June 24th, 2009

LucidEra's demise is about money, not SaaS

Posted by Phil Wainewright @ 2:27 pm

Categories: Business models, Customer experience, Venture capital

Tags: Software-as-a-service, LucidEra, Software As A Service (SaaS), Managed Hosting, Cloud Computing, Emerging Technologies, Phil Wainewright

I’ve been struck by the contrasting reactions to two separate company shutdowns that have taken place this week.

It emerged on Monday that SaaS business intelligence vendor LucidEra emailed customers late last week to inform them the company will cease operations at the end of this month. Immediately there was a flurry of blog posts debating what this meant for the future of SaaS and of SaaS BI in particular. Tech journalist Christina Torode even wrote that LucidEra’s demise harkens to ASP downfalls.

Monday also brought the news that Clear, a subscription service that operates fast-track security lanes for frequent travelers in a number of US airports, had abruptly ceased trading. No one blogged that its demise raised question marks over the future of business services sold on subscription, nor whether the notion of commercially operated fast-track channels was simply not viable (indeed many speculated who might enter the market to take Clear’s place). This was simply seen as a story about a company that couldn’t renegotiate a crucial loan, and went under.

LucidEra, too, simply ran out of money, and it is fatuous to attempt to draw any broader conclusions about the state of SaaS or SaaS BI from its demise. Darren Cunningham, LucidEra’s VP of marketing, was contacted by phone Monday and Read the rest of this entry »

May 8th, 2009

Another week, another $70m vote for SaaS

Posted by Phil Wainewright @ 9:36 am

Categories: CRM, Omniture, Venture capital

Tags: Software-as-a-service, ExactTarget, Software As A Service (SaaS), IPO, Managed Hosting, Cloud Computing, Financial Planning, Investment, Emerging Technologies, Financial Services

After last week’s announcement of a $75 million VC funding round raised by Workday, I thought it would be a while before I heard of another SaaS company raising a similar sum. In the event, it took just a week. On Wednesday, on-demand email marketing provider ExactTarget announced a $70 million round.

It seems there’s plenty of VC money available for the right SaaS proposition, which bodes well for the industry’s prospects. I spoke today with ExactTarget’s CEO Scott Dorsey and he told me the company had found “an immense amount of interest from late-stage VCs that don’t usually get the chance to invest in such a late-stage SaaS venture.”

ExactTarget is something of a special case in that it filed for an IPO in December 2007, but found its plans thwarted by the bleak IPO climate prevailing since then. The new round of funding brings in roughly the same level of cash as the company was seeking from the IPO, and coincides with the company finally withdrawing its S-1 filing. In a VentureWire interview, Rory O’Driscoll of new investor Scale Venture Partners explained its motives:

“We can’t control when the IPO window opens, but frankly we can take advantage of the conditions … This is an opportunity to own this company for the next couple years while it continues to grow.”

O’Driscoll, who is joining ExactTarget board, knows quite a bit about SaaS growth having invested in Read the rest of this entry »

April 29th, 2009

How far will Workday go with its $75 million?

Posted by Phil Wainewright @ 11:58 pm

Categories: ERP, Venture capital, Workday

Tags: Workday, Software As A Service (SaaS), Enterprise Software, Emerging Technologies, Software, Phil Wainewright

For any business software start-up to raise a $75 million funding round would be good news in any economic environment. But in today’s challenging times — when people are even questioning the sustainability of the VC model itself — Workday’s latest funding round (Techmeme coverage) is especially remarkable. It’s certainly a boost to morale and credibility for anyone working in the SaaS sector, for which enterprise business systems vendor Workday is something of a poster child.

The new round, which has been dubbed a ‘Series E’, doubles Workday’s total funding to date to $150 million. It all leaves me wondering how exactly Workday will use the cash, and what the size of the investment tells us about the provider’s ambitions (of course founder Dave Duffield has always said the aim is to rival SAP and Oracle’s ERP hegemony, but market bluster is cheap — this is real money talking now).

The nature of the SaaS business, in which providers take on the upfront burden of building and operating the technology infrastructure, means that high-growth SaaS companies need big reserves of cash to fund their expansion. Josh James, CEO of Omniture, explained in a presentation to the SIIA OnDemand conference in San Jose last November how SaaS companies bleed cash with every new customer they acquire: “Every time we add an incremental customer, it costs us more money that quarter … When you multiply that by [n] customers in a quarter, that’s a lot of expense for no money.”

Workday’s management are well aware of this conundrum, as co-founder Aneel Bhusri explained in Read the rest of this entry »

March 17th, 2009

Denmark first, then the world

Posted by Phil Wainewright @ 6:09 am

Categories: ERP, Europe, Venture capital

Tags: Revenue, Software-as-a-service, Europe, Denmark, E-conomic, Software As A Service (SaaS), Managed Hosting, Cloud Computing, Venture Capital, Internet

As confirmation that Europe has its own indigenous SaaS stars, allow me to introduce e-conomic, a Danish online accounting vendor (UK site here) that’s been posting 60% annual growth rates for the past two years and is projecting up to 40% growth for the current year. With 2008 revenues of $5.6 million (32 million Danish kroner), the company is typical of a new generation of SaaS startups that are beginning to find their feet now across Europe (more Europe stories here), and will be one of many taking part in this June’s OnDemand Europe conference in Amsterdam, which I’m helping to organize (see disclosure).

