Wednesday, April 12, 2006

Secrets to Successful SaaS

The joke around SaaS circles (pretty geeky cliques apparently): "How do you get to $600 million in revenues on the Saas model? You raise $175 million!!!" (Enthusiastic laughter.)

This joke (a shot at the war chest raised by SaaS poster child salesforce.com) was shared by Jim Geisman, president of software pricing firm MarketShare, as he moderated a Mass TLC panel yesterday on Software as a Service. This richly informative panel shared the ups and downs of the Saas business model from two perspectives: that of startups and the view for legacy software firms who want to shift totally or in part to a SaaS model.

Jay Muelhoefer/PTC (our host) noted that some firms seem to think they can "throw some on-demand dust on their product" and get more funding and visibility. But he noted there are other considerations, such as security issues and the need to maintain 24x7 uptime. In addition, for software vendors with ingrained cultures and architectures, major changes may be required.

Bob Nealon/IBM noted that many existing software vendors are chosing a hybrid model. These firms need to think about their "routes to market." Will the sales force/channel partners/resellers stay the same and how do you compensate them?

The attorney on hand, James Nelson/DLA Piper, noted that the SaaS model takes much of the pain from customers, but on the vendor side, you're assuming more risk. He suggested spending more time upfront working through the operational details with your hosting provider (most likely a third party; IBM is happy to step in for this role). You also need to think through service-level commitments and factor this into your agreements.

From the VC perspective, Michael Skok/North Bridge noted that his firm currently has eight SaaS portfolio companies (including our market-leading client, Phase Forward). He estimates that it takes 2-3 times the amount of funding to get a SaaS company to liquidity. There are important considerations over the old software models. SaaS companies have to bear risks to be managed and support people have to be front-lined trained.

Muelhoefer noted that customers don't care about the reason behind the glitch if something goes wrong: "You're only as good as your last subscription month."

Will SaaS continue to be focused on the SMB market? Skok noted that major companies are adopting salesforce.com right now. "It will catch on in the enterprise but they are slower to change their business processes."

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