With Cornerstone OnDemand’s recent IPO (NASDAQ: CSOD) and their high valuation based on a negative EBIDTA, many are starting to ask if we are headed for a second Internet or SaaS Bubble?

I do agree that some of the valuations at this point are a lot higher than a reasonable person would expect, but this is probably just pent up interest in the technology sector. It doesn’t help that Facebook and LinkedIn has seriously pumped up the valuations for Internet/Social Media firms, but today’s SaaS companies are very different from the Dot Bombs of 1999/2000.

Remember these companies?

All of these companies were built on bad business models, too much money and expectations that were out of control. And by the way are all out of business.

But not all of the Internet companies that were formed during this period were bombs; in fact there are a number of firms that are now pillars of the technology industry including these firms:

It would be safe to say that each of these companies struggled during and after the Dot-Com collapse but they were able to modify their models to take advantage of the efficiencies that the Internet provided. Amazon has built a business that can effectively compete against the largest retailer in the world, Walmart, even though its sales are only 1/12^th their revenues.

All of these Internet Survivors had to develop a real business model that would deliver solid margins, profits and growth. They each had to assemble experienced management teams, learn how to deliver superior customer service and build trusted brands. Not easy to do, but they did it.

Fast-forward to today and we have a whole new set of Internet and Software-as-a-Service companies that have emerged and gone public including these firms:

(1) CSOD IPO: March 17, 2011

(2) SREV IPO: March 25, 2011

As you can see most of these companies were founded before the Internet Bubble burst and were forced to create real business models that could deliver profits.

At Montclair Advisors, we specialize in SaaS business advisory services and we know many of these firms quite well and they all have strong management teams, growing businesses and staying power. Unlike the Internet firms that went IPO in 1999 or 2000, most of these firms have had to build up their businesses over ten or more years and are based on some form of recurring revenues.

Major differences between the companies on this list versus the early Dot Bomb firms include:

• Proven Over Time. As you can see most of these firms are at least ten years old and have weathered the economic changes through the last two recessions.

• Businesses at Scale. Most of these companies are over $100M in annual revenues, which means they have been successful in selling into multiple markets and geographies.

• Recurring Revenue Streams. Anyone who has been involved with a company that has developed a subscription business can tell you how hard it is to create a meaningful recurring revenue stream. The advantages of being a SaaS software company based on subscriptions means that revenues remain consistent so there is a high degree of transparency and visibility.

• High Degree of Customer Satisfaction. All of these companies are dependent on satisfied customers that want to renew their annual subscription agreements and purchase more services. This is quite different than the ‘drive-by’ relationships many of the early Internet companies developed with their customers.

• Strong Management Teams. After the Dot Com crash it became much harder to file for an IPO and manage a company in the post Sarbanes-Oxley world. These next generation of Internet companies have attracted leading management expertise that knows how to innovate and rapidly scale viable businesses.

So are the valuations of companies like Cornerstone OnDemand and Servicesource, Facebook and LinkedIn too high? Are we beginning to see a SaaS Bubble? Maybe, but all of these companies have been built for the long term and will be around long after any correction, unlike their early Internet cousins Web Van or Kozmo.com.

By Kevin Dobbs

Montclair Advisors, LLC

Dreamforce 2010 was in San Francisco last week and there were a lot of announcements and it is only now that I am starting post my thoughts.   This post is going be around Force.com 2 and how Salesforce has rethought their approach, repackaged their platform and now have relaunced their PaaS.

This table provides a quick summary of how Salesforce has repackaged the Force.com 2 Platform.

What is interesting is that several of these offerings are just new packaging concepts and several are net-new products.  Let me walk you through the suite:

Appforce

This is basically the original Force platform using their proprietary 4GL, point-click-language APEX that has been repackaged as a departmental application platform.  What is interesting is that this environment is not just for departments, large enterprises like Japan Post and Thomson Reuters have done very large Cloud development projects using this platform.  I think that Salesforce realizes that due to its proprietary nature, most organizations will be attracted to Force.com but would prefer a more open and portable development environment.  Applications built with Appforce are also able to be easily integrated with Salesforce’s collaboration capability Chatter

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Siteforce

This is a development environment specifically designed for building websites without having to write code. There was a great demonstration of how you can build and modify websites, even for mobile devices, using their drag-and-drop interface.  This will be popular with firms that do a lot of campaigns and need to design a lot of landing pages which can be tied back to Salesforce.  Like the Appforce products, Siteforce can be linked to Chatter to add social and mobile features to websites.  This was an existing capability inside of Force.com that has now been exposed as a new offering.  The marketing materials we were given state that there have been more than 20,000 website built using Siteforce.

VMforce

This platform is a result of a partnership with VMware, that opens up the Force.com platform to more than 6 million Java developers.  Using VMforce, developers can now run their Java-based applications on the Force.com platform, similar to what they would do it they were using Amazon EC2.  Developers can also use Java IDE’s like Spring or Eclipse as well as other open standards.  With my clients, this is a popular approach, it provides some leverage with existing Java-based apps as well as professional developers prefer to develop in this type of environment, rather than using a 4GL point-and-click product.   VMforce is currently in beta and will be ready for general availability in 2011.

