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After our post on January 26th we got several great comments about the cost of starting a SaaS company. It definitely takes a commitment to build a true SaaS company, especially when you consider some the following facts about the 15 public companies that I tracked in my high level analysis:
- Average Start-up Capital Required: $44M
- Average Time Required from Start-up till IPO: 7 years
- Average Capital Required per Year till IPO (Burn): $6.8M
- Average IPO Proceeds: $76M
- Additional Capital Raised After the IPO: $243M
- Average Total Capital Raised: $363M
- Average Market Capitalization: $1,262M
- Companies Who are Profitable: 8
The costs of getting a SaaS start-up off the ground are substantial but only about half of the firms we tracked actually started out as a pure SaaS company. These other Cross-Over firms started out as either Application Service Providers (ASP’s) or were traditional On-premise ISV’s that move to SaaS through a combination of organic migration or through a series of acquisitions. Companies like Concur, Kenexa, Taleo and Ultimate Software have all transitioned to SaaS from an on-premise heritage.
Montclair Advisors - SaaS Start Up Costs - Pre IPO
The shortest time to go from start-up phase to an IPO was 4 years and the longest was 13 years. Most of the firms we tracked were founded between 1997 to 1999, which was prior and during the Internet Bubble.
When these firms went public they raised a range between $30M (LivePerson and Ultimate Software) to over $150M (DealerTrack and NetSuite), but on average they raised about $75M. All the firms then went on to do additional capital raises from $32M (LivePerson) up to $750M (DealerTrack) but on average each raised $243M! The total capital raised, when considering both pre IPO, IPO and post IPO capital raised, these firms raised between $100M (LivePerson and Ultimate Software) to close to more than $500M (DealerTrack, Salesforce.com and SuccessFactors).
Montclair Advisors - SaaS Start Up Costs - Post IPO
After going public, this SaaS market basket of companies have done well as a group. The majority of the firms are profitable, which makes for solid cash flow performance, revenue visibility and overall stability of the company’s stock, for the real SaaS firms.
The most valuable company, based on their Market Cap is Salesforce.com at more than $8B and there are at least 4 other SaaS firms with valuations over $1B (Blackboard, Concur, NetSuite and SuccessFactors). When comparing the amount of capital raised to the market valuation, the 5 best performing firms are Salesforce.com (.09), Ultimate Software (.13) , Concur (.19), RightNow (.22) and LivePerson (.31).
Montclair Advisors - SaaS Start Up Costs - Market Caps
This year, as the economy improves, promises to launch a few new SaaS IPOs and we will continue to track this core group as well as a larger group of Hybrids and Cross Overs and will periodically report back with our findings.
Company: OpenAir, a NetSuite Company
Started: 1999
Located: Boston, Massachusetts
Geography: Global
Market: Cloud Computing PSA Solutions
Products: OpenAir Business Development, Resource Management, Project Management,
Knowledge Management and Project Accounting
Key Customers: American Federation of Teachers, Clickability, MetricStream, Model N,
PreVisor, Selectica, State of Oregon, and SupportSoft
Website: OpenAir
Twitter: @OpenAir
Recent News:
OpenAir CEO Joins SIIA Panel to Discuss Growting a SaaS Business Internationally
OpenAir Launches OpenAir Connect for SAP, Oracle and Salesforce.com
I asked Morris Panner, OpenAir’s CEO a few questions about his business and his view of the SaaS market as we move into 2010.
Did you start out as a Software-as-a-Service company?
We started the company in 1999 and were one of the original Software-as-a-Service pioneers like Salesforce.com according to Phil Wainewright who was at ASP News at the time.
Professional Services Automation or PSA started out because the world economy was moving to more of a Human Capital intensive market. Companies where beginning to leverage talent wherever they could get it through outsourcing, consulting and all types of value added professional services. Product companies were also evolving into services companies that were trying to solve all types of complicated business challenges. Companies like PRTM, a global strategy firm, Lafarge Cement, Siemens, AstraZeneca, Software AG, Progress Software and BMC were all evolving into product and services companies.
All the OpenAir founders came out of a variety of professional services organizations and we realized at that time, there were no good ways to manage complex, global services projects, especially using spreadsheets and email. Then the Internet came along and OpenAir saw this market need, where existing companies were struggling, then we refined our strategy and began developing products to meet this opportunity. There were other PSA firms at the time, including Niku, who moved into IT management, but the overall PSA market space was and continues to consolidate around fewer, larger players.
About 18 months ago, Zach Nelson, the CEO at NetSuite approached me and we agreed that the market was moving towards not just SaaS-based Enterprise Resource Planning (ERP) market but to a Service Resource Planning market. At that point we agreed to merge the companies and since then we also acquired QuickArrow and now the OpenAir PSA segment of NetSuite comprises more than 1,000 customers and 85,000 users globally.
Why do your customers buy from OpenAir?
We think our customers are looking for a knowledgeable, long-term PSA partner. This type of partnership is very different than an infrastructure or transaction-type of software relationship, because professional services is it is really complex business process software. Our customers expect us to bring them our specific professional services domain expertise to help to make their businesses operate more efficiently.
For example, when we launched in Europe, we did a presentation to Siemens in Barcelona. They had SAP but didn’t like using their platform for managing complex services. Siemens wanted to select a services- oriented software platform that was referenceable with large enterprises like theirs. OpenAir’s difference wasn’t just the platform; it was our deployment approach for enterprise customers as well as our people.
