By Kevin Dobbs

Montclair Advisors, LLC

Now that many software companies really feel that the risks associated with a second recession are firmly in the rearview mirror, it now seems like everyone is looking to grow their businesses.

I read a great post yesterday by Bruce Cleveland at InterWest Ventures about the Value of Growth for SaaS Companies, which I thought really accurately captured a challenge that many software firms face when transitioning to a SaaS model.   This is a subject that is near and dear to me given my background as a reformed marketing executive and someone who was responsible lead generation at Oracle years ago during the Tom Siebel and Marc Benioff era.   I think it was Tom Siebel when he was running Oracle’s inside sales team that told me “I want it to rain leads from the sky!” At the time I was actually shocked because he was asking me to literally drown his sales team with qualified opportunities who wanted to buy Oracle’s database products.

As I have come to learn that he knew exactly what he was talking about and his track record demonstrates that productive sales teams deliver amazing revenue growth results.  Bruce’s post highlights that a SaaS company without meaningful growth is not worth very much and probably will fetch the low-end of the valuation curve, which is still pretty good in today’s crazy market (See last week’s post about the SaaS Bubble).   So how are high flying SaaS companies like Salesforce and SuccessFactors achieving CAGR’s in excess of 30% every year?   Check out this chart I put together on some of the leading publicly traded SaaS firms (sans Salesforce because they will skew the chart):

As you can see the companies with the higher growth rates are also the ones that have high market caps (valued more highly by Wall Street).  What is really interesting is that SuccessFactors was able to grow by almost 50% for the past three years, even through one of the worst recessions in the last 100 years.  The value of growth can also been seen by a company that recently went public, Cornerstone OnDemand, they have been rewarded with a market cap that is over $800M even though the company lost more than $40M last year.  Seems crazy right?  But they have a great organic growth story along with a major channel relationship with ADP which could also signal even faster growth in the future.

If you talk to any software sales rep they often complain about their pipeline and the lack of quality leads. Reminds me of those coveted Glengarry leads  from Mitch and Murray downtown.    So at the heart of all of these companies and their rapid growth rates is that they have all developed a core competency to generate high quality leads and build pipelines quickly.

(click on picture to see clip)

Here are some tricks that I have learned along the way that will help you to build out your SaaS lead generation strategies:

• Use a Portfolio Approach - Depending on your product, buyers, and market there may be many ways to generate interest.  Campaign elements of a typical lead generation strategy are a combination of organic and paid web traffic, email campaigns, webinars, customer programs, social media and targeted events.   Don’t put all of your investment in a single demand generation approach, but reward the tactics that generate quality leads at an affordable price.
• Test and Test Again - With the portfolio approach you will need to continually test your messaging, packaging, value propositions, and price points.   The best-in-class SaaS firms are continually testing and refining their lead strategies.  This is important as most SaaS marketing organizations are trying to lower and optimize their Customer Acquisition Costs (CAC).
• Automate Where Possible -  There are a lot of great Sales 2.0 tools available today that can give you a real unfair advantage in the lead generation process.  Companies like Marketo, Pardot, Eloqua, Constant Contact, NetSuite and even Salesforce offer many tools to help you automate and analyze your marketing efforts.  I would definitely recommend implementing a lead nurturing or drip marketing program to continue to work your lower quality leads, this is a great way to build your pipeline over time with little direct human intervention.
• Track Everything - Make sure your sales operations and marketing teams are tracking and analyzing all of your lead activities and conversion rates.  You don’t need to be overly complex, but just tracking some basic things like lead scores, lead acceptance rates, leads converting to opportunities and close rates can help your organization to fuel your high growth SaaS sales engine.

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

As Zach Nelson kicked off last week’s Netsuite’s Partner and Developer Conference – SuiteCloud 2010 in San Francisco, there was a real focus on the importance of their platform as a way for partners to play a critical part in helping to take his company to the next level.

They kicked of the special launch event that featured a video of some of their key partners including TrueCloud, InsideView (who has been profiled in this blog), Aria, Hein & Associates, PaceJet, RootStock Software and Demand Solutions Group.

I think it is great with companies are building their business around their partners and creating a cool ecosystem where everyone can make money… more on that in a minute.

Zach then covered some Cloud Computing trends;

· Fake SaaS – He compared the NetSuite offerings, which are Cloud-based to Microsoft’s GreatPlains offering which is just a hosted version of their same on-premise offering. Still single tenant, version locked and requires Citrix to make it work like a true SaaS application. These types of business models will find it almost impossible to make money using a Fake SaaS. Other vendors mentioned here were Lawson and SAP.

· SaaS-based Financial Systems Are Popular. He showed a Gartner market slide (from 2008) that showed NetSuite as the fastest growing FMS provider.

