you only the tools that we give our own application developers (or gave them months ago)… who you may ultimately be competing with.”  Remember, a good deal of Salesforce.com’s AppExchange apps are indeed of their own making.  See, this way Salesforce.com’s own developers define a ceiling… a guarded gate through which the ISVs they are ‘enabling’ cannot pass through.  You see, you can’t really create the next Salesforce.com; you may be able to create what Salesforce.com is today.  Tomorrow Salesforce.com will have progressed, and then you can try to be that.  Sound fun?  Sound endless?  By bringing in developers through Apex, Salesforce.com is swallowing competition in an enterprise application market that it is certainly not abandoning.  Is Apex simply a vehicle for making sure that Salesforce.com stays ahead of the game?  After all, if you outgrow or otherwise find little need for the tools provided to you by Apex, you pretty much have to dismantle your application and start over on a different technology stack - putting you far far behind.  Sounds kind of Borg-ish to me.  Come to think of it… didn’t we talk about the risks of this thing called lock-in before?  In the case of Apex we might be talking about lock-in through assimilation!  Heck, you even have to learn the Apex language.  I rest my case.

In all fairness, an answer to this question may require a solid grasp of the definition of ‘platform’, and in the context of the SaaS world this definition is constantly being tugged at and remolded.  However, here’s something to start with:  I propose that a true SaaS platform, one that will in fact revolutionize the industry from the perspective of the ISV and end user alike, is not a body of technological implementation that binds and assimilates and attempts to lead by example (Ahem. “We want you to be us.”), but one that can better be likened to the traditional concept of the platform that is used for elevation – not of the platform itself, but of those that stand upon it.  Yes, I am saying that a SaaS platform must get out of the way of the applications, and likewise the ISV business models, it enables.  ISVs will find true enablement through a platform that serves only one purpose, and does it well – to make the development and delivery of robust enterprise SaaS applications as easy as writing software and delivering it on premise.  To elevate, or enable, without demanding explicit recognition from the application or those that use it meets the true definition of a platform. A platform is a very humble, simple, and oft overlooked thing - yet a well-engineered platform silently keeps entities aloft that are many times its size.

And so I turn it over to you:

Is Apex really a platform?

 

*** UPDATE 2/7/07 9:56am ***

Marketing Consultant Joe Bentzel wrote a similarly-themed article a couple of weeks ago.  This is terrific further reading: Salesforce.com APEX: Platform or ‘Platformula’?

 

 

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