Being a SaaS player is also an advantage because you don’t have to install anything, which saves our customers time and cost. This especially important for large global companies, because the types of services problems they face are distributed and complex, so SaaS just makes a lot of sense for them. Typically our customers are probably using Oracle, SAP platforms or even email and spreadsheets, to manage their services projects, but they aren’t easy-to-use or efficient solutions.
Our partnership with NetSuite has definitely helped us step on the gas with regard to new customer acquisition. Zach really understands markets and how they evolve, which is why he choose to work with OpenAir. Services and consulting executives are at the center of this market shift to a Service-based economy and OpenAir is helping them improve their businesses.
What do you see as the key trend emerging in the SaaS industry?
We see the major drivers as Cloud Computing and the shift from a manufacturing-based economy to a people and services-baed economy. OpenAir’s Cloud-based solutions are going to do for the service economy, what is what SAP did for the manufacturing economy.
NetSuite is making a big bet on Professional Services Automation and now have put the resources behind our Service Resources Planning approach to the market.
What is your outlook for 2010?
Even though last year was difficult for most software companies, 2009 was a great year for OpenAir.
As we look to 2010, growing our talent is the key to the success of our company and we will continue to build out our capabilities in Boston, Austin, London and the Philippines. We doubled our headcount in 2009 and we building a great team.
We’re very thankful for our good results in 2009 and 2010 looks to be on track for us.
When speaking with entrepreneurs and investors about the investment required to start up a new Software-as-a-Service company, I often refer back to this list. At Montclair Advisors thought this would be a handy reference for those looking to start a SaaS company during 2010.
Looks like you might need a money tree to start a SaaS company, but for those that reach critical mass and go public, there is a tremendous payback. This is information has been gathered from various sources including Wachovia, CrunchBase and Google Finance.
| Company | Investment | Current Market Cap | Ticker Symbol |
| (in 000’s) | (in 000’s) | ||
| Blackboard | $100.7M | $1,300M | BBBB |
| Concur | $30.2M | $2,100M | CNQR |
| Constant Contact | $37.3M | $527M | CTCT |
| DealerTrack | $48.0M | $774M | TRAK |
| Kenexa | $54.5M | $256M | KNXA |
| LivePerson | $41.6M | $335M | LPSN |
| LogMeIn | $20.0M | $448M | LOGM |
| NetSuite | $84.9M | $1,000M | N |
| RightNow | $32.2M | $553M | RNOW |
| Salary.com | $5.7M | $40M | SLRY |
| Salesforce.com | $64.5M | $8,500M | CRM |
| SuccessFactors | $54.5M | $1,100M | SFSF |
| Taleo | $36.9M | $891M | TLEO |
| Ultimate Software | $25.1M | $755M | ULTI |
| Vocus | $26.4M | $345M | VOCS |
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.
When most companies think about moving towards a Software-as-a-Service business model they often just change their pricing model. You know the drill, instead of charging a big perpetual license fee upfront with some services and then an annual maintenance fee, you switch over to a SaaS agreement that is structured quite differently; with the subscription being spread over the term of the agreement and some upfront services to get started.
Don’t get me wrong, changing your pricing is a big deal if you are a traditional software company. By changing your pricing dynamic you are moving from a Capital Expense (CapEx) to an Operating Expense (OpEx) orientation, this is a dramatic change! It’s even a bigger deal if you are a publicly traded software company. But the overall SaaS business model is really all about monitoring and measuring metrics, ratios and statistics.
I ran into a very interesting company recently, OpEx Engine, that has done extensive benchmarking of SaaS and technology companies, and has complied a library of operational metrics for over 50 public and privately held software firms. Lauren Kelley, OpEx’s CEO is an ex- Art Technology Group (ARTG) executive who realized that smart technology people were looking for these types of real-world benchmarks and operating metrics. Lauren’s team has spent the last two years accumulating a lot of really value information. I can’t tell you how many times I have looked for good comparative metrics on how much companies typically invested in sales and marketing, research and development and G&A when building out a business model. For instance, did you know that of all of the publicly-traded SaaS companies that DealerTracker (TRAK) has the lowest R&D investment as a percentage of their revenue? (4.9%) Did you also know that Salesforce.com (CRM), Omniture (OMTR), NetSuite (N), and SuccessFactors (SFSF) all spend more than 50% of their revenues on sales and marketing? That’s an easy one but you should definately check out the free information that Lauren provides on her site.
There are many other metrics that are needed to successfully run a SaaS company but one of the most important is your overall cost of sales and marketing. Understanding what your true Customer Acquisition Costs is a critical SaaS business performance indicator. I was recently at the SIIA On Demand Conference in San Jose where I heard Josh James, the CEO at Omniture present his sales and marketing modeling methodology, that he has dubbed the ‘Magic Number’ for SaaS companies. Since it would probably justify a completely separate post, all I can say that this is a really innovative way to determine if your % of sales and marketing spend is either too much or too little. Phil Wainewright wrote a great piece on the Magic Number - When to spend cash in a SaaS business - which is definitely worth reading. What Omniture has done really well is to figure out the overall profitability of their clients, market saturation, marketing effectiveness and the number of Quota Bearing Sales Reps (QBSR’s) that are required to grab market share. It’s cool.
Other sources of good SaaS market information and metrics are:
TripleTree, a boutique investment bank which conducts some solid SaaS research, Cutter Consortium, Saugatuck Technologies, and Jeff Kaplan’s firm Think Strategies.
If you hear of any other good ones, let me know.
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