While at the application level, it’s easy to view Salesforce.com as the star of that sector, it gets a little murky as you move to other functional areas of the front and back office as well as down the overall cloud ’stack’. As with most nascent markets,  the market is highly fragmented: CoLo/Managed Services (e.g. Rackspace, OpSource, many others),  Infrastructure/Platform (e.g. Amazon, Salesforce.com, VMWare, many others), Tools (e.g. Salesforce.com, Corent, Serena, SAP/Coghead, many others), and some a mixture of 2 or more areas (e.g. Salesforce.com).

To make some sense of the trends, I attended a presentation last year by Bill McNee who is an industry analyst with Saugatech. I thought he did a particularly good job breaking the market down into sectors, segments and strategies. Here were some of his observations and predictions he shared with respect to the growth of cloud computing and SaaS at that time:

1. Core systems of record (e.g. Finance, HR and BI/EPM) are growing rapidly – both SMB & Enterprise are adopting.
2. International is beginning to grow.
3. Standalone applications is Wave 1, International is Wave 2, Workflow/Collaboration is Wave 3 and Measured/Monitored/Managed business processes are Wave 4.
4. Platforms are beginning to proliferate.
5. M&A will accelerate.
6. Customer satisfaction is generally quite high with high annual renewal rates.

Bill went on to say that their data showed that 70% of the companies with >100 employees would deploy at least 1 SaaS-based application by 2012. And, he believed that one of the biggest market opportunities would be SaaS-based BI/CPM which in 2008 represented about 17.3% market share and would grow to 40.7% by the end of 2010.

He also predicted that SaaS-enablement would lead to cloud development — which indeed is occurring. Salesforce.com’s announcement of Force.com last year and its latest quarter’s growth from that business is proving this out. In addition,  with acquisitions by companies such as SAP with Coghead last year and VMWare with SpringSource this quarter, we are now beginning to gain a sense for how this may play out.

For traditional software companies in the fight for ‘cloud’ leadership, the overriding issue that remains is the hostile business model that SaaS/cloud computing presents. Wall Street measures these companies by in-quarter revenue growth and margins. Deferred revenue and in-quarter expense are antithetical to those models. With Salesforce.com, they have been successful in selling to the Line of Business and primarily SMB’s (that’s where 90%+ of their business still resides). Selling a Platform/Tools to IT and larger companies is a big departure from that success. However, they recently hired some big sales hitters from Siebel Systems to help address that issue.

Here is some other data Bill shared with us based upon their market research polls:

1. 40% of large enterprises will seriously consider SaaS-based ERP, HR, order management, and procurement solutions.
2. 30% will choose a new next gen SaaS solution provider
3. By 2012, only 20%-40% of software will be sold under traditional perpetual license model

In support of this data, I  think we are beginning to see SaaS break into the back office — initially in SMB — just as Salesforce.com did with its CRM applications. Companies such as Host Analytics, SmartTurn, and Adaptive Planning are beginning to make  progress in an area that has traditionally gone unserved by the large enterprise ERP suppliers such as SAP, Oracle and Manhattan Associates.

However, even though we are beginning to see where companies are picking their spots to compete in the cloud/SaaS space, identifying the future master brand(s) out of this fragmented market is challenging. I would say, though, that the comments I made in a blog I wrote early last year titled “Global Market Leadership” are still germane to becoming the next ‘master brand’.  It may be one of the existing competitors we know about today or, in fact, it may come from a new entrant we have not yet seen.

That’s what makes this market so exciting.

SaaS companies are typically built upon a stream of relatively low cost subscription licenses, paid out monthly/quarterly/annually — even multi-annually. Unfortunately, for the vendor, the subscription model usually generates far less up front cash than a traditional ‘perpetual license’ software model. But, over time, the compounding effect of the SaaS model can build into a nice annuitystream — provided churn rates are minimized.

It is this up front cash differential that is the primary appeal of the SaaS model over the traditional software model with customers. However, this differential is also what makes the model vexing for the SaaS management team and the investors.

If we examine the income statement of a typical SaaS company, we find that the operating ratios are not that disimilar from a traditional software company that uses a perpetual license model.  Both require similar sales, marketing, engineering, SG&A, etc expenses. However, the SaaS company has the additional burden of absorbing the expense of delivering and managing the service.

The compounded problem of less up front cash and additional expense can make the SaaS model a challenge for the vendor. Therefore, in order for a SaaS company to be successful it must be very efficient in how it designs, builds, markets and sells its service.

Also, while the operating ratios of both models may appear to be similar there are some fundamental differences in how each generate revenue. In a perpetual software license model, revenue is a function of sales capacity. That is, revenue generation is driven by the number of fully onboarded and trained sales representatives. In contrast, SaaS revenue generation is a function of lead generation; sales capacity should only be added once it is determined that sales will be unable to keep up with total lead pipeline generation.

In a traditional software company, lead generation typically comes from 3 primary sources: sales, marketing and partners. We can debate the ratios but basically a traditional software company should expect the sales, marketing and partner organizations to each deliver 33% of the leads in each period in sufficient quantity such that there is an overall pipeline of 3x+ the total number of qualified opportunities needed to achieve the period’s revenue objectives.

In a SaaS model, given its cash constraints and dependency upon lead generation to drive revenue, it is imperative that the lead generation function be highly structured and optimized. 

