Software as a Service (SaaS)

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.

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While innovative enterprise software solutions are still needed, there is a dearth of funding for new enterprise-targeted software companies within the venture community. Why? Because enterprise IT  - the target market for these solutions – and the incumbent enterprise IT software providers (e.g. Oracle, SAP, MS, IBM, etc.) have conspired to build a virtually impenetrable gauntlet for start-up software companies to overcome. If you – the start-up that is – are not part of a ‘blessed’ corporate architectural standard you will find selling your innovative enterprise software solution a very tough slog. You will bear the burden of extended sales cycles, high sales costs and increasingly smaller budgets already spoken for by the big brands.  » Read the rest of this entry «

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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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.

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Market Overview

The enterprise software market, which includes a diverse set of software for different functions such as: HR, Sales, Marketing, Finance and IT is a mature market (with a range of 2% – 10% compound annual growth rate). This market is dominated by just a few global brands such as IBM, Microsoft, Oracle, and SAP. IT budget constraints and software complexity make it difficult enough for companies to support and maintain their current enterprise software let alone allow new vendors to enter the mix. As a result, IT organizations have created extensive policies to block new entrants, making it extraordinarily difficult for recent independent software vendors (ISVs) to break into the enterprise market. This, coupled with the high go-to-market cost structure of an enterprise software company has made the enterprise software market a relatively uninteresting investment area and caused innovation to stagnate in this field over the past decade. However, all of this may be poised to change due to Software as a Service (SaaS).

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