As it turned out I was right about 50% of my predictions last year, so here’s my educated guesses for what is going to happen to the SaaS market in 2012:

#10  Oracle will buy Netsuite.

I know this isn’t much of a surprise since Larry Ellison owns approximately 65% of Netsuite, but with the RightNow acquisition, this type of move makes more sense as part of coordinated Cloud acquisition strategy.

#9  SaaS IPO window remains open.

There are a number of SaaS firms who have either filed, like Eloqua, or are seriously considering going public in 2012, like Workday, Dropbox, Box, and Guidewire.  This window can be opened even wider by successful IPO’s from companies like Yelp and Facebook.  The only problem is that there are over 100 companies who have already filed to go public in 2012, so it might be difficult for smaller SaaS firms to do their IPO.

#8. Master brands will continue to chase SaaS offerings.

IBM just purchased DemandTec and SAP bought SuccessFactors, while Oracle bought RightNow.  This is a big change from 2010 when most of these companies were not interested in the Cloud or SaaS.  All of these master brands have tried to build their own SaaS businesses, but I think they have now finally realized that SaaS is a business model, not just new technology.  The smart firms will keep their SaaS businesses and their core license businesses separate and not try and merge them.  Good luck.

#7. Workday will have a monster IPO.

There is no doubt that the 2012 IPO of Facebook will set all sorts of records but for enterprise software, I think Workday will be one of the biggest on record.  The company just took in $85 million in funding over the past few months, in what was termed an IPO preview round. Workday could raise as much as $500 million in an IPO, which would force the big ERP players to start building out their SaaS businesses as a defensive strategy at the bare minimum.

#6. SaaS starts to go global.

I was involved in an Oracle SaaS webinar a couple of weeks ago for an audience in Europe and the response was really impressive.  I initially thought that most of the registrants would be from the UK, the Netherlands, Germany and Scandinavia.  Actually there were attendees from almost every country in Europe.  I have also started to hear about strong SaaS interest in Australia, New Zealand, Brazil, Japan, China and many other countries.  2012 will just continue to build on the SaaS market’s growing global momentum.

#5. Salesforce continues to expand beyond CRM.

During 2011 Salesforce purchased several firms that added new capabilities to their platform including DimDim (collaboration), Radian6 (social analytics), Model Metrics (mobility) and then they bought Rypple in December, which launched them into the Human Capital market.  I predict that Salesforce will add several other HCM tuck-in acquisitions (JobScience, Jobvite), financial applications (FinancialForce, Zuora), or even supply chain management (Glovia OM, Kenandy).

#4. IT Management and Security SaaS offerings emerge.

Companies like CA have been successful in launching their new Nimsoft ITM SaaS offering during 2011, but there are also many other firms that are beginning to gain momentum with their new SaaS offerings as well. This is a very big market opportunity to replace existing legacy infrastructure and security offerings. Companies to watch include Service-Now, Trustwave, Splunk, PingIdentity and Proofpoint.

(Note: CA/Nimsoft and PingIdentity are Montclair Advisors clients)

#3. SaaS continues to be social.

With Jive going public during December 2011, they are just the most recent example of SaaS social applications gaining market acceptance.  Salesforce has been very successful with their Chatter and Radian6 offerings.  Independents like Yammer, SocialCast, Lithium and CentralDesktop will continue to see increased demand for their social/collaboration platforms.

#2. More big VC rounds for SaaS firms.

2012 will continue to see VC’s put a lot of money to work with leading SaaS companies.  We saw some major investments during 2011 including Box ($81 million), Dropbox ($250 million), HubSpot ($32 million), Marketo ($50 million), Workday ($85 million) and Zuora ($35 million).  This trend will continue in 2012 and companies will be putting a lot of money to work to build out their platforms and distribution capabilities.

#1. Storage is a major story for 2012.

As more and more data is stored in the Cloud, consumers and businesses are looking to all different types of on-line storage services.  During the year that Apple launched its iCloud small business and music storage service, we also saw major funding rounds for SaaS companies including Dropbox and Box.  We even saw a new IPO from Carbonite that provides a small business/consumer Cloud back-up service.  This is definitely a segment of the SaaS market to keep an eye on in 2012.

For the SaaS world, Oracle’s OpenWorld has lately been all about hardware and the Exastack products. These offerings have limited appeal to all but the largest SaaS ISV’s.   The good news is that there were some new announcements though that were much more interesting for the SaaS community at last week’s Oracle OpenWorld in San Francisco.  Here is a quick summary of the news and drama:

Oracle Public Cloud

This was a welcome move by Oracle, to finally embrace their vision of the Cloud. Oracle is re-packaging many of their assets including the Exastack, Java, and the Oracle Database into a pay-as-you-go service, which should be appealing to smaller customers as well as ISV’s looking for an easier way to leverage Oracle technology.

The key theme that Larry Ellison [video] kept emphasizing was that the Oracle Public Cloud is standards-based and will allow a customer to port products they built on their Cloud to other standards-based Clouds or even on-premise. Larry was quite funny in his keynote by referring to his competitor’s Clouds as the “Roach Motel of Clouds”, because once you go in, you never come out.