In all companies, but especially in a SaaS company, the marketing function should be held equally accountable for revenue production as the sales organization; sales should be held accountable for “in period” revenue production and marketing should be held accountable for ”future period” revenue production – where “future period” revenue is in the form of contacts generated by any form (sales, marketing and/or partners) that are qualified and then converted into “sales-ready” leads.

In addition, rather than just the 3 primary lead sources discussed previously (sales, marketing and partners) one other lead source must be added. This critical lead source is “customers”. Done correctly, this is the lowest cost lead source and most valuable; there is nothing more credible than a customer who is willing to promote the benefits of your products. In a SaaS model constrained by cash, it is imperative that you harness this lead source and maximize its effect.

Here are two simple suggestions to help you leverage your customers in the lead sourcing/generation process: 

1. Make it easy for your existing customers to share with anyone else the output of your application. For example, the UI should enable a customer to send graphical reports with data generated by your application with the phrase ”powered by..”  at the top and bottom of the report.  And, you should enable/encourage the recipients to click on ”powered by..” which can take them to a landing page where you can serve an offer to trial the application. 
2. Create a community. There are a number of community applications out there (e.g. Jive, Lithium, HelpStream, HiveLive, etc.)  and you can pick any one of them that appeals to you depending upon the type of features you desire (e.g. ranking/ratings engine, chat, surveys, etc.). These applications enable you to embrace your customers daily, query what they like and don’t like about your products and to use them as mavens and/or super references. You can then use your community as part of your SEO/SEM strategy. On your landing pages, you can offer the prospect a trial and at the same time give them the ability to roam/query your community to find out whether your “marketing hype” matches up to reality. Nothing like a real customer to sell a prospect.

The bottom line is that in order to make the SaaS model successfully work for you – as well as your customers – you need to focus on lead generation. And, due to the cash constraints, you must be hyper-efficient in managing your lead sourcing/generation process. The key here is to harness the power of your customers. Without them, you will place the financial burden of lead generation primarily upon your company and potentially consume more capital than is necessary.

I have listened to hundreds of presentations from entrepreneurs looking for funding since I joined InterWest Partners. They all have one thing in common: the majority of the presentation is spent on the product they are building and the market they are targeting.

Similarly, when a venture firm does its due diligence, it spends a significant amount of time and effort speaking with current or prospective customers and analysts to gauge their level of interest, the importance to the business, ROI, usage rates, etc.

This is all very laudable.

However, if you were to perform autopsies of technology start-ups that have failed, I think you would find that most were able to build the products they said they would—and that the customers who purchased them received more than marginal utility from them.

So, if these companies were able to build their products and were able to find customers who used and liked them, why did they ultimately fail?

I believe that one of the primary reasons has nothing to do with products or markets. Instead, most of these companies went under due to their failure to create a recognized and differentiated global brand– a brand that linked their company and the use of their products with their customers’ success.

Global brands must be engineered – they seldom just happen on their own. It takes a management team that understands the value of building a brand and one that knows how to do it and is willing to invest a significant amount of effort.

When I think of great high tech brands, I think of those built by IBM, Microsoft, Oracle, SAP, or more recently Salesforce.com. Each of these companies invested heavily in their brands and their “brand promise.” When you think “SAP,” you think “runs my business.” If you think “Salesforce.com,” you think “No More Software.” Oracle invested heavily in PR and advertising for many years – and still does today – to build its brand as a leading provider of database and information technology.

So, if creating a global brand is important, what can you do if you’re a small technology start-up with very little cash to create a global brand?

Well, consider the example of Salesforce.com’s Marc Benioff. Marc created controversy by taking on the CRM Goliath at the time — Siebel Systems – even when his product was substantially inferior and he wasn’t focused on the enterprise market. He created conflict and drama through the use of his “No More Software” campaign and got the media to write about him at virtually no cost in order to achieve an unfair share of voice in the market.

It’s a good strategy. Technology journalists are weary of writing about speeds and feeds. If you can give them juicy content about your company’s plans to upset the status quo–with some credible evidence to back up your statements–you will get “free” press all day long.

As I wrote earlier, you must engineer your brand — and your brand objectives — into your day-to-day operations from the very beginning. You must measure yourself against these objectives weekly if you are serious about achieving these goals.
Here are some questions to ask yourself and your team to gauge your progress:

1. How many keynote speeches at major industry conferences were you and/or your key executives personally invited to deliver last year? Not panels, keynotes. You should be giving at least one keynote every quarter, perhaps more often, or you really aren’t relevant. If not, why isn’t your PR agency getting these for you?

2. Do the leading industry analysts regularly follow your space and are you in the furthest upper right hand corner of their charts? If not, what are you going to do about it? Achieving this position takes a dedicated effort by the CEO and key product and marketing executives. It won’t just happen because you build a great product.

3. Does your Web site support a community of your end users and partners with content, ratings and a way for the community to suggest new product ideas? Hosting a “User Week” is fine, but it’s only once a year. Today, you can receive customer feedback on your products and funnel it to your organization daily.

4. If you did a random survey of influential CEOs in your industry, would they know you personally and would they recognize your company’s name and products? If not, what are you going to do about it?

5. If you took a random sampling of your employees, customers and partners, would each of them use the same words to describe what your company does and its value proposition? Does every employee in your company know the corporate mission statement? Have you tested every customer facing employee to ensure they deliver the corporate messages identically? A global brand starts with consistency.

These are five things you and your team can do to start separating yourself from the rest of the pack. From my experience, the great companies never neglect their brands.

And if you’re still looking for funding, a good place to start paying attention to your brand is during your presentations to venture capital firms.