· Traditional License Software Firms Are Hurting – This is nothing new because Saugatuck Technologies, Ray Wang from Altimeter and Montclair Advisors have all written about this but this slide says it all…

Customers are moving away from the old software model.

· The Cloud can now handle complex business processes. This has been demonstrated by vendors like NetSuite, Workday (Flextronics), Amazon AWS and SuccessFactors (Siemens) servicing very large and complex clients.

· Customization is no longer the Achilles heel of Cloud applications. In fact, it was argued that customization with NetSuite is now a killer feature of their Cloud offerings.

· Channels are emerging as an important component of a successful Cloud business model.

· The Cloud is getting social. With applications like Twitter, Facebook, LinkedIn, blogs, Fluid, Mzinga, InsideView, applications are more focused on communities and content than ever before.

There was a funny segment that discussed the complexity associated with the development of years of on-premise software, which he called an infrastructure hairball. It is much more cost effective to manage a single architecture, database and system of record. He mentioned that the cost of managing an SAP system (ala hairball) was approximately 3% of a company’s revenues, while operating their system was only 0.1%.

Then Zach got back to the partners and referenced a number of applications that are being built on top of the NetSuite platform – SuiteCloud , like RootStock Software’s MRP application. Other providers who have integrated into SuiteCloud include Amazon Web Services, Google, InsideView and HostAnalytics.

I thought the most interesting part of this session was when they brought IRON Solutions and NewHolland on stage to discuss the vertical application they had built on top of SuiteCloud.

New Holland has approximately 9,800 customers and they wanted to automate and enhance their relationship with their partners/distributors. They started working with NetSuite in 2007.

IRON Solutions is the Kelly Blue Book of agricultural equipment and offered a very complex product configurator along with CRM capabilities that allowed distributors better create and manage pricing and leads. They launched their new products built on NetSuite, IRON HQ for new product promotions, IRON Builder for pricing and lead management, IRON Guides for appraisal and trade and IRON Search for promotion and sales.

New Holland wanted to balance both the science and art of their business to move more of their customers to the web. Darwin Melnyk, CEO from IRON Solutions and David Greenberg from NewHolland whipped out their iPads and demonstrated their new applications.

Increasingly these type of vertical partner applications are going to be popular with customers looking for more tailored solutions for their specific businesses. NetSuite has more than 200 channel partners and sales through their channel has grown by 40% on a compounded annual basis. Which is quite healthy given our recent recession.

New partner announcements included;

· ISV/OEM’s – JCurve Solutions

· Systems Integrators – Hein & Associates (a Top 50 CPA firm), Fujitsu that is forming a strategic relationship for Japan with NetSuite and WIPRO who is building a practice around NetSuite OneWorld.

· BPO – GenPact is building an ERP Outsourcing business on NetSuite

I mentioned at the beginning why working with partners like NetSuite can be really profitable and with their new SP100 program, channel partners can get 100% of their first years revenue when they move older client/server applications to NetSuite.

Overall, it is nice to see major players embrace their partners and give them an opportunity to build their business and help their partner - a real win-win for everyone.

Company:          NetSuite

Started:              1998

Located:             San Mateo, California

Geography:        Global

Market:               Cloud Computing Business Management Suites

Products:            NetSuite Accounting/ERP, CRM, eCommerce, NetSuite OneWorld, Suite Cloud Platform and OpenAir PSA

Key Customers:   SuccessFactors, Smashbox, Solarwinds, Intuitive Surgical, Isuzu Truck, GestureTek, Virgin Money, Six Apart, Cash Edge, Oakland A’s, Ashi Kasei Group, Cartridge World

Website:              NetSuite

Blog:                   Cloud NetSuite

Twitter:              @NetSuite

Recent News:

NetSuite OneWorld Strengthens Links at Wireless Matrix

Independent Survey Finds High Satisfaction Amongst NetSuite Customers

NetSuite Wins RedBuilt From SAP, Making it the Largest Company Yet to Leave SAP for the NetSuite Cloud

NetSuite and Hein Partner to Provide Expert Accounting and Regulatory Compliance Solutions From the Cloud

I asked Mini Peiris, NetSuite’s VP of Product Marketing a few questions about their 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 we were founded in 1998 as a SaaS or Cloud-based solution. The company was started Evan Goldberg and Larry Ellison, providing cost-effective business management software for small and medium sized businesses or divisions of large enterprises. We’re now the #1 cloud business management suite, with over 6,600 customers.

