Since everyone is interested in SaaS funding and valuations I thought it would be helpful to tell you about an interesting Cloud Computing investor panel I attended at the recent All About the Cloud conference in SF. The session was moderated by Jason Green from Emergence Capital Partners and was joined by Gary Hromadko from Crosslink Capital, Mark McNay from William Blair and Evangelos Simoudis from Trident Capital.

So what did they have to say?

The market has finally changed for the better

2009 was all about survival and the venture community did less than half the investments than in a typical year.

This year is now about growing again and current investments are more focused on companies that have weathered the economic downturn. Their investments are focused on changing the slope of these types of company’s growth curves, by concentrating more on sales and marketing.

SaaS and Cloud companies are leading the way

Consumers have been driving the adoption of easier to use Cloud-based solutions like eBay, iTunes, Facebook, Twitter and LinkedIn. They are viral and can reach critical mass very quickly because there are low barriers to adoption.

With SaaS, the recession has really pushed the advantages of a subscription business model and moving from CapEx to OpEx software investments. It’s like leasing your car rather than buying it.

Lean start-ups are definitely in. Almost all early stage software investments in 2009-10 are Cloud-based because it takes a fair amount of capital to fund SaaS firms and it takes a long time for them to reach profitability. One interesting comment was that later stage on-premise companies are now being asked about what their SaaS/Cloud strategy is for the future, because without it, they may find funding might be difficult.

What the VC’s are looking for

SaaS 1.0 focused on a company’s income statement, expenses and cash flows than GAAP reported financials. One important measurement is a company’s incremental contribution margins (gross margins), which is critical for SaaS. Companies needed to balance capital efficiency with building a business that can scale.

Investors are looking for unique business processes that can only be built or automated through SaaS or the Cloud. Emergence latest investments are pure Cloud-based companies that have viral qualities like YouSendit, the files sharing company and Yammer and the enterprise micro-blogging firm, both of these companies are viral enterprise solutions. Yammer has more than 70,000 customers with at least 1 user and is signing up between 7-10,000 users a month and 10% are turning into paying customers. Crosslink invested in Carbonite, a backup and recovery company, has high margins and is the only other independent player in the category with Mozy, who is owned by EMC. They felt that scarcity of competitors and their ability to manage Customer Acquisition Costs were important in establishing the company’s value.

The panelists also said they are looking for companies that have a rigorous focus on metrics like Customer Lifetime Value and Customer Acquisition Costs. In fact CAC appears to drive business value because it has a lot to do with capital efficiency and the company’s ability to grow their business.

Exits, IPO’s and Valuations

Economy has recovered and CEO’s are ready to start taking on more risk, and it’s a real change in psychology because we are at the beginning of a macro trend that will last more than 10 years.

This is evident by more than 100 M&A transactions last quarter including high profile deals like IBM buying CastIron, Salesforce buying Jigsaw for $142M, Successfactors buying CubeTree for $50M. The current environment is right for deals, especially as SaaS is gaining enterprise momentum with recent deals like SuccessFactors’ mega deal with Walmart for 1.6M users. Transactions like Jigsaw, CubeTree, and CA’s purchase of 3Tera and Nimsoft for $350M all indicate a return to a healthy M&A atmosphere, that will probably last for the next 12-18 months.

Oracle and SAP won’t be aggressive on the M&A front until they come to the realization that they can’t build Cloud solutions internally. Because many SaaS companies have now crossed the $25-30M in recurring revenues threshold, these firms may become quite attractive to these larger ISV’s looking to make the move to the SaaS business model.

But these acquirers don’t want to take on the burn associated with many start-ups so it will be important to stay close to breakeven and you may have to sacrifice growth for profitability. Since the access to capital is still tight, start-ups will have to try and collect cash upfront and continue to tune their business models to improve cash flows.

Companies that seem to own a category have perceived scarcity value which will result in a premium on any transaction, especially if they are perceived to own a segment franchise. VC’s and acquirers are looking for a minimum of 40% CAGR to get a premium valuation.

On the other side of the liquidity front, the IPO window for SaaS companies is beginning to open up and firms like SolarWinds and LogMeIn have now been joined by SPS Commerce and Convio. At least before the recent stock market downturn, these companies had traded up by 15% since their IPOs.

The panel seemed to believe that the market is definitely getting better and that is good news for SaaS and Cloud Computing companies looking for funding or an exit!

There were a number of keynotes at last week’s All About the Cloud conference that focused on Public and Private Clouds and the market. What was interesting is that the typical hype associated with Cloud Computing appears to be calming down. It seems like it is no longer necessary to justify or explain the Cloud, or at least for the audience at that conference. According to Gartner the Cloud Computing market will be $150B in IT spend by 2013 as compared to $56B in 2009 and is the #1 Strategic Technology for CIO’s in 2010

The new Cloud attitude appears to be more about ‘when’ and ‘how’ enterprises will be utilizing Cloud solutions rather than ‘if’.

