Happy New Year!

In February Montclair Advisors launched our SaaS Business Profile Series and have been focused on covering as many SaaS companies as possible during 2009. As it turns out we were able to profile more than 30 SaaS companies of all types including pure SaaS firms, Cross-Overs and Hybrids!

We would like to thank all of the executives and companies that participated during 2009 and we look forward to continuing to follow their progress during 2010.

What we learned from these thirty-four profiles:

• SaaS is an evolving business model - It is still a new concept and few firms are running a pure subscription software models. Beware that there is still a lot of “Fake SaaS” out in the market overall.
• There are many variations of SaaS - these variations are based on the company’s starting point, the market they serve and the types of products they sell. Interestingly, Salesforce.com is actually not a very representative SaaS business model for the broader market.
• It takes time to build a real SaaS company - For many SaaS firms it takes up to 7 years to reach breakeven and nearly 10 years to ultimately gain scale with their business model.
• Cross-over providers will still need to hold onto their on-premise legacy for the foreseeable future, because it is hard to switch customers to SaaS all at once.  It is also difficult to upset your maintenance revenue streams, especially during tough economic times.
• The Great Recession has permanently changed the Software buyer’s behavior towards SaaS due to the lack of available capital. When you see SAP and Oracle and many of these profiled ISV’s moving their businesses to SaaS, you know it isn’t a fad.
• Penetrate and Radiate. The successful SaaS firms have started small, with easy to sell, easy to consume solutions.  They then develop additional software, services and content solutions to sell back into their installed base.

Here is an overview of the thirty-four companies Montclair Advisors covered in 2009:

Profiles by SaaS Category

Pure SaaS:        15     Started out and only offer SaaS subscription services

Cross-Overs:    11      Started out as on-premise, but have fully transitioned to SaaS

Hybrids:             8      Continue to offer SaaS services AND on-premise software

Public vs. Private

Public:               6

Private:             28

Profiles by Age of Company

0-5 Years:         9

5-8 Years:        10

8+ Years:         15

M&A by Companies

Sell-side:            2    Mint.com by Intuit for $170M and QuickArrow by NetSuite for $20M

Buy-side:           4    Lithium Technologies (Keibi Technologies), RightNow (HiveLive), Taleo

(Worldwide Comp), Xactly (Centive)

Fundraising Public & Private

What was also interesting to see is that even in the toughest economic climate since the Dot Com meltdown, that many firms that were profiled were able to raise capital in both the private and public market places.   The big winners were SuccessFactors who raised more than $200M in a public offering and Workday, raised an impressive $75M private round that was led by New Enterprise Associates.  As the economy begins to turn in 2010, expect to see more SaaS firms going back out to raise growth capital.

We hope these profiles have been helpful to our readers and we will continue to profile interesting SaaS firms in 2010, because we learn a lot about our emerging industry and we will continue to build back into the Montclair Advisors advisory services that help our clients become successful SaaS companies.

Please let us know what you think, because we would welcome any ideas on how to improve the Saas Business Profile Series for 2010.  Just drop me an email at kevin@montclairadvisors.com.

Company:         Cast Iron Systems

Started:             2001

Located:            Mountain View, California

Geography:       Global

Market:              SaaS and Cloud Integration

Products:           Cast Iron Integration Solutions

Key Customers: Allianz, British American Tobacco (BAT), Amerisource Bergen, Emerson, IBA Molecular, Krueger International, Peet’s Coffee & Tea, PGP Corporation, and salesforce.com.

Website:            Cast Iron Systems

Twitter:             @Castironsystems

Recent News:

Cast Iron Systems Reports 12th Consecutive Quarter of Growth

Cast Iron Systems and SuccessFactors to Help Customers Improve Business Execution

Taleo and Cast Iron Partner to Bring the Benefits of Cloud Computing to Companies Investing in Talent Management

Cast Iron Accelerates Data Migration and Application Integration to Amazon Web Services

Cast Iron Systems Wins Most Innovative Business Model Award

I asked Simon Peel, Cast Iron Systems’ SVP of Strategy and Marketing a few questions about his business and his view of the SaaS market in 2009.

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

We started out in 2001, and our first commercial product was launched in the market in 2003. This first product was intended to be a mission critical integration for on-premise systems like Oracle and SAP.