In addition to just pure infrastructure services, Oracle will also make available its applications including Fusion CRM and Fusion HCM products as their collaboration platform.

Here are some other interesting articles on the Oracle Public Cloud:

• Ellison Reveals Oracle’s Public Cloud; Calls Salesforce The ‘Roach Motel’ Of Cloud Services, Rip Empson, TechCrunch.
• How Oracle’s Public Cloud Is Different, Charles Babcock, InformationWeek.
• Oracle Public Cloud might be extensive, but it’s boring, Larry Dignan, ZDNet.

Oracle Social Network

Sounds a little like that movie about Facebook. The Oracle social strategy is to provide an easy-to-use interface for both their new Fusion applications as well as the Oracle Public Cloud.

Their social network looks remarkably similar to the Chatter offering from Salesforce.com. The Oracle Social Network allows you to track projects by activity streams, follow people and objects as well as standard collaboration inside the enterprise.  There is no social analytics capability similar to the Radian6 offering that Salesforce offers, but I think this is just version 1 of the Oracle Social Network.

This new collaboration tool will also be available on-premise as well as in the Cloud. The Oracle Social Network also provides an iPad front-end that should be appealing for mobile workforces

Fusion Application Suite – Now Ready

Last year there was a quiet announcement of the general availability of the Oracle Fusion applications. This year was much different with Larry Ellison announcing the full suite of Oracle Fusion apps and he even did a demo of their new Fusion CRM system (BTW he did a great demo).

Oracle spent six years to completely re-write all of the PeopleSoft, Siebel, Hyperion suites of applications and now there is a new generation of Fusion applications including;

• Fusion CRM
• Fusion Financials
• Fusion Governance, Risk and Compliance
• Fusion Human Capital Management
• Fusion Procurement
• Fusion Project Portfolio Management
• Fusion Supply Chain Management
• [Photos] Fusion Apps

The interfaces look modern and don’t appear to be warmed over client/server applications. Coupled with the Oracle Social Network, these products should be quite competitive in the SaaS market. All of the Fusion applications are available either on-premise, as a managed service and as a SaaS service through the Oracle Public Cloud. There weren’t a lot of details about this hybrid architecture and like the Oracle Public Cloud and Social Network, there will probably be more details early in 2012.

Salesforce – Occupy OpenWorld

As always, there is some great theater at OpenWorld when Oracle rescheduled Marc Benioff’s keynote to Thursday morning (the day the conference ended) and he went rogue. Salesforce quickly shifted the keynote to the hotel down the street. Montclair Advisors was right at the press conference but as it turned out it was basically the same Social Enterprise keynote that was delivered at Dreamforce.

A lot of kudos goes out to the Salesforce marketing team for being able to pull off such a solid event, including streaming the keynote speech over the Internet, in less than 24 hours. Talk about business agility!

Here are some pictures from the event and a few articles with more controversy:

• [Video] Marc Benioff’s rogue Oracle OpenWorld keynote.
• [Pictures] Montclair Advisors was at the rogue Salesforce press event, got some good shots.
• A Keynote Cancelled, A Database Dropped, Lauren Carlson, Software Advice.
• Benioff, Denied OpenWorld Keynote, Mounts Podium Anyway, Charles Babock, InformationWeek.
• Oracle OpenWorld snub fails to put off Salesforce CEO, Brid-Aine Parnell The Register.

I was going to write this post earlier in the week but it seemed that everywhere I turned I saw more developments and wanted to include them.  The market is really starting to get frothy and there are many big SaaS/Cloud deals happening and companies going public with very large market caps.  Let’s take a look:

Recent Acquisitions

SuccessFactors (NASDAQ: SFSF) Acquires Plateau Systems for $290M, which was paid in half cash and half in stock.  This is an interesting move since it is the first acquisition that could be considered ‘core’ functionality when compared with other acquisitions like CubeTree (Collaboration), YouCalc (Analytics), Inform (Analytics) and Jambok (eLearning).  Plateau also has a fairly significant product portfolio overlap including compensation, performance management and succession planning, so it should be interesting to see how these offerings are consolidated.

Plateau has a very respectable customer-base with a large number of federal government customers as well as many large enterprise customers.  The company also was profitable and has some interesting Platform-as-a-Service capabilities that should be very useful for a larger SaaS portfolio.

Based on the market basket of publicly traded SaaS firms, this deal will make SuccessFactors the second largest firm in the group based on current revenues.  We estimate that at their current quarterly run-rate of $68M and Plateau’s estimated annual revenues, the combined company now is probably around $340M, which is only second to Salesforce.com.

CenturyLink (NASDAQ: CTL) Buys Savvis (NASDAQ: SVVS) for $2.5B, which is now third largest telecommunications company in the US with $18B in annual revenues.  The company had purchased Qwest earlier in the year and that deal was finalized on April 1st.   Now with the acquisition of Savvis, CenturyLink is moving into the Cloud Computing market with more than 48 data centers globally.

This is the second major deal in the Cloud Computing market of an emerging Infrastructure-as-a-Service provider, when Verizon purchased Terremark for $1.4B in January.  This should stimulate further consolidation of other providers and Rackspace may be the next target.

