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By Kevin Dobbs
Montclair Advisors, LLC
According to Gartner, the Software-as-a-Service market is forecast to have a 15.3% compound annual growth rate through 2014 for the enterprise application markets, compared with total application market CAGR of 5.3%. It is this type of growth and adoption that is causing many traditional ISV’s to seriously consider transitioning their business models to SaaS.
This is obviously easier said, than done. According to our informal research, close to 50% of all ISV’s fail at least once before successfully rolling out a successful SaaS strategy. What is interesting is that 35% of all ISV’s are currently in the process of trying to move to SaaS according to Saugatuck Technologies. Because it is difficult, I am going to share my 12 best tips when transitioning to a SaaS business model over the next few Smart SaaS posts.
Tip #1: What Is Your SaaS End Game?
This sounds basic but it is amazing how many clients don’t really know how far they plan to go with SaaS. Will your company go all the way and convert 100% of your business to multi-tenant subscription solutions over time or will you continue to offer on premise software as well. This diagram is helpful with speaking with your team to determine where your company fits along our Software Continuum.
Depending on your strategy - traditional, hybrid, cross-over or SaaS, this should change your game plan. Keep in mind that a complete SaaS transition can take anywhere from 3-5 years to complete, so break your plan into 12 month phases. For a company just looking to launch a hybrid model, offering both deployment options, the timing for transition will be less than a company looking to do a full move to SaaS.
A new SaaS start-up takes about 5 years to break even and most venture capitalists are looking at 7 years before the company could possibly go public. On average most successful SaaS firms take about $35M in investment before they can reach an IPO stage, so you should be prepared to invest in your SaaS transition as you shift from a perpetual model to a subscription model.
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:
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Financial |
Human Capital |
CRM + |
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Kenexa (KNXA) |
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Intuit (INTU) |
RightNow (RNOW) |
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Mint.com (Acquired by Intuit) |
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SuccessFactors (SFSF) |
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Taleo (TLEO) |
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Collaboration |
Infrastructure |
Other |
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i365 – Seagate (STX) |
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QuickArrow (Acquired by Netsuite) |
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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.
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Public |
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Amount Raised |
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SuccessFactors (SFSF) |
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Taleo (TLEO) |
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Private |
Lead Investor(s) |
Amount Raised |
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Bill.com |
August Capital, Emergence |
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Genius.com |
Deep Fork Capital |
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Host Analytics |
StarVest |
$8.6M |
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InsideView |
Emergence and Rembrandt |
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Jive Software |
Sequoia Capital |
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Lithium Technologies |
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$18M |
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M-Factor |
Bay Partners |
$10M |
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OpSource |
NTT |
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Workday |
NEA |
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.
June has been a big SaaS month for Intuit! Over the past few months I had noticed that Intuit had quietly started moving more into the Software-as-a-Service market. These moves became more apparent this month with these announcements:
June 2 - Intuit acquires PayCycle, a leading SaaS payroll firm
June 4 - Intuit announced their new SaaS partner platform - Intuit Partner Platform, releases their online portal Intuit Workplace and pulls in their Intuit Marketplace.
So what does this all mean?
Well, for a company that couldn’t seem to spell SaaS and has traditionally sold almost all of their products in CD’s, this is a really major shift. Intuit had dabbled in on-line versions of Quicken and QuickBooks but these announcements were a real strategic departure in their business away from the old software model.
Consider the Intuit business franchise for a moment;
* 4 million QuickBooks customers, representing 25 million users
* 1 million Intuit Payroll customers, about 14 million employees. Of this maybe 100,000 are onlinebut that still represents about 1.5 million employees. With the PayCycle deal adding another 80,000 customers.
* QuickBase adds another 250,000 customers to the portfolio.
* The Intuit Developer Network has approximately 75,000 developers enrolled.
These are big numbers, in a market segment, Small and Medium Business, that everyone in the software market is looking to penetrate.
Why Buy Another Payroll Engine?
This was the first thing that crossed my mind when I heard the news. I guess it’s obvious. Moving Intuit’s existing payroll engine over to SaaS would cost too much and take too long, so they bought the leading SaaS payroll product.
Why is payroll important? Because if you think about a sticky application for any size business, payroll has got to be one of the most important. Look at ADP, Paychex and Ultimate Software to see the type of rock solid franchise you can build with a great payroll engine. Considering how many small businesses already use Intuit’s other off-line software products, some basic cross selling of payroll could dramatically increase their revenues and help them to move these customers on-line, where the real revenue play is.