Heroku

In a really interesting move, Salesforce went out an purchased a leading provider of Ruby-on-Rails for $212M in cash, $27M in stock and another $10M for un-vested employee shares.  Like VMforce, Heroku will offer developers a way to write applications using Ruby and then run them on Force.com.  The rumor was that VMware had made a run at the firm several months ago, but wanted to remain independent.  Marc Benioff in his keynote indicated that Heroku would remain independent from Salesforce, I am assuming in the way VMware has remained independent from EMC.  Several benifits for Heroku as part of Salesforce will be access to their 87,000 customers as well as their technology stack including Chatter.  Today, there are more than 100,000 websites and applications written using their platform including BestBuy and FlightCaster.

ISVforce

In another re-packaging move Salesforce has taken the Force.com platform and created a new program to help larger ISV’s to build their next generation applications on top of their PaaS.  This is a program that contains services and tools to help Independent Software Vendors to move their apps to the Cloud. Salesforce provides development services, trails and provisioning, connections to AppExchange and application monitoring along with their multi-tenant Infrastructure-as-a-Service.  Some early adopter ISV’s include Blackboard (who did a quick little demo), BMC (RemedyForce) and CA (Agile Vision).

AppExchange

Salesforce continues to promote their on-line application marketplace, which is similar to what Apple offers with their App Market, and how has over 1,000 applications available. Some interesting facts provided by Salesforce about the AppExchange include there have been more than 360,000 application test drives through the AppExchange, nearly 700,000 application installs and more than $1B invested in companies who are on the AppExchange.

Database.com

Another interesting announcement is that Salesforce has gone into the database business.  When I first heard this, I thought it wasn’t necessarily a good idea, but then I read that they were just repackaging a gigantic Cloud-based version of Oracle and selling the database by-the-slice.  Apparently Oracle thinks this is not a secure approach to selling databases, but let’s see how this all works out.  Amazon has something similar with their RDS offering.

The result is that Salesforce now has a suite of offerings that are designed to meet the needs to enterprise customers, software companies, professional and casual developers.  The strategic benefit of all of these offerings is to open up several new revenue streams for the company and continue their leadership momentum in the Cloud.

By Kevin Dobbs

The last few months have been quite active in the SaaS market and here are some things that caught my attention:

• Who would have believed that we would be seeing Initial Public Offerings after our recent recession but new offerings include SciQuest (NASDAQ: SQI), Qlik Technologies (NASDAQ: QLIK), Ancestory.com (NASDAQ: ACOM) and Financial Engines (NASDAQ: FNGN).  There are a number of upcoming IPO’s including Talent Management provider Cornerstone OnDemand.

• You can tell the SaaS and Software markets continue to gain momentum based on the number of M&A deals over the past 90 days including Oracle buying Art Technology Group, hardware company Dell purchased SaaS integration firm Boomi, Deltek buys government market research firm INPUT, talent management leader SuccessFactors buys analytics firm Youcalc, Taleo purchasing Learn.com for $125M, recruiting firm Kenexa acquired Salary.com and even PE-owned SumTotal Systems buying Softscape.

• Firms that are making good progress in their SaaS transitions include Callidus (NASDAQ: CALD) and Plateau Systems.

• Software companies who seem to be having more trouble with their current subscription and license models include Concur (NASDAQ: CNQR), MicroStrategy (NASDAQ: MSTR), Manhattan Associates (NASDAQ: MANH), and SAP (NYSE: SAP).

• The Venture community continues to fund SaaS and Cloud Computing firms, several who have been profiled by this blog have received funding in the last six months (congrats!) internet billing firm Zuora lands $20M, Cloud management platform RightScale grabbed $25M, multi-tenancy Cloud platform firm Nimbula raises $15M, marketing automation provider Marketo, Bill.com, social platform provider Jive Software raises $30M, Gooddata and Cloud9 Analytics.

• SaaS, Software and Cloud Computing firms have also made some interesting management changes over the past few months including; ex-Oracle president Charles Phillips (video) moved over to become the new CEO at Infor, Taleo lands a new CFO former Palm executive Douglas Jefferies, Saba has added a SaaS-experienced CMO Karen Steele, SuccessFactors brings in seasoned President from Salesforce.com - Doug Dennerline, PeopleclickAuthoria Chairman Charles Jones returns as CEO to run company and well-respected analyst Ray Wang joins Constellation Research.

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.’

Last week at Salesforce.com’s Dreamforce conference, the big news was around the launch of the new business collaboration set of platform capabilities called “Chatter”.

After updating the audience on Service and Sales Cloud 2, which both had some really cool new capabilities, Marc Benioff announced the latest Cloud offering – Chatter or the Collaboration Cloud.