Coexistence is ‘In’

The other interesting change, which I first noticed at the end of last year at both OracleWorld and Dreamforce, was that everyone seemed to be talking about co-existence or hybrid uses of the Cloud with on-premise assets. This more reasoned approach is going to make more sense to CIO’s and business executives to who have spend millions building out their infrastructure over the past 10 years. Cloud can be complimentary. Starting with fringe or edge applications and then over time becoming more useful for mission critical functions.

The Consumer Cloud

Tuesday’s press panel with [insert names] focused mostly on the use of the Cloud for consumer applications like Facebook, Google, Amazon, eBay and future offerings like iTunes LIVE and Microsoft Office 2010 (launched on May 12^th). Cloud is everywhere but the average consumer doesn’t even know they are in the Cloud. With the advent of ubiquitous broadband access, smart devices and massive data centers, there are all sorts of Cloud based consumer services emerging. But the market is still evolving because the Generation X’ers are plugged into the Cloud but as Kevin O’Brien from Oracle said in his session, ‘My mom still doesn’t know what the Cloud is’, and she is probably isn’t alone.

Private Clouds

There were many sessions that discussed how there is money to be made in the Private Cloud market. You can have many of the advantages of the Public Cloud without the security and control issues. IDC projects that by 2014, $11.8B will be spend on servers to create Private Clouds, considering overall IT spend in the US is approximately $1T, that’s not big percentage today, but it will be in the future.

Scared of the Cloud

Are CIO’s scared of the Cloud because of their potential for loss of control, security issues and resource impacts? Several sessions touched on this aspect of the Cloud Computing market including CIO’s creating hurdles to adoption.

Given the cost and scalability advantages why wouldn’t organizations like the State of California quickly adopt Cloud based solutions? What about the switching costs like decommissioning your own data centers, software and restructuring personnel. If you already own PeopleSoft and it is working, will you really be open to a Workday ‘rip and replace’ scenario? Enterprise organizations are warming up to the idea, just ask Flextronics.

One panelist cited a recent Google Docs deal that went sideways at UC Davis where they scrapped their trial for several thousand users. Maybe there were other considerations than the Cloud but most of the sessions agreed that the benefits of the Cloud outweigh the risks and CIO’s are starting to think in terms of intelligent trade-offs instead of just being against the Cloud. This is probably smart, given the recent economic conditions and every CEO is looking to optimize their IT spend.

Cloud 2010 and Beyond

Cloud is just the new thing. According to Bill McNee at Saugatuck Technologies, their most recent Cloud Computing survey indicated that 86% of the respondents thought that the Cloud would be part of mainstream IT by 2014.

There appears to be reasonable optimism that Cloud Computing is not a fad and its going to happen, it’s just going to be the way people are operating today in the future. The Google Docs business is adding 3,000 new companies a day, that doesn’t seem like a fad. According to Gartner, their Hype Curve for Cloud Computing showed that July 2009 was the peak and it really appears that the market is maturing about the Cloud.

Venture Capital firms are only funding Cloud-based start-ups and large technology companies like Cisco, CA and IBM are buying SaaS and Cloud based companies (like CastIron Systems) because they realize they need to overcome the ‘Innovators Dilemma’ around the Cloud. There will be an increase in successful SaaS and Cloud companies as the market continues to mature, as well as a lot more M&A activity.

As one speaker so aptly described the current market situation for many companies when evaluating Cloud Computing, ‘When a piano falling from the sky, you should be worried more about will it hit you not where it is while it is falling.’

Company:              GoodData

Started:                  2000

Located:                 San Francisco, California

Geography:             Global

Market:                   Cloud Business Intelligence

Products:                GoodData On-Demand Analytics

Key Customers:      MarketMetrix, TriNet, Enterasys, Black Duck, and Gazelle

Website:                  GoodData

Blog:                       GoodData Blog

Twitter:                   @gooddata

Recent News:

GoodData Powers Reporting and Customer Analytics at Sinu

GoodData Powers Customer Analytics at Market Metrix

GoodData Deploys Talend for SaaS Data Integration

GoodData Helps TriNet Sharpen Focus on Customer Analytics

I asked Roman Stanek, GoodData’s President, CEO and Chairman a few questions about his business and his view of the SaaS market in 2010.

Did you start out as a Software-as-a-Service company?