So Once You Get Your Customers On-line, Then What?
This has been one the bigger challenges for most software companies transitioning to the SaaS world, how best to bring along their legacy customers. Just telling your customers that you can get the same application over the Internet, won’t get customers to move. If you are luck you can get 10-25% of them to move to a new platform over their lifetime.
A different approach to getting them on-line is to offer very compelling products that they need and aren’t currently offering as an off-line or on-premise solution. Payroll? This is also where the Intuit Partner Platform comes in. Bob Warfield, in a recent blog post about Intuit’s plans, relays what Bill Lucchini, Intuit’s GM for their IPP, told him about the platform:
1. Need to offer a platform that you can truly build great applications on
2. Partners must be able to build a profitable business on top of the Intuit platform
3. Intuit must offer developers significant cost and time to market savings
The plan seems to be to start offering all types of new products on-line, make it easy and really affordable, then you might have a fighting chance of moving a majority of your customers over time.
More about the Intuit Partner Platform
Intuit really made an interesting decision that was quite a contrast to others in the maketplace by picking a third party technology for their IPP Software Development Kit (SDK), Adobe Flex. Salesforce, Google,NetSuite, FaceBook and every other Platform as a Service (PaaS) player is based on their own proprietary technology, but Intuit must have believed that their best shot at delivering a platform to build great applications on was to use someone else’s technology. Flex is also complimentary to SAP, Salesforce, Amazon and others.
Another thing to like about the IPP is that you don’t have to use the IPP SDK to develop SaaS applications. You can use any other technology or Cloud infrastructure and then publish to the IPP. The advantage to the developer is, develop once but publish in many places. This Federated Applications approach will provide for faster adoption. The advantage to Intuit is that existing AppExchange and other SaaS developers can move their products over to the IPP quickly, which will provide a lot of application choices for their customers. So not only the 75,000 Intuit Developer Network members but also all the other SaaS ISV’s will be able to leverage the IPP to expand their SMB market penetration.
Intuit also provides the Intuit Workplace which allows customers to integrate Intuit and non-Intuit applications using their federated integration and security structure. The Intuit Workplace provide single sign-on to all types of applications, all offered inside of an Intuit Cloud infrastructure.
The ability to access the Intuit customer base is also priced reasonably. Partner revenue sharing ranges from 14-20% plus a small fee for monthly usage. Some early adopters of the IPP include Vertical Response (email marketing), DimDim (web conferencing), Rypple (performance management), Setster (appointment management) and Expenseware (T&E expense reports). It looks like Intuit has about 100 applications in their marketplace today and it will be interesting to check back with them in six months. There appear to be other go-to-market services that can help the partner market, manage and bill for their applications as well.
My general conclusion is that Intuit is clearly making some good moves towards migrating its business model to SaaS, but it is going to take time to make the move and old habits die hard. If I were offering a competitive offering like Workday, Netsuite or Intacct, I would be watching their progress very carefully over the next 6-12 months.
Other commentary on the Intuit Partner Platform include:
Jeff Kaplan, THINKStrategies: Why Intuit Can Become A Major SaaS Platform Player
Phil Wainwright, ZDNet: Intuit makes two-pronged PaaS and SaaS push
Laurie McCabe, Horwitz: Intuit Partner Platform: Changing the Rules of Cloud Platforms with Federated Applications
Intuit Partner Platform on Twitter: http://twitter.com/ippdev
Intuit IPP Blog: IPP Team Blog
I listened to an interesting panel discussion at the Opsource, SaaS Summit a few days ago and I thought I would share what I heard.
Venture capital panelists were from Intel Capital, Emergence Capital Partners, CrossLink Capital and Hummer Winblad Venture Partners and Merrill Lynch.
New Investments
Seems like there was no agreement from the panel about what stage of investment was the most popular given the downturn. There were several Series A and Seed investments that were mentioned including Crowd Factory and Zuberance. One bright spot for investors was the fact that OpenTable has filed for an IPO, which would be a good step in the right direction given 2008’s anemic IPO performance.
