May 17, 2010  |   

“the emergence of Software-as-a-Service (SaaS) is currently the single most important trend in the software industry and that this tectonic shift in the global software ecosystem is just beginning.”

In 2008, just two years ago, Bessemer Venture Partners wrote this in a widely circulated article called, “The 10 laws of SaaS and Cloud Computing”.

A year later in 2009, Mint was acquired by Intuit for a handsome $171M. The Consumer SaaS startup was only 3 years old at the time of acquisition. Its runaway success nearly burst the SaaS meter right off the charts.

So what is this SaaS stuff? Software as a Service, or SaaS for short, is a software delivery/distribution model. The software is hosted on a server and delivered as a service. Users can access the software anytime, anywhere via a web browser. They don’t have to install anything on their computer or worry about upgrades and maintenance.

I have spent the last solid year working on a SaaS application for the real estate industry. Up to this point it has over 12,000 programming hours in it.  This is my 2nd time working for a startup company building a SaaS application. SaaS provides the balance of building a high-tech venture with exponential growth, with a feasible sales model in a recurring revenue subscription service. I truly believe this a wonderful business model to build and sell a company around.

As an added advantage, the company is usually agile and can pivot quickly to refine and improve business and revenue models.  “There are lots of aspects a SaaS venture can tweak like pricing, packaging/features and trial duration”  Dharmesh Shah, founder of HubSpot notes. Side Note: Shah is also an investor and advisor in a local Louisville cloud computing company called Backupify.

Enterprise vs. Consumer

There are also enterprise SaaS companies that service businesses specifically. Examples of enterprise SaaS companies are Saleforce.com.  Consumer SaaS companies offer services to the general public. Examples of Consumer SaaS companies include: Mint, Flickr, and Dropbox.  Interestingly my latest venture, Uvestor, is a combination of both models using what we have termed a “top-down and bottom up strategy” for users.

Bessemer Venture Partners is a top venture capital firm and one of the most successful SaaS investors ever, with multiple company IPO’s.  Research on their portfolio companies they have invested/guided has shown several interesting trends.

  • A company needs an average of $35M in capital, versus $20M for a similar license company.
  • It takes on average 6 to 7 years to get to a liquidity event of IPO or acquisition.
  • It takes 70% to 100% more capital to fund an enterprise SaaS company to liquidity.
  • It also takes enterprise companies 2 to 3 times longer to get there.

Still, there may also be a great opportunity to take an enterprise model to an IPO. Bessemer VP has taken NetSuite($126M in venture financing), DemandTec($66M), Salesforce($61M) and SuccessFactors($45M) all to the proverbial promised land of an IPO. These are all Enterprise SaaS companies.

Consumer models on the other hand, are not usually great for an IPO because of their likelihood of being a freemium or ad-based business model. Companies like Mint, only (note the word only) raised $32M over 3 venture rounds before getting acquired by Intuit for $170M. Still a nice win, but not an IPO.

Subscription Models

The most common SaaS revenue model is subscription, where software is sold on a subscription basis, usually monthly, quarterly, or annually. Most companies use a subscription model provides a predictable revenue stream. On the other hand, the fees are received in a smaller amount on a recurring basis rather than a lump sum upfront. It often takes multiple billing cycles to recover customer acquisition costs.  To summarize; it takes time to get sales up and humming, but once they are going, they can provide excellent returns. In addition, the predicable revenue stream makes them easy acquisition targets.  Bessemer said this about subscription model:

“It can be argued persuasively that SaaS is a lousy business model because costs are front-loaded and revenue only arrives in modest monthly or annual payments. However, as we know from the cable industry, subscription businesses can be very profitable over time.”

Bessemer also notes that most SaaS businesses consume more short-term cash if they start growing faster. So they need “a comfortable cash cushion” and they need to “weigh forward investments carefully.”

Dually noted guys.  Thanks for the heads up.