Why managers – and investors – prefer Software as a Service companies
Why should we care about the current crop of acronyms and buzz words: Software as a Service/SaaS, On Demand, Cloud Computing, Web Apps?
09.11.2009 – Why should we care about the current crop of acronyms and buzz words: Software as a Service/SaaS, On Demand, Cloud Computing, Web Apps?
Do they represent a paradigm shift in how we use computers to improve the speed and efficiency of our work? Or are they just the latest way of selling an incrementally better solution that puts processing power at the fingertips of end users?
I look at this question not as the CEO of a SaaS company (BasicGov.com is a cloud computing solution for cities and local government) but more as an investor of my time and other people’s money in SaaS and Cloud Computing deals. What I see is that investors prefer SaaS companies because they can be managed better than traditional software businesses. On that basis alone we should all pay attention. SaaS is not a fad.
As an investor I take risks. I sift through deals to find the businesses I think will win; I convince myself and others to bet successively more money on each deal – first hundreds of thousands, then millions of dollars. Each larger bet on a deal should be made with more information about how a company is performing. Either the performance of a company meets plan with more funds invested and life is good; or, performance doesn’t match expectations, serious conversations begin, and the funding spigot starts getting turned off. The problem is that with traditional software businesses the information tracked by management and relayed to owners may be dangerously out of date or may hide the true performance of the company.
What’s so different about a SaaS deal for an investor? Visibility. We can see precisely how well a company is doing because week by week – even day by day – we measure almost everything. We have key performance indicators that track every aspect of a SaaS company’s performance from Marketing ROI’s, progress up the Sales Learning Curve, Customer Acquisition Cost, “Magic Number”, Committed Monthly Recurring Revenues, Churn, Payback Period etc. Why is this different from traditional licensed software? Because with SaaS you’re building and funding an ongoing stream of income, whereas traditional software licenses produce lumpy revenues around initial sales and major upgrades. There shouldn’t be sudden surprises with SaaS. For more details see this great post about SaaS metrics. http://www.buildasalesmachine.com/2009/03/bessemers-top-10-laws-for-being-saas-y.html
Bottom line: if a software company follows a SaaS delivery model, it’s much easier to for management to tune the business and for owners to monitor their investment. And that’s why financial markets – including acquirers – place a premium on SaaS deals that have a proven product in the market. See this recent update from Corum that includes SaaS valuations
http://www.worldfinancialsymposiums.com/images-for-email/SanJose09/Valuation_Update.pdf
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- Bottom line: if a software company follows a SaaS delivery model, it’s much easier to for management to tune the business and for owners to monitor their investment.
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