I’ve been doing a bit of research on the Software-as-a-Service (SaaS) business model recently for one of the companies that I work with. While I’m not going to pretend to be an expert, I will share my findings and sources. And please, if I’m wrong, correct me!
SaaS is getting quite a bit of traction recently with investors because of Salesforce.com’s success and the IPO’s of Netsuite, Omniture (in 2006), and DemandTec. And while it’s a hot market right now, allow me to play devil’s advocate for a moment.
1. Of the publicly traded companies that I looked at, only Salesforce.com has been consistently profitable. The rest are still operating at a net loss.
2. It has taken most of these companies somewhere between at least $30million and $65million in venture funding to reach IPO. This is significant because as an entrepreneur, you better be thinking big numbers. Your $300K Series A isn’t going to cut it.
3. They spend an ABSURD amount of money on sales & marketing. Omniture spends between 41%-57% of total revenues on M&S. Netsuite spent 65% of revenues on M&S. Salesforce spends between 48%-61%, if you don’t count the 467% they spent the first year they were in business (thank you Salesforce for educating the public for the rest of the SaaS companies).
While investors are excited because IPO Valuations are coming in as high as 10X revenue, I think the next 36 months will be the true test if the SaaS model can hold its own. These guys had better turn the corner or the model is in trouble.
The SaaS model definitely makes sense though. From a personal perspective, the less software I have to manage, install, update, host, etc, the less time I have. I love all that is online because my life goes with me where ever I go, without requiring to lug around my laptop. And to the extent that, on the consumer side, companies can partner, I’d be even more likely to rid myself of bulky clients and opt for the online version. (By the way, I’d pay someone to take away my 2007 version of Quicken and provide me with a usable, easy, online, interconnected version of personal financial software)
Anyway, here’s a link to a Google Spreadsheet (love goog, biggest fan) with all of the historical financials I found on a select number of SaaS companies, including Omniture, Netsuite, Salesforce.com, RightNow, DemandTec, and Concur. I’ll continue to update it as I find more information.
Here are links to some interesting articles that I’ve found as well:
Saugatech has a research article out on SaaS trends – anyone care to share with me?
Good luck to all the SaaS companies out there – and share your research with me if you have any.