Unlike in the US, private companies in most European countries are legally obliged to file public accounts each year. E-conomic has made a virtue of this by announcing its 2008 results in a press release (PDF) last week, along with its projected revenues for 2009 — an estimated DKK43-45 million, or just over $7.5 million. Its subscriber base stands just shy of 18,000.

I’ve written before about the difficulties European vendors face when expanding beyond their home country. The Nordic region is a microcosm of that challenge, with each country retaining its own currency, language and statutory framework. “It is by no means easy,” said Torben Frigaard Rasmussen (pictured), CEO of e-conomic International, when we spoke a week ago. “Denmark, Sweden and Norway are competely different countries.” But the flipside is that it’s far easier to get established in that home market and then use what’s been learnt there to expand elsewhere. E-conomic says it already holds 25 percent of the Danish market, and the profits being generated there are funding expansion elsewhere. It’s the equivalent of a US company getting established in, say, Read the rest of this entry »

February 28th, 2009

Appirio, shafting the global SIs

Posted by Phil Wainewright @ 11:09 am

Categories: Development, Ecosystems, Platform as a service, Venture capital

Tags: Software-as-a-service, SiS, Appirio, Software As A Service (SaaS), Managed Hosting, Cloud Computing, Emerging Technologies, Phil Wainewright

VCs placed another $10 million bet this week that global SIs will crumble in the face of the enormous change being wrought on their businesses by the advent of SaaS and cloud computing. Jeff Richards of GGV Capital, who is joining the board of cloud integrator Appirio after the VC backed a new $10 million funding round, told me this week that Appirio is “building a leadership position” at the expense of established big-name integrators. [Disclosure: Appirio is a recent client].

“Appirio has very large customers that are signing on for multi-million dollar contracts,” he said. “When a company like Japan Post wants to do something [in the cloud], they’re turning to Appirio and not to the global SIs.”

A recent blog posting by Appirio’s CEO Chris Barbin discussed this phenomenon under the heading, Short the Global SIs, and inspired my more aggressive title, above. Forget shorting, these BigCos are utterly shafted (along with some others I could mention). Barbin recounts several examples of how woefully out of their depth they show themselves to be when pitching for SaaS and Paas implementations, summing up:

“Global SIs such as Accenture, Cap Gemini, TCS and others are still shackled by their dependence on old-school, on-premise partnerships with SAP, Oracle & Microsoft. While they may be paying lip service to cloud computing, most offer SaaS-based solutions at 2-3x the total cost necessary, are nowhere to be found in the relevant communities and developer ecosystems, and have few true SaaS enterprise reference customers to speak of…

“… enterprise executives are simply bypassing the Global SIs because of their bloated costs models, old school methods, multi-billion dollar partnerships with legacy vendors, or systemic lack of knowledge of cloud computing products and services.”

This at a time when many large corporations are starting to get deadly serious about Read the rest of this entry »

February 7th, 2009

What have we done?

Posted by Phil Wainewright @ 3:38 pm

Categories: Business models, Venture capital, Web 2.0, Web 3.0

Tags: Geometry, Conventional Wisdom, Money, Fred Wilson, Blogging, Internet, Phil Wainewright

What have we come to when a respected VC feels no shame or embarrassment when actually publishing a blog post entitled When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs, as Fred Wilson did last weekend? Has the world become so blind to the basics of commerce that it needs reminding of such a basic tenet?

Apparently yes. Even Wall St can’t count, as Robert Cringely revealed last week. (An analyst at JP Morgan came up with a graphic to illustrate the extent to which bank market caps shrank in 2008. It was widely circulated in financial circles without anyone noticing the elementary error in basic geometry which meant it massively overstated the shrinkage).

Fred Wilson’s blog post cited Chris Anderson’s WSJ article of last week on The Economics of Giving It Away, which, he notes, “suggest[s] that Internet entrepreneurs are going to have to get people to step up and pay for something instead of just giving everything away for free …” Really? Is such a concept so novel?

Have we brought up an entire generation to believe that cash isn’t important? Is this the payback for all those millions of dollars spent educating a multitude of MBAs? It turns out it was all a waste of money, because all it’s done is encourage the hubris that this generation is so smart it can defy the rules of economics (as well as remain oblivious to the tenets of geometry). For a few years there, Read the rest of this entry »

November 22nd, 2008

When to spend cash in a SaaS business

Posted by Phil Wainewright @ 1:53 pm

Categories: Business models, Omniture, Uncategorized, Venture capital

Tags: Software-as-a-service, Omniture Inc., Magic Number, