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It is always hard to predict the future, but here are my 10 Predictions for the SaaS market in 2011, and they might just happen:
Blockbuster Subscription Software IPO’s
A number of large consumer subscription software players including Facebook, Groupon, LinkedIn, Zynga and Skype could really open up the public markets with a major blockbuster IPO (or IPO’s) in 2011. SaaS firms that look to get everyone’s attention with potential IPO’s next year include Cornerstone OnDemand, Workday, Marketo, Service-Now and possibly Plateau.
Major Players Merge to Form the Next Big SaaS Brand
So my prediction (which is a pure guess) is that SuccessFactors and Taleo finally get over their respective CEO ego issues and decide to merge. Sounds a little crazy, but when you really consider their product portfolios, there might not be as much of an overlap as you might think. SuccessFactors is basically a performance and analytics company and Taleo is a recruiting and learning (after acquiring Learn.com) company. They both have some additional components that could be plugged into to create a more comprehensive suite of CPM and Talent Management offerings.
This would also create a combined company with a market cap approaching (SFSF + TLEO) $4B and annual revenues in excess of $400M, which would be the second largest SaaS firm in the market, and a clear leader in their space. Another potential marriage might be Concur and Ultimate Software.
Oracle Finally Pulls the Trigger on NetSuite
It seems like most Oracle SaaS rumors involve the acquisition of Salesforce.com, and that may happen some day, but the more likely combination for 2011 is NetSuite. Larry Ellison is a major investor in NetSuite (early investor) and own/controls more that 50% of the company’s shares. He may come to the conclusion that he needs some real SaaS DNA inside of Oracle to help grow their Fusion business in 2011 and beyond.
SAP Throws in The Towel and Buys Leading SaaS Player
Similar to the realization that many other major traditional ISV’s will come to in 2011, that they are too far beyond in SaaS to catch up organically, SAP will buy their way into SaaS. The Business ByDesign project for SAP, by some estimates, has cost more than $1 billion and there isn’t much to show for it. I always thought that the Sybase acquisition was just a smoke screen to cover up how little progress has been made with BBD at their most recent Sapphire user meeting. Like Oracle, I think SAP reaches out into the market and purchases a SaaS firm to jump start BBD. RightNow would be an interesting choice since SAP wants to make a splash in the CRM market.
Master Brands Continue to March Towards SaaS
These big software companies are no longer just paying lip service to SaaS or the Cloud, they continue to catch up with the subscription software market transition that is happening everywhere. All sizes of customers who were battered during the recession are no longer interested in spending a lot of capital and time that has been associated with traditional software projects and are becoming increasing comfortable with SaaS. This shift in the Software market is massive and is going to take at least 10 years, and we are probably only in the second year (post-recession) of this shift. Continue to look to see what SaaS moves firms like Oracle, SAP, HP, CA and Infor make in 2011.
Continued Explosion of PaaS offerings
Look at Salesforce.com’s recent moves to expand their Force.com Platform-as-a-Service portfolio with VMForce and then buying Ruby on Rails provider Heroku for over $200 million. Beyond Force.com there are many other offerings here today and coming in 2011 including App Engine by Google, Apprenda, Azure by Microsoft, Corent, Engine Yard, Facebook, Flex by Adobe, Fusion by Oracle, Intalio, IPP by Intuit, LongJump, Nimbula, SuiteCloud by NetSuite, and Wolf Frameworks.
As long as traditional ISV’s continue to move towards SaaS, there will be a green field opportunity for all types of PaaS solutions. Look for several of these firms to be acquired in 2011 by larger ISV’s.
Salesforce.com Continues to Expand Beyond CRM
After attending Dreamforce this month, it was curious to see a number of Force.com firms offering ERP extensions starting to gain real market momentum. Companies like FinancialForce.com (they purchased Appirio’s PSE business) who are delivering a growing suite of financial and accounting applications, JobScience who continue to build out their Talent Relationship Management suite on Force.com, Less Software who is selling a targeted Supply Chain Management solution and even Remedy’s Service Desk offering, RemedyForce Cloud. If Salesforce offers an attractive exit for any of these firms or their Force.com products, like they did with Heroku, then it might be possible to do a quick roll-up of key partners to create a competitive Cloud-based ERP solution.
Interestingly this type of move might be triggered by Oracle buying Netsuite or Workday going public.
Fake SaaS Firms That Use Private Clouds Will Loose Altitude
Although Private Clouds might be a viable alternative for enterprises who are looking to leverage the economics of the Cloud, for software companies this type of approach will only provide short term ‘Fake SaaS‘ types of solutions. This type of business model of hosting single-tenant software was known as Application Service Providers (ASP’s) and none of these companies that emerged about 10 years ago were able to find a business model that really scaled profitably. Private Clouds will offer a short term technology transition steps for software companies who are moving away from just offering traditional on-premise software but this trend will really start to fade by later next year.
New Revenue Streams for SaaS Firms That OEM
At Dreamforce ‘10 Salesforce.com announced that they are launching their new Database.com offering, a Database in the Cloud. What was interesting about this news is that Salesforce is really just reselling a private-label version of Oracle’s database technology. For Salesforce this is a unique way to take proven Oracle software, designed for on-premise deployment, and create a true subscription-based version of this product. No doubt that Salesforce will need to do some work to create a massive multi-tenant version of an ORACLE database and then deliver it as a service, but they are already doing this today through their Force.com platform. This could be a significant new revenue stream for both companies and look for other SaaS firms to try OEM’ing their software as a way to improve their CAGRs in 2011.
This should be an interesting year as the economy improves and the SaaS market really begins to gain some serious momentum. It should be a fun time to be in the Software business again.
Kevin Dobbs, Montclair Advisors, LLC
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:
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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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.
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.
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.
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).
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.
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.
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!
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