This new business collaboration offering, which was never to be confused with Social CRM, consists of a wide range of Chatter platform capabilities. Many of which look very similar to Twitter, but don’t get confused, this is NOT Twitter. Although Chatter will be integrated with popular social networking sitesl like Twitter and Facebook, these integrations are only feeds into Chatter.

The key line that kept getting repeated was “Why do I know more about strangers on Facebook than I do about my own employees?” This apparently was a major driver in the development of Chatter by Salesforce.

On a funny note, during the analyst meeting, someone asked Marc if he was going provide Chatter on-premise? (Remember Salesforce is in the Cloud!) In a sarcastic reply said that he was actually packaging up the Exodata Chatter servers and that they were being shipped out to clients at the time of the launch. That got a big laugh from the audience. This was also humorous because Chatter won’t be Generally Available in the Cloud until sometime in 2010.

Key capabilities include employee profiles, status updates that are familiar with LinkedIn and Facebook, Groups, external and internal feeds, ability to share content with groups and events, alerts and notifications that allow for your apps to speak to you, an extensible API for the Force.com platform, integration with Google Docs, Twitter and Facebook. To learn more watch this Chatter demo by Parker Harris, Salesforce.com’s EVP of products of the opening day keynote.

Unlike other emerging business-related Social CRM players like Jive Software (SAP partner), Lithium, RightNow or even Oracle, Salesforce seems to be focusing much of it competitive energies against Microsoft SharePoint. I think this is probably a red herring.

Another major benefit to the Chatter strategy is the addition of a new Salesforce mascot family. Saasy now has Chatty. People were lining up to get their photo with both of these mascots… wow.

Here’s what I think the real Chatter strategy is based on…

• Stickiness. This is a ‘fun’ business application and if it is widely adopted as a business collaboration tool, it will be hard to replace. This process may take awhile for this adoption to take place but it will have lasting impact on their clients. The flip side to stickiness is that customers will be much less likely to cancel their service if they are hooked on it. With industry attrition averages between 10-20%, this could have a real hidden benefit. This is especially interesting in that they are giving the basic Chatter capability away with the basic and enterprise subscription licensing. Wonder if they have modeled out this impact?

• Barrier to entry. I think that it is interesting that Salesforce is thinking that this capability might actually upset Oracle Fusion and SAP’s next generation of SaaS offerings because it would require a rewrite of their core platforms. Actually this might make it more likely that SAP might do more than expand their partnership with Jive Software, and force them into a situation where they might have to buy them to keep up with the Benioff’s. With Fusion targeted for GA some time in 2010 (probably December), if they were to add in a robust collaboration capability, it would most certainly delay the GA, which would push Fusion into 2011. So Chatter becomes a key differentiator for Salesforce, even if it experiences low user adoption.

• Facebook and Twitter. By aligning themselves with these leading social networking platforms, Salesforce will be able to differentiate their solutions as hip compared to the older generation. With all types of younger workers continuing to move into the market, this makes Salesforce solutions possibly more interesting to the Generation Y workforce.

• Productivity. By putting collaboration (email, chat, document and knowledge management) in context to various business processes, the hidden strategic benefit might actually be a more productive workforce – closing more deals, resolving more issues, and engaging more employees. Because this is a solution that doesn’t need any training, it could be rolled out broadly without a lot of costly change management activities. Difficult to quantify this benefit but as more use cases become exposed over the next 6-12 months, this will be a really interesting benefit to solutions like Chatter.

So what are the issues with Chatter?

• Security. Kept emphasizing that Chatter has been built on a common security architecture that is the same one being used by Salesforce, which meets stringent bank-level security requirements. This actually might be a CIO selling point because it might be a way to reel in employees who are social networking with corporate information on unsecure sites like Facebook and Twitter. By integrating with them but controlling the internal networking, and not allowing export of data to these sites, the security teams can at least protect data access and distribution.

• Adoption. Salesforce has never really launched a enterprise-wide application before and Chatter is even a different animal than a traditional employee-oriented application. This is uncharted territory for Salesforce and it is unclear how rapid or widespread the adoption of their technology will be. What is good is that Marc Benioff did mention that they are not making any projections on what is going to happen with Chatter, they figure it will be popular but were reluctant to make predictions based on wide-scale adoption. It is in Salesforce’s best interest to make sure Chatter is successful because even modest adoption would ensure a level stickiness that their current applications may not even enjoy.

Just try and take away someone’s Facebook and you will understand stickiness!

If employees only want to use Twitter, they probably won’t like Chatter.

So how much does it cost? For existing Salesforce customers who have already purchased seat of Sales or Service Cloud, those seats will get Chatter at no cost, which is good deal. For those employees who don’t have Salesforce seats but want to have limited access to Chatter, the pricing is $50/seat/month. After talking to a product manager on the Dreamforce show floor about this, it seems like a lot of money for almost no functionality. My guess is that when they roll out Chatter later in 2010, they will have a better thought out plan around pricing

In the end, the Chatter strategy makes a lot of sense. The customers I spoke to about it really like it and I will anxiously await the official launch in 2010.