On a couple of separate occasions last week I was asked to write about my list of characteristics that define true SaaS application
companies. Establishing these
characteristics is becoming important now that there is so much interest in
cloud computing and is getting easier to confuse SaaS applications with cloud-based
there are a couple of recent posts and active discussions on this topic taking
place in different forums (here,
here and here).
As you can imagine, I spend a considerable amount of time every week with our SaaS portfolio companies, as well as talking to the management teams of SaaS companies seeking investment from our firm. The continued interest of venture investors in SaaS, and more recently in cloud computing, is resulting in management teams trying to position every company that uses the cloud as a SaaS company.
Let me start with a definition of a cloud-based application so that we may be able to better distinguish it from a SaaS application. Any application that can be deployed in a cloud (public, private, or hybrid) is a cloud-based application. Let’s consider a couple of cloud-based application examples. A company like Goldman Sachs using its own application developers can create a proprietary application and deploy it in its private cloud (that resides in its own data centers). Alternatively, Goldman may contract an IT services provider, like IBM, to develop a proprietary application and deploy it in the private cloud that the provider, in this case IBM, runs for Goldman. According to the above definition, these two are examples of single tenant cloud-based applications. But they are not SaaS applications.
A true SaaS application company has the following characteristics:
- Offers an application using a single instance multi-tenant architecture
- Simultaneously runs at most three versions of the application (the current version and the two previous versions) in its data center.
- The application supports cloud-specific functionality such as social networking among users, rich collaboration among users, presence, and activity streams.
- Uses processes and the associated software tools for data and application integration so that data from other cloud-based and/or on-premise applications can be moved to the SaaS application, and the SaaS application can communicate with other relevant applications.
1 (a) and (b) are important because they impact the company’s costs of doing business and ultimately its margins. While not necessary, 1 (c) is very important because it allows true SaaS companies to offer value and further differentiate themselves from their on-premise counterparts (some of which are aggressively moving their applications to the cloud). Finally, 1 (d) is important since no application is an island but needs to be integratable into each customer’s application fabric.
- Business Model: The software license model is subscription-based. Furthermore, no more than 30% of the company’s revenue is coming from professional services.
- Services: Application customization only through configuration changes rather than programming. Example configuration changes include the simple activation (or deactivation) of certain application modules or menu-driven changes to the application's look and feel. Application onboarding should be accomplishable through the web and not require extensive on-site presence.
- Sales: Extensive use of self-service processes. I have written more extensively about this topic here and here
- Support: Extensive use of self-service processes. I have written more extensively about this topic here.
- Marketing: Broad use of the web for lead generation, and market reach.
- Operations: The performance of every aspect of the business such as customer acquisition costs, lifetime value, cost per lead, uptime, etc. must be measured constantly. Relevant posts on metrics can be found here and here.
During the first meeting or call with the management team of a prospective SaaS investment we want to make sure that the company possesses the above characteristics before we can move into further due diligence. Finally, as you can already figure out, while all SaaS applications are cloud-based applications, the reverse is not true.