Zombie Venture Capitalists
Most of the panelists had done some investments in the past six months but it is clear that SaaS entrepreneurs need to be on the look out for Zombie VC’s, who are still operating but are no longer making investments. These walking dead have their lights on, they have websites, and cash to support existing investments but no longer have enough cash to add new portfolio companies. In writing this post I even discovered that peHUB publishes a list of these Zombie VC’s. If they haven’t made any new investments during 2008, then I would be careful about wasting any time with these firms.
Flat is the New Up
One phrase that was uttered more than once is that ‘Flat is the New Up’. Although when it comes to Software as a Service… it appears that ‘Up is still Up’. Even in 2008, most publicly traded SaaS companies have bounced back from their lows by an aggregate of 20%, which is much better than the S&P 500. Apparently Wall Street likes SaaS companies and now are valuing them at 3 to 3.5 times their recurring revenues, unfortunately at the beginning of 2008 that number was closer to 8x. Keep in mind that this is better than a lot of public firms that are currently trading at their cash values. Other Wall Street analysts are valuing SaaS firms at 12x their cash flow but it is difficult to understand if there is a consistent valuation metric that firms or investors should be using.
Another interesting development is that Venture firms are now forced to value their private portfolio the same way they would value a portfolio of publicly traded stocks due to new accounting regulations (FASB 157). Based on the discussion this new regulation, it will only create more company valuation compression on top an already tough market for portfolio companies.
What Does a Good Investment Look Like?
So what are the VC’s looking for in an attractive investment in this market? Apparently the same things they were looking for in the past; a game changing idea, the team, the product and a big market. If you are a software company you better be offering a real SaaS solution or be leveraging the Cloud Computing to even be considered.
They are also looking for new portfolio companies to be more conservative about spending their precious cash. There is now an overt trade-off between the rapid growth rates of the last five years and capital efficiency to provide a longer runway for portfolio companies. The panelists indicated that they would like to see their new Series A companies, for example those who might raise $4 million, to survive at least for 18-24 months before going out for their next round! With the difficult market dynamics it is important for SaaS firms to form a strong syndicate when raising capital because your next round will be an insider round.
The panel indicated that they are looking for operating executives who know how to manage cash and scrub expenses. Another observation was that many of the early stage companies that they are seeing now are much more mature and well run than they were just a few years ago.
There also won’t be any more Salary.com (NASDAQ: SLRY) IPO’s of $15 million companies. IPO candidates will need to be $50 to $70 million in revenues and ideally profitable before filing their S-1.
For public SaaS companies you are going to see a slow down in the rapid growth rates we were seeing from companies like Salesforce.com (NYSE: CRM) and SuccessFactors (NASDAQ: SFSF). Public markets want to see profitability first and growth now comes second. Momentum stocks, those with high growth rates were trading at 8-9 times revenues, like Salesforce and SuccessFactors, are giving way to slower growth companies that are profitable and are given a multiple on cash flows.
Customer Acquisition Costs
When building your SaaS business model, it is important to assume that for every dollar of recurring revenue you will probably need to invest $.50 to $1.00 in your Customer Acquisition Costs (CAC). It is important than ever to have an active program of testing various CAC channels and tactics to maximize your investments. Then you need to have a smart statistical framework that you can explain to your investors.
Smart firms like EchoSign and YouSendIt are creating leads virally by infecting their customers and they are finding that they are finding 1/3 to 1/2 of all of their leads are generated organically. It is also important to leverage distribution channels, especially companies that have access to large customer bases like Salesforce.com, Google, and Intuit. Take more of a focused approach to your customer acquisition efforts by targeting a vertical market and use the power of your customer referrals because ‘word of mouth’ is the least expensive and most effective lead generation engine. Keep in mind that your sales process needs to be as easy as possible, in other words it needs to be ‘friction-less’. When your prospects sign up for a trial, it only takes a few minutes and weeks and they can do it without any involvement from your company. Give them a free trial, a sandbox a free version.
So I came away from this panel discussion with the following advice for companies looking for funding in this environment:
- You need to still need to have a great idea, product and team but you might need to have reduced risk for your potential investors.
- Demonstrate your company knows how to stretch a dollar as far as possible. Fewer employees is better… think Craigslist.
- Show traction. Number of transactions, members, customers, revenues, profits.
- Shop carefully for your potential investors and don’t waste time with Zombies.
Good Luck!
