Software as a Service (SaaS) is a hot trend that’s getting bigger. Fueled by demand from both businesses and consumers, SaaS has emerged as the dominant model for innovative software vendors. As the market matures, we’re beginning to see new IT providers emerge to support the industry.
SaaS benefits
This huge shift to SaaS isn’t surprising, as the benefits of cloud computing are proven. SaaS is available through any web enabled device so it’s accessible to anyone, anywhere in the world, provided they have a browser, tablet or mobile phone. As more people move from PCs to mobile devices the demand for SaaS just keeps growing. From a technical perspective, mobile devices aren’t very powerful, so software applications need to be delivered to them via the cloud.
SaaS is more affordable than traditional on-premise software because there’s no need for customers to buy hardware or software licenses, users simply sign up to services. SaaS can be up and running immediately and users pay on a monthly subscription basis, based on the number of users, so they know exactly how much it’ll cost and get the benefits from day one. With on-premise software you pay large amounts upfront and often don’t see the benefits for a long time because implementation and customization takes months, sometimes years.
Last but not least, SaaS software is maintained by the service provider, so users don’t have to buy and maintain IT infrastructures and can take advantage of ongoing technology updates that are automatically rolled out through the cloud.
True SaaS
There’s lots of confusion regarding SaaS solutions because vendors that host traditional solutions on virtual servers often describe themselves as SaaS/cloud providers. However, remote hosting is not the same as SaaS. True SaaS solutions are designed to be multi-tenant, serving a large number of customers on a shared infrastructure and with a single product. This means investment in SaaS software is shared across all customers. Vendors can scale to meet customer demand and respond to changing market requirements much faster than with on-premise or hosted software.
On-premise and hosted providers charge for IT development and each time they add a client they need a new copy of the software – making them expensive and slow to change.
Higher investor valuations
As a result, many traditional software companies are trying to improve their SaaS credentials and are snapping up SaaS businesses. Investor appetite for SaaS businesses is also strong and valuations are much higher than for traditional software businesses – 8x annualized run rate revenues for SaaS companies compared to 1.5 to 3x for traditional software companies.
We’re even hearing rumors that Microsoft wants to buy Salesforce.com. With a market value of nearly $50 billion, it could become the largest software company ever purchased.
At Vie Carratt, we know how the valuation model works and present SaaS businesses in a way that will attract investors. We’ve helped to market clients who successfully raise capital, most recently Falcon Social and SalesSeek. We understand the challenges SaaS businesses face, whether they’re traditional businesses moving to a SaaS model, or innovative applications. We also offer a range of services, from content marketing to analyst relations, which focus on winning new customers and improving our clients’ operations.
It’s important to position SaaS businesses to attract the best valuations as this can make a huge difference. According to Tibco Analytics, VC investment activity in SaaS has almost tripled since 2011 with $11.7billion invested in 2014. Since 2011 almost half of all VC-backed SaaS exits raised less than $10M before exiting. There have been a few unicorns – star companies that achieve very high valuations – of the exits with disclosed valuations 11% exited for $1B+, including Workday and LinkedIn.
SaaS support industry
The SaaS gold mine is now big enough to support a burgeoning “picks and shovels” industry and we’re seeing the emergence of infrastructure software companies to support the SaaS model, in the same way as software companies emerged to provide business systems to the telecoms industry 20 years ago. This is a sign that the market is maturing. A recent example is the acquisition of subscription analytics company Frontleaf by Zuora. Zuora provides subscription billing and management software and will use Frontleaf’s cloud analytics software to provide subscriber use and behavior analytics to customers.
The potential for SaaS is yet to be realized and a whole new industry of providers to support cloud vendors is beginning to take shape. It’s a great time to attract interest from VC investors and traditional IT providers in true SaaS applications.
By David Carratt, Founder and Director, Vie Carratt