Software as a Service (SaaS)

Trying to determine which companies will emerge to be the future leaders in the cloud computing market is still fairly difficult. A poll taken by Saugatech last year revealed that 51% of the respondents  “didn’t know or weren’t sure which company would be the next ‘master brand’”.

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). » Read the rest of this entry «

I recently caught up with Cary Platkin. Cary is an attorney and more specifically was the in house attorney assigned to the CRM On Demand  & SMB divisions I ran at Siebel Systems. Cary was instrumental in developing Siebel’s CRM On Demand Service Level Agreement (SLA) and helping me and my organization negotiate many Siebel CRM On Demand contracts. 

I really enjoyed working with Cary because he acted as a member of my management team; he first focused on the business objectives I wanted to accomplish and then applied law to help me accomplish those objectives. He also helped me negotiate through a minefield of sticky issues like Vendor Specific Objective Evidence (VSOE) for revenue recognition and managing SLA issues.

Cary now has his own legal practice, Platkin Law,  and one of his specialities is helping SaaS startups. I asked Cary if he wouldn’t mind addressing a number of common legal issues that SaaS companies are faced with and he was kind enough to oblige.

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Recently, I was interviewed by ReadWriteWeb about investing in enterprise applications. The following is a link to that interview.

Investing in Enterprise SaaS

The following article was published in the WSJ today. I think it captures perfectly the issues we’ve been discussing on this blog.

Tech Giants Ramp Up Their Online Offerings

(From THE WALL STREET JOURNAL)

By Ben Worthen and Justin Scheck

The recession is forcing technology heavyweights Oracle Corp., Hewlett-Packard Co., and SAP AG deeper into a low-profit business that the companies have traditionally resisted: selling online software. As businesses look to cut costs many are turning to Web-based software, which saves companies from having to buy or maintain expensive back-office computers.

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One of the key issues that concerns investors and management teams alike vis a vis the SaaS business model is its potential to consume a large amount of capital until finally reaching profitability. Many people have written about this topic, including me.

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.

» Read the rest of this entry «

In my last blog entry, I asserted there has been a dearth of start-ups in the enterprise software market for at least the last 5 years. According to VentureSource, from a high of 506 enterprise-oriented software start-ups securing a Seed or Series A round in 2000, only 201 new enterprise-oriented software start-ups were funded in 2008 and the vast majority of those used a SaaS, PaaS, or IaaS business model. Very few traditional model enterprise-oriented software companies were funded at all, the notable exception being in enterprise search and analytics.

As a result, large software companies whose innovation/growth strategy has relied upon a steady stream of start-up company candidates to acquire may be faced with a shortage in the not-so-distant future. Consequently, companies that have traditionally relied upon their strategic software providers to deliver innovative new solutions to enable them to further optimize back office and front office operations will suffer. 

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By now, those of you who’ve read my previous blogs realize I tend to only post something when I think I have something interesting to say. Unfortunately, the empirical data suggests that this doesn’t occur with great regularity! It’s my hope, though, since you’re investing your valuable time reading this that I am providing something useful to you.

With that, here are my latest thoughts that pertain to ‘process work’ and ‘knowledge’ work and why I think the software industry has done a reasonable job addressing the former and has until recently let down the latter. Let’s start out by defining the two terms.

I define ‘process work’ as those sets of predefined actions that a person must perform in order to accomplish a business task. These include things like: placing an order, posting a transaction to the general ledger, entering a customer’s contact information.

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This is a follow on to my post on July 18th, 2008 titled “Does it Really Take $100M to Build a SaaS Business? Say it ain’t so, Joe!”. As part of some research I’ve been doing, I wanted to dig into the actual amount of capital it takes to make a successful SaaS company.

Wachovia Securities issued a report in May 2008 on the state of the SaaS market. On page 25, it shows amount of capital paid in prior to an IPO for 18 out of the 28 public SaaS companies. Here is that list below:

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Sarah Lacy, a reporter with BusinessWeek just issued this article about On Demand/SaaS businesses.

I had an opportunity to meet and get to know Sarah in 2004 because she did a long story about me and Siebel’s entrance into the OnDemand market.  I have a lot of respect for her and her opinion. However, I take issue with a few of the conclusions one might reach by simply reading this article and taking it at face value.

On Demand or SaaS isn’t a panacea, it’s a business model. Companies won’t succeed simply because they are SaaS-based. You still have to build a compelling application that solves a real business problem that people will really use and pay money for.  However, what the SaaS model has done is to give customers the ability to try a few seats and then “walk away” with relatively few sunk costs when a vendor fails to deliver real business value. Under the traditional enterprise model most customers needed months/years to do a pilot — which seldom gave them a complete picture - and once they committed they were committed forever because of the psychological and financial investment. So big projects like Oracle, PeopleSoft, Siebel, etc. rolled on even when it was clear that the customer wasn’t happy with the expense or the value.

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No one has ever accused entrepreneurs of being stupid which is why almost every new B2B software company emerging today is SaaS-based.

This is good because trying to build a software company using the traditional enterprise software model is just too difficult and expensive. Over the past 15 years, enterprise IT has developed a gauntlet (e.g. internal architectural standards, purchasing processes, etc.) that prevents all but the largest brands (e.g. IBM, Microsoft, Oracle, SAP, etc.) from selling to them.

So, the only way to sell to these companies is to bypass IT — at least as much as possible — and go directly to line of business owners. And, since the SaaS business model obviates the need for IT and is success-based (customers can cancel any time) business leaders in these companies are becoming more open to using these solutions for non-mission critical functions. This is primarily why SaaS holds such promise for new and innovative start ups and their investors.

That said, SaaS isn’t a panacea for success for these new companies.

» Read the rest of this entry «