We restarted the company in 2007 focusing exclusively on Cloud Business Intelligence. Based on my experience, until recently most SaaS BI was based on an older ASP rather than a true multi-tenant model. By 2007, there was a real opportunity to build elastic BI solutions on top of the Cloud especially with the emergence of companies like Amazon who launched EC2. The traditional way of delivering business intelligence was too expensive and not available to everyone who wanted access important business data. Often times a company’s BI solution was slow and expensive because of inconsistent data demands which are common, that creates spikes in usage.

GoodData spent two years thinking through this problem and building out our platform, which is built on top of Amazon’s Web Services infrastructure that provides a scalable way to build our business. Our team beta tested our solution and by late in 2009 we started selling our new products and re-launched our company.

Our collective experience over past last ten years has been in and around the SOA space, which is very closely aligned to the new Cloud Computing world. For me the inspiration for GoodData was when I really began to realize the possibilities and the disruptive properties of the Cloud. We just needed to find a big business problem, which led us to the world of BI.

It was clear that customers who have bought traditional Business Intelligence solutions from IBM/Cognos, SAP/BusinessObjects, SAS and others, faced the classic innovators dilemma when expecting these providers to deliver new, easy-to-use solutions. Then Salesforce.com came along and said you no longer had to buy software, you could rent it, and by having your software in the Cloud it would always be fresh. They really helped to validate our use of the SaaS business model.

Why do your customers buy from GoodData?

With our approach GoodData can now deliver Business Intelligence for the masses through our use of SaaS and the Cloud. Our customers buy from us because we are focused on creating a really positive product experience, which means that our customers can control and personalize their own user interface, dashboards, metrics, and reports.

Our solution was designed to be really easy-to-use because our customers would rather just turn it on and start using it, which makes their ‘out of the box’ adoption very rapid. We provide a nice set of business-oriented BI templates including pipeline management, marketing, customer services and customer lifecycle analytics all at a reasonable price.

GoodData’s focus is to have our customers up and running quickly. Today we concentrating on “Success in a Month” but over time we want to be continually improving so in the future we will be able to say to our customers GoodData will provide “Success in a Week”.

The most difficult part of building a fully functional BI solution is the intelligence part. GoodData understands that any BI deployment requires creating the model, loading data, integration, then producing metrics, reports and dashboards, we just want to make it really fast and easy.

For Trinet, one of our early customers, our solution is so easy they were able to get started with only one hour of training and most users actually have had no training at all. User adoption at TriNet has been fast because our solution is intuitive. GoodData believes that the analyst in the cube type of BI solution is a broken model because they rely on IT to get their SQL queries and it takes a lot of expertise to use that type of product. We believe that IT should be out of the report writing business and more focused on getting data into systems.

The use of marketing metrics typically get heard but not seen but with collaboration this type of campaign information can be shared in reports, dashboards and KPI’s. When you visit call centers, for example, they have all their metrics on the wall about sales regions, agents and then make decisions about this static information. With our model, we want employees to register and use our solution and we don’t charge for extra users. This model encourages adoption. We charge by the project and use a ‘land and expand’ sales approach. We evaluate our business not on the number of users we are charging for but more on the ‘data under management’ approach, which we think is a better way to approach BI.

With our target market, firms with over $100M in revenues, it’s not about the software or tools, it is about getting the information to front office workers quickly, so they can make better decisions.

What do you see as the key trend emerging in the SaaS industry?

Over the past two years we have been very vocal about Cloud Computing and how it is becoming a credible infrastructure. We hope that there will be less focus on the differences between Public and Private Clouds because this is not really relevant to GoodData. We think the discussion in the future will be mostly focused on costs and pricing of the Cloud.

We have a partnership with Amazon AWS, which delivers a complex, sophisticated Cloud platform. What is great about working with them is that they introduce new services every month that we can leverage without additional investments in R&D. The industry is going to be a lot more price competitive going forward, just like Moore’s Law was for microprocessors, innovation in the Cloud continue to drive down costs. This Cloud innovation cycle will be a key factor in our ability to lowering our prices while improving our BI services.

Another trend is metrics- driven businesses. This has been driven by the web, which produces much more data and business are now beginning to rely more on data than instincts. With the emergence of great web-based tools, metrics are now more accessible and usable for business management.

Collaboration is one step away from metrics. The recent announcement of Salesforce Chatter is a great way for organizations to distribute metrics/dashboards and better understand what is going on in their business. Internal tools like Chatter will help deliver and notify line-employees and managers how to better run their businesses.

What is your outlook for 2010?

Since this is our first year of being a commercial company, as the founder and CEO I am keeping the company very focused on Delivering Success in a Month in a repeatable fashion. Because at this stage in our evolution it is all about execution and focus.