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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: Cornerstone OnDemand
Started: 1999
Located: Santa Monica, California
Geography: Global
Market: Integrated Talent Management
Products: Onboarding, Learning Management, Social Networking, Compliance, Performance Management, Compensation, Succession Planning and Extended Enterprise
Key Customers: Barclays, Barnes & Noble, Kelly Services, MasterCard, Turner Broadcasting, Starwood Hotels & Resorts, Flextronics, Ticketmaster, Sanford Health, Save the Children
Website: Cornerstone OnDemand
Blog: Talent Management Blog
Twitter: @Cornerstoneinc
Recent News:
Cornerstone OnDemand EMEA General Manager to Give Keynote Presentations at iLearning Forum 2010
NRF Foundation Chooses Cornerstone OnDemand’s Industry-Leading LMS for Global Training Initiatives
I asked Adam Miller, Cornerstone OnDemand’s President and 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 as CyberU, which was an on-demand Internet content company, focused on e-Learning. We were on-demand before there was Software-as-a-Service.
The original idea for the company was to provide access to education on-line for individuals and small businesses, which was more of a consumer business model than what we are doing today. CyberU was a distributor of on-line training content as opposed to delivering the courses through a traditional classroom.
What we started to realize is that large companies were interested in educating their employees, so we then begin selling to large Fortune 100 type companies. Many of these companies had a strong resistance to using any type of on-line business solutions, because they felt that it should be inside their own data center behind a secure firewall. There were a lot of concerns around security, scalability and control of business applications. This was about the same time that Amazon.com was launching their on-line retail operations and consumers had similar issues putting their credit card information on-line. From about 2000 through 2006 we were just a small software company that sold training and content over the Internet.
We held to our belief in on-line solutions and even as recently as 2004 we lost many of our deals because we wouldn’t deliver our product as an on-premise offering, but we knew if we did that for even one client we would undo our economic model.
Then over time we were still managing training on-line but our customers wanted to tie the courses back to leadership and succession plans and then led us to rollout an integrated Talent Management suite of solutions. Well, as it turns out the SaaS model has caught on and has grown form less than 300,000 to now over 3.3 million eLearning and Talent Management users, who are happy we decided to deliver our products over the Internet.
Why do your customers buy from Cornerstone OnDemand?
Our customers buy from us because our solutions are better, faster and cheaper than traditional Talent Management solutions.
We are better because we offer a fully integrated talent management platform that covers all of the different aspects of managing people all the way from ‘hire-to-retire’.
Cornerstone OnDemand is faster because our entire system is configurable with 11 discrete modules and over 9,000 individual features, that all can be personalized to address our customer’s business requirements. Our customers can also start with a single model and then turn on incremental modules over time as they are ready for more functionality. Our system can scale to serve the needs of the largest organizations and down to very small companies. In fact, our largest customer is Kelly Services with over 750,000 users and we have eight customers who have more than 150,000 users each. Our average customer has about 14,000 users.
The reason we are cheaper is because we are a pure-play SaaS provider. Our customers have found that it is cheaper to only have to buy from a single supplier, not have to buy hardware and have a lot of staff having to manage multiple systems and relationships.
Our customers also like that we only build products based on their enhancement requests because we don’t build software they don’t want. We currently offer five integrated products including Learning, Performance, Succession, Connect or what some are calling Social Networking and Extended Enterprise which services the needs of non-employees using both our Learning and Connect products. Cornerstone offers global capabilities and has users in 141 countries and supports 16 languages. We think we are doing a good job because we have 95% customer retention rates and that is very important to us.
What do you see as the key trend emerging in the SaaS industry?
The biggest trends we see are Cloud Computing and Mashups. Mashups can be Platform-as-a-Service (PaaS) methods to combine application functionality and even integrations between different company’s systems. It is like delivering third party content to customer and they don’t know where it comes from but it is valuable. We anticipate that customers in the near future will be able to do basic integrations between content and systems themselves without needed the assistance of any third party or system integrators and that will be very popular.
We are also starting to see more, large-scale deployments as SaaS becomes more mainstream. As I mentioned earlier we have eight customers with over 150,000 users including some very large banks, insurance and two of the largest healthcare companies who are now deploying Cornerstone OnDemand solutions, which is exciting.
What is your outlook for 2010?
2009 was the best year we have ever had and broke all of our records. We think that 2010 is even going to be better and we are very bullish.
Last year we were able to gain some significant marketshare and we will continue our expansion this year. For instance our partnership with ADP is just getting off the ground and this year we will anticipate more deals from a growing partner pipeline. ADP is proving to be a great partner and has brought a lot of resources to the table and we are optimistic about 2010.
But we are still not out of the woods with the broader economy and there are still has some weak spots, so we will continue to monitor things carefully.
Last week at Salesforce.com’s Dreamforce conference, the big news was around the launch of the new business collaboration set of platform capabilities called “Chatter”.
After updating the audience on Service and Sales Cloud 2, which both had some really cool new capabilities, Marc Benioff announced the latest Cloud offering – Chatter or the Collaboration Cloud.
This new business collaboration offering, which was never to be confused with Social CRM, consists of a wide range of Chatter platform capabilities. Many of which look very similar to Twitter, but don’t get confused, this is NOT Twitter. Although Chatter will be integrated with popular social networking sitesl like Twitter and Facebook, these integrations are only feeds into Chatter.