One thing we knew all along was that application integration is different than data integration. Originally there was business process integration and then new applications started to show up such as Salesforce.com that needed a standardized approach to application integration. Our Salesforce partnership began in 2004 and then our business really started to pick up. We found that customers were very interested in connecting on-premise systems to Cloud-based systems, using a hybrid model, so we then provided connectivity between Salesforce CRM to on-premise ERP systems.

Cast Iron had kicked off the Salesforce relationship with some transactional projects but later the partnership became mission critical for Salesforce and other SaaS-based application systems. After the Salesforce.com partnership was launched, it took a couple of years to get rolling but then a lot of other SaaS companies began coming out of the wood work because many of our competitors viewed this connector market as an after thought.

Other phases and partnerships during our history include when Netsuite, Taleo, RightNow and they all came to the realization they needed integration. That’s when we launched the Powered by Cast Iron program. This was validated by companies like Taleo, who decided it was smarter to just OEM Cast Iron, because they want to take the integration off their development team’s plate. As part of the Powered by Cast Iron program, we also needed to show our partner’s sales teams on how to sell our integration technology and then advise them on how best to build their own application programmable interface (API).

Then the latest phase of our growth has been in the Cloud with new relationships with Google, Amazon and HP and our most recent Dell new announcement. They all want a piece of this new rapidly growing Cloud market.

We view application the integration market like how Cisco looked at creating ‘packaged networking’ solutions. Remember all of the SPX, IPX drivers how they were a big nightmare for customers looking to put together networks, Cisco just took this complex problem and provided an easy solution. Our founders came out of companies like Webmethods, Vitria, Tibco and Informatica. They understood that most large customers didn’t use 80% of the delivered functionality, customers want suppliers to keep it simple, with a plug-and-play solutions that can handle transformation, that keeps data clean, and manages the logic, workflow and alerts. Cast Iron also adopted the appliance form factor, just like Cisco did with their router boxes, because we knew we had to provide integration-in-a-box. SaaS applications doesn’t want to provide a complicated solution, they need to just make it easy.

Why do your customers buy from Cast Iron?

Cast Iron is the best-known integration provider and we have been in the market the longest. We are the trusted integration provider for hundreds of clients, because can connect so many systems in just a matter of days.

We are flexible and have many case studies on how Cast Iron has deployed our solutions in just 10-15 days in a variety of form factors; Cloud-to-Cloud, hardware appliances or on a VMWare server.

Customers also see that mega partners like Amazon.com, Google, Salesforce.com, Netsuite, HP, and Oracle have selected Cast Iron and it shows how that they have done their due diligence and selected us as their trusted integration partner.

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

Integration is becoming a mandatory requirement for any real Cloud computing initiative. Simple uploads are no longer good enough. First generation SaaS firms are also starting to think about growing up. Enterprise architects are now looking at these systems because they all need to talk to each other.

The fact that Marc Benioff, the CEO at Salesforce.com, was a keynote speaker at Oracle World a few weeks ago, shows that SaaS and the Cloud have made now made it over the hype hump and won’t be pushed out by on-premise ERP, it is okay for on-premise solutions and SaaS to co-exist. In this new world, there needs to be more cooperation among ecosystem providers, so integration is now key to strategy, business processes, and every piece of the eco-system.

There are many layers of the Cloud – infrastructure, platforms, and application companies in each layer is figuring this out because they also need to bridge SaaS and on-premise systems and make it easy. This is a big shift because many Cloud and SaaS companies are asking ‘should I own integration or partner instead?’ For example, Dell integration services provides integration for both Cloud and on-premise systems in multiple form factors. The Dell team looking at this challenge is young agile and quick thinkers and their decision was to either own integration or outsource it and they ultimately decided to partner with Cast Iron. Vendors who are smaller than Dell can’t afford to deal with their integration solution and that is why they are looking work with firms like ours.

What is your outlook for 2009?

Before 2009 we had to push, push and push, but given our new partnerships with Google, Dell and HP, we are starting to get a lot of pull in the marketplace. Over the next couple of years, we believe a lot of application vendors will all be reselling our integration solutions. Many mega vendors have already figured this all out and realize that embedding integration technology makes financial sense and the per unit costs will continue to go down over time.

The dirty little of secret of SaaS is the 6-year total cost of ownership is actually more expensive than on-premise. Many SaaS firms are experiencing approximately 1% churn per month, or 12% per year. Customer acquisition costs are huge. But by embedding easy integration plumbing, this one step can actually dramatically lower churn rates from 12-15% to around .5% per year. So we believe this is what is driving a lot of our momentum in the marketplace.

Thank you to Simon Peel for contributing to this profile.