Does it Really Take $100M to Build a SaaS Business? Say it ain’t so, Joe!

Sarah Lacy, a reporter with BusinessWeek just issued this article about On Demand/SaaS businesses.

I had an opportunity to meet and get to know Sarah in 2004 because she did a long story about me and Siebel’s entrance into the OnDemand market.  I have a lot of respect for her and her opinion. However, I take issue with a few of the conclusions one might reach by simply reading this article and taking it at face value.

On Demand or SaaS isn’t a panacea, it’s a business model. Companies won’t succeed simply because they are SaaS-based. You still have to build a compelling application that solves a real business problem that people will really use and pay money for.  However, what the SaaS model has done is to give customers the ability to try a few seats and then “walk away” with relatively few sunk costs when a vendor fails to deliver real business value. Under the traditional enterprise model most customers needed months/years to do a pilot — which seldom gave them a complete picture – and once they committed they were committed forever because of the psychological and financial investment. So big projects like Oracle, PeopleSoft, Siebel, etc. rolled on even when it was clear that the customer wasn’t happy with the expense or the value.

What I can say as a former traditional enterprise software executive who had to be “retooled” for SaaS, is that SaaS companies need to sell, market and support differently than traditional enterprise software; this is where a lot of firms are getting into trouble. Many don’t have executives who are experienced with SaaS and they attempt to do it the way they’ve always done it (hence the reference to getting on planes in the article — you can’t afford to do that with most SaaS models). Instead, you need to couple a strong direct inside sales program with a product that can have a somewhat viral element or a strong partner program that helps to substantially reduce the cost of sales and marketing over time. And, a customer success team that is compensated to ensure people use the service and are happy with it.

By my count, there are 27 public SaaS companies that have figured out how to build a compelling application and deliver it profitably via a SaaS model — and they didn’t each take $100M of capital to get there.  As Sarah reported, there are a lot more that haven’t and probably won’t.

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  • Bruce,
    Your comments are correct and I have to admit I was suprised Sarah didn’t make these points. When I read the article a few days ago I almost felt it was Oracle propaganda given Larry’s recent bashing of SaaS.

    We’re based in Australia and have operated in the SaaS space for over 6 years. We’ve seen other companies come and go, primarily because they hadn’t got their heads around the revenue model. They have these wild expectations that they will get a huge chuck of coin up front rather than subscription revenue spread over time.

    Having said that, I was very suprised recently to learn that has changed their concept of subscription revenue to involve up front payments – generally 1 – 2 years in advance. This looks and feels like traditional software licensing to me.

    Having lived and worked in Boston, I would suggest the difficulties experienced in the US market are exacerbated by US GAAP where revenue recognition plays an important part in reporting of quarterly and annual results.

    I was at a Sales 2.0 conference a while ago and Stu Schmidt from Webex spoke about how they operate in the SaaS model. They are a very good example of what you talk about with respect to changing the sales model to put greater focus on the inside sales team and the tools to close sales via the lowest cost option (i.e. not getting on a plane).

    We follow a similar model to Webex (though it seems to be the defacto standard in the SaaS market now). We focus the majority of our sales effort on remote delivery/qualification, and only invest in face to face selling when the opportunity is well qualified and we’re confident the potential project revenue (i.e. professional services) can sustain the f2f cost. Our experience shows that if we can get the new customer past the first 6 months, the stickiness increases significantly. Guess where we focus our customer service efforts?

    cheers from down under

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