Company: Bill.com
Started: 2003
Located: Palo Alto, California
Geography: Global
Market: On-Demand Accounts Payable
Products: Accounts Payable Management
Key Customers:
Website: Bill.com
Blog: Bills 2.0
Recent News:
Bill.com CEO René Lacerte Named to List of Accounting Industry People to Watch in 2009
Bill.com Wins ‘Awesome Add-on’ Award for QuickBooks
Bill.com and Intacct Get Together on Financials
I asked Rene’ Lacerte, Bill.com’s Chief Executive Officer 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 built Bill.com as a SaaS solution from day 1. I have been a huge believer in software as a service model since my days at Intuit, well before the term was even used. When I left Intuit, I started PayCycle, the first and largest SaaS payroll company. With the huge customer satisfaction we enjoyed at PayCycle, it became clear to me that there is no better way to build software. Once you go SaaS you never go back. As such, I designed Bill.com from the beginning to take advantage of “Cloud Computing” both for our customers and for us—Bill.com operates 100% SaaS for our internal systems.
Why do your customers buy from Bill.com?
Our customers buy from us because we are the easiest and most affordable way for businesses to streamline the entire bill management process from bill receipt through payment and reconciliation. We call it collaborative online bill payment, and it drives huge efficiencies both within organizations and between accountants/bookkeepers and their clients. Our paperless workflow approach combined with online payments allows our customers to save over 50% of the time and money they currently spend on A/P.
What do you see as the key trend emerging in the SaaS industry?
I think a key trend is the need for SaaS companies to deliver on the “Service” part of the name. Software in the cloud is great but it is just software. To me the power of the cloud is that it creates an unprecedented opportunity to “service” your clients. At Bill.com that not only means creating a “WOW” experience when customers call, but it means leveraging the data our customers entrust to us to constantly provide them with services they couldn’t otherwise easily (or affordably) get, such as connectivity to banking and payment systems (both online and offline), fraud protection, and unlimited digital financial document management.
What is your outlook for 2009?
Even in these tough times we are gaining speed and momentum, so I am optimistic about 2009. More than ever, businesses need ways to become more efficient and save money, but they need to be able to do it quickly, inexpensively, and without long term commitments. That bodes well for SaaS applications that are laser-focused on improving real world business processes. Once you try SaaS, it becomes clear that it is the only way to build and use software. In fact, I don’t think anyone will be buying retail applications to run their business in 5 – 10 years. That means there is a lot of growth for SaaS this year and for the next decade to come.
Thank you to Rene’ Lacerte and Jeff Schultz for contributing to this profile.
SMB Financial Productivity Software
There is an increasing number of Software-as-a-Service (or SaaS) firms jumping into the smallest end of the Small and Medium-size Business (SMB) market, and they are offering a variety of financial productivity solutions. This is the fastest growing segment of the economy according to the Bureau of Labor Statistics there are up to 21 million self-employed consultants and small firms in the US.
This has traditionally been the sweet spot in the market for companies like Intuit. Although most customers are somewhat happy with their offerings, Intuit’s offerings tend to be cumbersome, packed with way too many features, hard to use and upgrade.
A new set of SaaS providers has emerged with products designed specifically for the small business owner. These packages are all delivered through the Internet as a service, so no more visits to Best Buy were required. Many of these new software services are very low cost and some were even free, and because of this, the adoption of these products has been rapid.
This Sector Report only covers the incumbent software provider and the promising new SaaS suppliers.
Financial Productivity Software Profiles
QuickBooks Free and $
The clear leader in providing Financial Productivity solutions for small businesses is Intuit. They have now also wrapped a set of small business services to help newly formed companies including payroll, website and logo development. Intuit is now offering a free single user version of QuickBooks, Intuit Online Payroll and Intuit Websites (from the Homestead acquisition) to encourage small businesses to use their financial and business productivity products.
Intuit has been trying to move more of their offerings to a subscription model for several years, without a lot of success. But they are continuing to push SaaS and you will see more SaaS offerings in 2009-2010 including QuickBooks Online.
Estimate millions of Quicken and QuickBooks users/customers.
Public company (NASDAQ: INTU)
New Alternatives
Online money management and budgeting software service. Free
This company has been adding 3,000 customers a month and have been a SaaS company to watch. Mint’s service is delivered through a subscription model but their software is free to use. To set up Mint’s money management service takes about 5 minutes, compare that to other industrial-strength solutions which require outside assistance and offer too much functionality for a small business.
