Since the start of the new year I have been going through the SaaS, cloud computing and internet investment opportunities we considered during the past 18 months, as well as the companies we met in conferences and other venues, to select the ones we should continue following. Looking through the set I was struck by the realization that the most exciting of these opportunities come for SaaS application companies automating Internet-related processes, primarily online advertising and ecommerce. This realization reinforced a belief I formed early last year that SaaS application innovation is now driven by the automation of internet processes, e.g., online ad optimization, rather than of enterprise processes, e.g., human capital management. We should be spending more of our time looking for investment opportunities in companies that develop this type of SaaS applications.
I compared and contrasted the SaaS companies that target “traditional” enterprise processes, e.g., spend management, let me call them enterprise SaaS application companies even if they may not always target Global 2000 enterprises, with those that target internet processes, e.g., search engine marketing optimization, which I will call Internet SaaS application companies. The former typically automate a business process that has already been automated by an on-premise software application. As such, enterprise SaaS applications innovate through the model the application is delivered (as a service), and the higher ROI and lower TCO this model affords because of the use of the cloud and of multi-tenant architectures. Internet SaaS applications, on the other hand, automate processes that haven’t been previously automated, so the opportunity for innovation is higher. You’d be surprised at how many companies, for example, still manage their search keywords in giant spreadsheets and manually perform search engine marketing. Several Internet SaaS applications integrate very large data sets (I have written here about the data volumes processed by the new generation of analytic applications), with novel and sophisticated algorithms (for example, Turn’s Internet SaaS application that is used for ad optimization must decide which ad to show to which user at the millisecond level), and innovative user interfaces that borrow the best of consumer applications’ look and feel. Successful Internet SaaS applications have already been developed for ad optimization, social media analytics, search engine optimization, publisher yield optimization, customer engagement marketing, etc.
The move from offline to online channels will continue accelerating. The stakes around online advertising and ecommerce are high as these sectors routinely experience double-digit annual growth. Business processes in online advertising and ecommerce are now being formalized and many of them have not yet been automated. The opportunity presented by new Internet SaaS applications is large. The pace of innovation in this sector will remain strong as existing companies compete for market leadership and new companies enter the market. Finally, as these companies are either being acquired or go public, their engineers and executives will look to start new ventures ensuring a strong pipeline of continued innovation.
By and large, private Internet SaaS application companies are now growing faster and are achieving profitability easier than enterprise SaaS application companies. We’ve heard that from the CEOs of the companies we considered investing and we can see it from the 2009 results posted by own portfolio companies (Turn, Sojern, Elucido). Technology innovation combined with strong growth and strong financial results bode well for attractive exit opportunities. Many of Internet SaaS application companies are already becoming acquisition targets or even IPO candidates. As a result, companies in this category that were funded over the past 12 months achieved valuations that were unaffected by the difficult economic environment. So, we are as we redouble our efforts to find the next Salesforce we start to realize that it likely come from the Internet rather than the enterprise space.