Our original focus was on small businesses and over time we have moved up market, . When we started NetSuite, we were based around financial management and we have now developed an entire business management suite across ERP, CRM and Ecommerce. Then in 2008 we launched NetSuite OneWorld for global businesses or their divisions, that are looking for a comprehensive business or financial management suite.

Why do your customers buy from NetSuite?

The value of purchasing NetSuite software is we allow our customers to focus on operating their core business instead of running and maintaining all different types of business management software and infrastructure. Most companies operate a hodge podge of different systems for financials, CRM, support, eCommerce and inventory. This requires substantial initial and ongoing investment, time to manage and resources to upgrade.

Cloud Computing reduces a lot of this IT pain by allowing customers to pay as they go, and eliminating the need to buy, maintain and upgrade expensive hardware, software, and infrastructure. NetSuite offers a fully integrated web-based cloud business management suite, which offers significant business benefits, such as CRM solution that is fully integrated into financials and into inventory, which creates a much more efficient order to cash process. Some of the big benefits include significant ROI because you can do more work with fewer employees and the work is more accurate. Older systems require business analysts who create and maintain sales orders, conduct ad hoc reporting, data management across systems and a lot of re-keying.

Our customers also like that they can centralize their data, centralize their customer data and have a single version of the truth.

NetSuite customers can leverage our standard analytics, run real-time reports, dashboard and fulfillment, without having to try and integrate a hodge podge of information using Excel. All of this all included and completely integrated with our system, so customers don’t have to pay a separate fee.

We typically service companies who have outgrown Intuit’s QuickBooks, struggled with having to maintain Microsoft Great Plains with multiple other business systems, and we’ve even had SAP R/3 customers convert to NetSuite, who have become weighed down by the IT costs, and multi-million dollar upgrade costs.

For example, Asahi Kasei Spandex America moved from SAP R/3 to NetSuite and reduced their IT spend from 3% of revenue to 0.1% of revenue with NetSuite - with NetSuite providing an easier to use, modern, integrated and cost effective completely web based solution. In fact, NetSuite has been shown to be 50%+ more cost effective than traditional on-premise solutions. Our sweet spot in the market is companies with 11-1,000 employees in high tech or software, wholesale/distribution, retail/eCommerce, manufacturing or services verticals, and our solutions are used across the globe.

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

A major trend is the enterprise adoption of SaaS. For example, we are seeing significant share of our new business bookings for our NetSuite OneWorld solution, our solution for global companies or divisions of global enterprises.

The increasing media coverage of SaaS and Cloud Computing is definitely a driver, because the significant cost savings and business efficiencies are very attractive to CIOs and they are starting to take a closer look at Cloud-based solutions. Even during the economic downturn, Gartner rated NetSuite for the first time as one of the Top 10 Financial Management Systems vendors in 2008 by market share - and the fastest growing in that Top 10. And IDC recently rated NetSuite one of the Top 10 ERP solutions for sub-1,000 employee organizations .

ERP upgrade cycles are coming up again like they did 3-5 years ago and customers are faced with either upgrading or switching their systems, and NetSuite’s solution provides the ideal solution to slash IT costs, and get off the upgrade treadmill.

Cloud solutions are becoming more highly tailored towards specific industries. NetSuite’s SuiteCloud platform provides the ideal platform for ISV’s to deliver industry specific cloud apps to market. For example, RootStock Software is a NetSuite partner that is building a manufacturing resource planning application on top of the NetSuite platform, because they can take advantage of NetSuite’s native ERP, CRM and eCommerce functionality and their application logic for manufacturers. ISVs can even market and distribute their applications through our marketplace at SuiteApp.com.

Traditional software resellers and solution providers are looking to transform their business models as the traditional on-premise market slows down and buyers become more skittish around large capital outlays. Cloud computing offers the opportunity for resellers to provide truly cost effective and compelling solutions to their customers. This transition is happening worldwide, and NetSuite’s cloud pay as you go solution provides the opportunity for resellers to to build a recurring revenue stream, and better fit with their customers’ needs. With our NetSuite Solution Provider program, partners can leverage NetSuite to make this transition. In fact, we recently announced the NetSuite SP100 Program which enables resellers to get paid 100% of the first-year revenues on new sales of NetSuite.

At our upcoming SuiteCloud2010 event in San Francisco in April, NetSuite partners will be coming together, sharing ideas and best practices and seeing how others have both built natively on top of NetSuite’s platform, as well as integrated with it.

What is your outlook for 2010?

Well, we’re pleased that at NetSuite we just closed out our 2009 fiscal year with record revenues.

In a recent Gartner forecast they are projecting that SaaS ERP/CRM versus traditional ERP/CRM, SaaS will grow at a much stronger growth rate. As Cloud Computing gets more play and enterprises continue to upgrade, this should be good news for us.