Estimate 850,000 users/customers.
Private company based in California. 30 employees.
Online invoicing, time tracking and expense management.
FreshBooks has had a lot of momentum coming out of 2008 and offers a subscription invoicing service that is designed exclusively for freelancers and small businesses. Their focus is to provide products that are very simple and easy to use as well as integration to other productivity tools like 37Signals Basecamp project management software. FreshBooks offers a free service for a single user and then an incremental pricing structure based on usage.
Estimate over 700,000 users/customers. 60% in the US and 14% in Canada.
Private company based in Toronto, Canada. 30 employees.
On-demand business management suite; marketing, sales, operations and finances.
NetBooks offers a one-stop location for a small SMB to get all of the necessary business services they need to run their company. Their offerings are similar to the breadth that Intuit’s QuickBooks is now offering. NetBooks offers its software on a subscription basis and targets very small SMB’s.
Private company based in California. 30 employees.
Online accounts payables and bill management.
Bill.com provides a simplified way for SMB’s to manage their payables using their SaaS based platform. The company appeals both to SMB’s but also to accounts who can use the Bill.com service to simplify their client’s payable processes.
Bill.com has just formed a partnership with Intacct and integration to QuickBooks.
Private company based in California.
Online account system; banking, invoicing, payables, expenses and contacts.
Xero’s core is a set of financial products with some added contact management and reporting capabilities. Definitely targeting the small business owner with a very simplified SaaS offering. Support for firms in UK and Asia-Pacific. Nice user experience and Mac-friendly.
Estimate over 4,000 customers. Signed up more than 1,000 during December ‘08 and January ‘09.
Private company based in New Zealand. 50 employees.
SaaS-based accounting software.
Kashflow has been in business since 2002 and offers a very simplified online global accounting service. Provides a 60 day free trial and then pricing is based on a per user per month model.
Private company based in the UK. 9 employees.
On-demand income management, expenses and taxes.
Outright used to be gobootstrap.com and targets its products to very small SMB’s by offering dead simple financial products. Outright is offering its products free of charge during its beta test phase. Has integration partnerships with FreshBooks and Shoeboxed.
Private company based in California. 5 employees.
Workday $$
On-demand financial management, expenses, procurement and ERP.
Workday provides a complete financial suite of SaaS-based products that scale for SMB’s and large enterprises. Their ERP suite also provides HR, payroll, benefits, procurement and expenses. Workday solutions require professional services support to install and configure. Dave Duffield, the founder of PeopleSoft is also the founder of Workday.
Private company based in California. 320 employees.
On-demand financial management and accounting software. $$
This product suite is designed for the small business that has outgrown QuickBooks. The suite includes general ledger, purchasing, order management, inventory, contract and revenue management. Intacct has available integration into Saleforce.com, OpenAir, QuickArrow and many industry-specific solutions.
Estimate over 2,500 customers.
Private company based in California. 100 employees.
On-demand corporate travel and expense management.
Although one of the original Software-as-a-Service companies, Concur is focused on the high-end of the SMB segment all the way up the Fortune 500. Deep functionality requires outside consulting assistance to set up. Pricing is a monthly subscription based on usage. Probably not a good fit for a small SMB company.
Estimate more than 6,000 customers.
Public company (NASDAQ: CNQR).
Netsuite Accounting and ERP Suite $$$
On-demand accounting, time and billing, order, purchasing and inventory management.
Netsuite is designed for the company who is looking for a modular on-demand ERP suite. The suite also includes Customer Relationship Management (CRM), eCommerce and Business Intelligence modules. All products are offered in a SaaS format. Company also offers a Platform-as-a-Service (PaaS) framework for Netsuite developers who want to build their own applications.
Estimate over 5,000 customers.
Public company (NYSE: N).
Given the current state of the economy, many individuals are now setting up their own businesses. Using these new subscription-based Office and Finance Productivity tools can not only be very affordable for start-up your businesses but also give the consultant or SMB many of the same capabilities they had at their larger firms.
The good news is that there is no shortage of SaaS-based Financial productivity products out there to choose from and this is just a top line summary of what is available. Many of these products are available at very attractive price points, including many who are free. Using or switching from older solutions not only can save a lot of money but also make SMB’s more competitive in this tough economic environment.
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