Salesforce.com (NASDAQ: CRM) Picks Up Radian6 for $326M for the Canadian social media monitoring company.  Radian6 helps their customers monitor ‘hundreds of millions’ of social media conversations. Salesforce believes that the acquisition will enable it to enhance all of its products, including Sales Cloud, Service Cloud, Chatter and Force.com.

Infor and Golden Gate Capital Buys Lawson Software for $2B.  Now this is technically not a SaaS or Cloud related deal but it just is another example of the pressure traditional providers are feeling from the up and coming SaaS and Cloud providers like Netsuite, Workday and even Oracle’s new Fusion offerings.

Recent SaaS IPO’s

Cornerstone OnDemand (NADSAQ: CSOD) went public on March 16th and quickly captured a market cap of $800M, even when the company lost more than $45M.  The company offers a suite of Talent Management solutions similar to what is offered by SuccessFactors and Taleo.

ServiceSource International (NASDAQ: SREV) completed their IPO on March 25th and were valued at more than $800M as well.  ServiceSource helps companies manage their revenue streams from renewals, maintenance and subscription agreements, which is especially important for SaaS firms.

Responsys (NASDAQ: MKTG) was able to launch into the public markets on April 21st and got a very respectable market value of $2.4B.  The company offers SaaS-based software and services that help retailers and eCommerce firms build and manage online campaigns.

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

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.

Last week’s Oracle OpenWorld show was quite an event with many different story lines including the tie-in to the Iron Man 2 movie.  In fact, in the main area outside the keynote hall there were three Iron Man suites along side their Exadata and Exalogic cousins.  So here is what we learned:

Cloud in a Box according to Marc Benioff and Larry Ellison.  There was quite a number of heated, yet humorous references to Marc Benioff’s (CEO at Salesforce) comments related to Oracle’s view of Cloud Computing that it has to reside in an Exadata box.  In fact in one session I attended, he even said that the Internet was not made of Cloud boxes that were even taller than Marc, and he is tall.  In the Sunday afternoon session, Larry was very dismissive of both Marc’s vision of the Internet and his book Behind the Cloud. If you have some time check out Marc Benioff’s OpenWorld keynote, very funny.

What is really interesting is that in many ways they are both right.  Larry is very famous about a his rant on Cloud Computing and that it is nothing more than a network, servers and software.  This is true, even the most Cloudy providers in the market like Amazon and Salesforce.com are dependent on a real infrastructure that can scale and is reliable and many of these firms are Oracle customers.

On the other hand, Marc is right that the Cloud is less about buying, building and maintaining this scalable architecture and more about leveraging a firm that provides their Infrastructure-as-a-Service.  This has been one of the main catalysts for the software industry’s move to a subscription business model or SaaS, just like Salesforce.com.

In some ways both companies are right, it just depends on your viewpoint.   I think that Oracle is thinking more like IBM and HP and Salesforce is more aligned to Facebook and Zynga. Even though Larry and Marc were both exchanging jabs last week, they are both customers of each other, and in the end that is good for all of their customers.

Mark Hurd looks like he fits in well with Oracle.  The keynote sessions where Mark presented, he was relaxed and really knew the material.   Given Oracle’s absorption of Sun, it is really helpful to have someone with Mark Hurd’s background helping Larry run the company.  The hardware business is quite different than running a software firm and Oracle was able to secure one of the best hardware executives in the industry from HP.

Oracle is really embracing the hardware world.  It was interesting to see the focus on the new Exadata and Exalogic products.  The company’s messaging revolved around performance, availability, security and management and not very much around applications or Cloud Computing.  A lot of discussion around hardware and software being engineered together to create these incredibly powerful database and middleware server platforms.  But does this approach raise concerns around ‘vendor lock-in‘?   This hardware-centric strategy makes sense because Oracle really views IBM as their biggest competitor and they need to monetize the Sun acquisition as well.

Fusion applications are coming at the end of the year, but not sure if anyone at Oracle cares. Larry told the crowd that the writing of the new Oracle Fusion applications for Financial Management, Procurement and Sourcing, Project and Portfolio Management, Human Capital Management, Customer Relationship Management, Supply Chain Management, and Governance Risk and Compliance.  These are the products that were promised last year at OpenWorld but they appear to be real at this point.  Although I didn’t attend the deep dive sessions for Fusion, others who did told me that they have done a good job.  At the Wednesday afternoon keynote, the demos of the products looked good and the user interface looks quite modern.

According to Larry the writing of the new Fusion applications was the biggest development project in Oracle’s history, it was interesting to see that there was little for no fanfare surrounding this major milestone.  As long as the Fusion applications sell more database and infrastructure software and more Exadata servers, I guess that’s what is important.   The successful roll out of the Fusion applications later in the year is going to be important for the overall software market but I doubt it will really impact the leading SaaS providers like Salesforce.com, Taleo, SuccessFactors or Workday.  It will be interesting to see how Oracle evolves its thinking about the applications market and it’s approach to the Cloud, because that is where all the growth will come over the next 5 years.

Here is our updated Public Company SaaS interactive spreadsheet.  Enjoy!

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!