Yesterday I participated in a panel discussion on how the startup model has changed in the era of open source, Amazon’s cloud infrastructure and SaaS. The panel was part of the AlwaysOn OnDemand conference. Three of Trident's SaaS portfolio companies made it to the AlwaysOn OnDemand 100, the list of the top 100 SaaS companies: Host Analytics, Pivotlink, and Tricipher. Other panelists included Gordon Ritter of Emergence Capital, Ravi Mohan of Shasta Ventures, Mark Gorenberg of Hummer Winblad and Sanjiv Parikh a venture advisor. Because of the participants the discussion delved primarily on the strengths and staying power of the SaaS model, the characteristics investors are looking for in SaaS companies, and areas of new investment opportunity. Below are some of the discussion’s highlights:
- In its purest form, cloud computing represents a fundamental platform shift in that allows everything to be offered over the internet as a service, elastically/dynamically, and paid ratably. Many companies (mostly large vendors of on-premise software solutions), are either trying to marginalize this shift by calling it a fad, e.g., Oracle, or are trying to leverage the recent hype around cloud computing to position their products as cloud-based because they feel that in this way they will remain relevant. At Trident we have a well-defined set of criteria that allow us to determine whether a company has a true SaaS product and the associated business model and practices. The other investors participating in the discussion have similar criteria
- The panelists agreed that corporations are adopting SaaS applications because they provide a) their employees with universal access to the solution (anytime, anywhere), b) quicker time to value, c) reduced Total Cost of Ownership (TCO), compared to equivalent on-premise applications, and d) unique and needed functionality that is enabled only by the cloud, most importantly collaboration. These adoption factors were most recently also validated through a survey conducted by InformationWeek. To continue providing superior TCO, SaaS companies must continue to rapidly evolve their products, business models and distribution models. Customers must feel that they are getting something of value immediately (even if they are just testing the free version of a SaaS product) thus creating the right conditions for future upselling opportunities. Cloud-based infrastructures enable the rapid iteration through product offerings and models.
- Strong teams with knowledge of the SaaS the model is a top characteristic of the SaaS companies seeking investment. Technological and business model innovation is another top characteristic. What type of technological and business model innovation does the cloud enable, other than a delivery mechanism, that will cause a customer or a partner adopt a SaaS solution? By understanding the target customer’s pain-points investors are also trying to determine whether a SaaS company is trying to automate an important business process that can be uniquely automated through a cloud-based solution or whether the SaaS solution will just replace an existing on-premise solution by introducing additional efficiency. Understanding of the target market (as investors we don’t want to hear that a SaaS company is targeting the generic SMB market; instead we expect a more sophisticated segmentation of a company’s target market since the purchasing and adoption criteria of a mid-size enterprise are completely different than those of a small company). Finally, there was a brief discussion regarding the metrics a company must have achieved to be considered an ideal candidate investment, such as MRR, LTV, and CAC.
- Regarding new areas of investment interest we mentioned vertical SaaS applications particularly in industries such as health care and pharma even though security and compliance of data were identified as potential impediments to broad and quick adoption of such solutions. I mentioned that my personal investment interests are around SaaS applications that automate Internet process in the areas of online advertising and e-commerce as well as in analytic applications and cloud-based infrastructure that address big data problems. Identifying applications that utilize the data captured by SaaS applications was mentioned as another promising investment opportunity. The panel touched upon the investment opportunity for a new generation of SaaS applications and cloud-based infrastructure created by smart phones and the new generation of tablets.