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

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

Remember these companies?

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

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

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

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

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

(1) CSOD IPO: March 17, 2011

(2) SREV IPO: March 25, 2011

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

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

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

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

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

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

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

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

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

Company:                   Patersons

Started:                       1996

Located:                      Salisbury, United Kingdom

Geography:                  Global

Market:                        On-Demand Global Payroll

Products:                    Click4HR, Free HR, and Global HR and Payroll

Key Customers:          Constellation Europe, Henderson Global Investors, Interdean International Relocation, Siemens

Website:                      Patersons

Blog:                           Patersons Blog

Twitter:                       @patersons

Recent News:

Patersons Announces New Partnership with Lawson

CEO Honored At Growing Business Awards | APA Article

Patersons Shakes Up the Market Again Adding ESS to Free HR Offering

Patersons Shakes Up The Market Again With ESS Added To Free HR Offering

I asked Karen Paterson, Patersons Chief Executive Officer a few questions about her business and her view of the SaaS market as we move into 2010.

Did you start out as a Software-as-a-Service company?

Yes

Why do your customers buy from Patersons?

Patersons ‘Software-as-a-Service’ payroll platform delivers payroll on one single database, one technology platform worldwide. This is the only multi-tenant, multiple country online payroll processing platform in the world. Clients also only have one global contract with Patersons. The leading-edge platform promotes scalability and we can cater for any size payroll anywhere in the world, whether a client has 1 employee in Kazakhstan to 10,000 employees in China. Patersons Logon2 solution is as feature rich as major ERP solutions. It also delivers instant Sarbanes Oxley and SAS70 compliance with its unique International Payroll Workflow, therefore making sure all local requirements are adhered to in a timely and accurate manner. Patersons comprehensive global consolidated reporting suite allows quick analysis of global client data.

SaaS is based on the concept of ‘Pay-as-you-go‘ on-demand and customers only pay for what they use and nothing more. The solution is regularly updated and developed to stay in the forefront of the industry. There is also no additional expense for customers when upgrades or updates are made to the solution, and as the system is delivered via the Internet, customers receive upgrades in real-time. Patersons technology is developed 100% in-house, therefore we do not have to pay third party fees.

What do you see as the key trend emerging in the SaaS industry?

There is a strong move from on-premise ERP to SaaS as a serious alternative global solution.  Many companies are looking for best-of-breed in a vertical industry rather than an ERP which generally gets 20% functional use of what has been paid for.  The mistrust of not hosting and relying on an outsourcer to provide an IT function is interesting and an indication that internal IT department have been failing the HR function.

What is your outlook for 2010?

2010 will be the Year of SaaS and the Cloud.  Coming out of recession companies are seeking single process outsourcing solutions and best of breed choices from software vendors.

Company:              Workday
Started:                  Founded in March 2005 by former PeopleSoft executives Dave Duffield an                                       Aneel Bhusri

Located:                 Pleasanton, California

Geography:            Global

Market(s):               Software-as-a-Service
Products:               Human Resources, Payroll and Financial Management  

Key Customers:     Flextronics, Chiquita Brands, H.B. Fuller, Salesforce.com,

                              McKee Foods

Website:                Workday

Blog:                     Workday Blog

Recent News:

-Workday Delivers Pay for Performance and Worker Spend Management

-More than 30 Companies Live on Workday

-Workday Passes 50 Customer Milestone      

I asked Workday’s Chief Technology Officer Stan Swete a few questions about Workday and the Company’s view of the SaaS market in 2009.

Did you start out as a Software-as-a-Service company?

Since its inception in 2005, Workday has always been a Software-as-a-Service company.  Our co-founders, Dave Duffield and Aneel Bhusri, both spent many years in the on-premise world and identified the opportunity for industry change.  Business software that was designed in the 80s and 90s had become far too complex and expensive to deal with, and it wasn’t meeting the needs of contemporary organizations.  There was a big opportunity to scrap all traditional software, start from scratch and take an entirely new approach.  Just 3 years out of the gate, Workday delivers Human Resources, Payroll and Financials – all via SaaS.

Why do your customers buy from Workday?

First, low cost of ownership and fast time to value are huge right now. Companies that are using on-premise applications are looking to get out from under the maintenance burden and many are turning to SaaS.  And, since SaaS can be implemented quickly, many Workday customers are measuring fast returns.

Second, customers are looking for innovation.  As I mentioned earlier, most on-premise software was built in the 80s and 90s.  Workday is new - built from the ground-up on modern Web-based technologies.  We’ve incorporated search, links and tags throughout the application, making it intuitive for the user.  And, by the nature of the SaaS model, the product is always getting better. 

Finally, and we take this very seriously, we are committed to being a trusted partner.  Our customers are our most valued and important partners, and in fact, our product is a direct reflection of their feedback.  Workday has recently achieved a 100 percent customer satisfaction rating, and we attribute this to our commitment to them as partners. 

What do you see as the key trend emerging in the SaaS industry?

Especially because of the hassles associated with on-premise maintenance and upgrades, companies will continues to replace their current traditional systems with SaaS.  I think the bigger driver over the next 18 months may be that companies start really looking at how to emerge from the tough economic environment in a strong leadership position – having a modern technology footprint will be a central part of those efforts. 

What is your outlook for 2009?

SaaS is ready for the enterprise.  We’ve hit a tipping point, and “Enterprise-Ready SaaS” will continue to prove itself this year as large companies continue to go live on Workday and other best-of-breed providers.  Mid- and large-sized companies will continue to select SaaS for many of the reasons I’ve outlined above: lower cost of ownership, faster time to value, continued innovation, and vendor commitment to be trusted partners.

 Thank you to Stan Swete, Jeff Pulver and Christine Cefalo for contributing to this profile.