The 1Q10 is Done. Good Reasons for SaaS Companies to Remain Optimistic

Several public SaaS companies (Netsuite, Concur, SuccessFactors) reported their quarterly results and they were positive.  Our own SaaS portfolio companies did the same (over the last week and during this coming week my partners and I are participating in a long series of board meetings) and the results are from positive (companies met their quarterly financial targets) to exceeding expectations (companies beat their quarterly targets).  Obviously this is very good news.  But beyond the good news, here’s what we are learning from the information we are receiving from our portfolio companies:

1. Corporations are investing in applications in general but SaaS is winning more than its fair share of opportunities.  The majority of our SaaS companies won most of their deals this quarter against on-premise vendors as opposed to other SaaS vendors, i.e., they are winning in situations where the customer may not know upfront whether a SaaS application will be chosen.  Gartner had predicted earlier in 1Q10 that spending in SaaS applications will be 5x higher than spending for on-premise applications over the next 5 years.
2. Large companies (over $500M in annual sales) are adopting SaaS applications faster than smaller ones (I believe that smaller companies are still reeling from the effects of the Great Recession).  In our SaaS portfolio over 60% of the wins came from such large companies.  Furthermore, the 2Q10 sales pipelines of these companies reflect a similar mix of prospects.  So much so that a few of our SaaS companies are starting to hire additional sales people and my sense is that, if this trend continues, we will see more hiring by the end of 2Q10.
3. While the impact of the Great Recession on corporations of every size has been brutal, subscription renewals during the quarter remained over 95%, indicating both the importance of these applications to the business of these corporations, as well as the high value they are receiving from using these applications (otherwise, why renew?).
4. Upsells were also on target, either because companies are moving from experimentation to broader adoption of SaaS applications, or because they have been satisfied enough with the SaaS application(s) to expand the usage to additional organizations within the same company.
5. Some of our SaaS companies raised their license prices during the quarter and didn’t see any slowdown in the sales cycle, again indicating that customers consider SaaS applications to be a great value even at a higher price.
6. Customers are evolving.  Rather than seeing SaaS applications simply as a more convenient and better value alternative to on-premise applications, they are now starting to ask for features that only cloud-based applications can deliver, e.g., social computing and community, collaboration, quicker release cycles and faster upgrades.

We are getting ready for the next meeting of our SaaS portfolio companies that will take place on 5/14.  In addition to spending time to elaborate on the points above, we will be delving into the ways the sales models of these companies are evolving (particularly around lead generation and customer lifetime value).  We are also going to discuss how SaaS applications will evolve as a result of the broad adoption of tablet computers in general and the iPad in particular.  Will these platforms enable SaaS vendors to offer applications in a way that will cause companies such as Apple to start claiming that “there is an enterprise app for that?”