The key line that kept getting repeated was “Why do I know more about strangers on Facebook than I do about my own employees?” This apparently was a major driver in the development of Chatter by Salesforce.
On a funny note, during the analyst meeting, someone asked Marc if he was going provide Chatter on-premise? (Remember Salesforce is in the Cloud!) In a sarcastic reply said that he was actually packaging up the Exodata Chatter servers and that they were being shipped out to clients at the time of the launch. That got a big laugh from the audience. This was also humorous because Chatter won’t be Generally Available in the Cloud until sometime in 2010.
Key capabilities include employee profiles, status updates that are familiar with LinkedIn and Facebook, Groups, external and internal feeds, ability to share content with groups and events, alerts and notifications that allow for your apps to speak to you, an extensible API for the Force.com platform, integration with Google Docs, Twitter and Facebook. To learn more watch this Chatter demo by Parker Harris, Salesforce.com’s EVP of products of the opening day keynote.
Unlike other emerging business-related Social CRM players like Jive Software (SAP partner), Lithium, RightNow or even Oracle, Salesforce seems to be focusing much of it competitive energies against Microsoft SharePoint. I think this is probably a red herring.
Another major benefit to the Chatter strategy is the addition of a new Salesforce mascot family. Saasy now has Chatty. People were lining up to get their photo with both of these mascots… wow.
Here’s what I think the real Chatter strategy is based on…
- Stickiness. This is a ‘fun’ business application and if it is widely adopted as a business collaboration tool, it will be hard to replace. This process may take awhile for this adoption to take place but it will have lasting impact on their clients. The flip side to stickiness is that customers will be much less likely to cancel their service if they are hooked on it. With industry attrition averages between 10-20%, this could have a real hidden benefit. This is especially interesting in that they are giving the basic Chatter capability away with the basic and enterprise subscription licensing. Wonder if they have modeled out this impact?
- Barrier to entry. I think that it is interesting that Salesforce is thinking that this capability might actually upset Oracle Fusion and SAP’s next generation of SaaS offerings because it would require a rewrite of their core platforms. Actually this might make it more likely that SAP might do more than expand their partnership with Jive Software, and force them into a situation where they might have to buy them to keep up with the Benioff’s. With Fusion targeted for GA some time in 2010 (probably December), if they were to add in a robust collaboration capability, it would most certainly delay the GA, which would push Fusion into 2011. So Chatter becomes a key differentiator for Salesforce, even if it experiences low user adoption.
- Facebook and Twitter. By aligning themselves with these leading social networking platforms, Salesforce will be able to differentiate their solutions as hip compared to the older generation. With all types of younger workers continuing to move into the market, this makes Salesforce solutions possibly more interesting to the Generation Y workforce.
- Productivity. By putting collaboration (email, chat, document and knowledge management) in context to various business processes, the hidden strategic benefit might actually be a more productive workforce – closing more deals, resolving more issues, and engaging more employees. Because this is a solution that doesn’t need any training, it could be rolled out broadly without a lot of costly change management activities. Difficult to quantify this benefit but as more use cases become exposed over the next 6-12 months, this will be a really interesting benefit to solutions like Chatter.
So what are the issues with Chatter?
- Security. Kept emphasizing that Chatter has been built on a common security architecture that is the same one being used by Salesforce, which meets stringent bank-level security requirements. This actually might be a CIO selling point because it might be a way to reel in employees who are social networking with corporate information on unsecure sites like Facebook and Twitter. By integrating with them but controlling the internal networking, and not allowing export of data to these sites, the security teams can at least protect data access and distribution.
- Adoption. Salesforce has never really launched a enterprise-wide application before and Chatter is even a different animal than a traditional employee-oriented application. This is uncharted territory for Salesforce and it is unclear how rapid or widespread the adoption of their technology will be. What is good is that Marc Benioff did mention that they are not making any projections on what is going to happen with Chatter, they figure it will be popular but were reluctant to make predictions based on wide-scale adoption. It is in Salesforce’s best interest to make sure Chatter is successful because even modest adoption would ensure a level stickiness that their current applications may not even enjoy.
Just try and take away someone’s Facebook and you will understand stickiness!
- But its not Twitter. What is interesting is that Chatter uses a very similar to Twitter (I didn’t count the number of characters in the message box but I would bet it is 140), but it is a different application. There is only a one way feed and employees are still going to try and go out and use their Twitter. What was confusing at the launch was one of the Twitter board members, Jason Goldman, that Chatter was not built on top of Twitter? We just took your idea and asked to join us on stage? Hummm… sounds like an SAP or Microsoft-type partnership
If employees only want to use Twitter, they probably won’t like Chatter.
So how much does it cost? For existing Salesforce customers who have already purchased seat of Sales or Service Cloud, those seats will get Chatter at no cost, which is good deal. For those employees who don’t have Salesforce seats but want to have limited access to Chatter, the pricing is $50/seat/month. After talking to a product manager on the Dreamforce show floor about this, it seems like a lot of money for almost no functionality. My guess is that when they roll out Chatter later in 2010, they will have a better thought out plan around pricing
In the end, the Chatter strategy makes a lot of sense. The customers I spoke to about it really like it and I will anxiously await the official launch in 2010.
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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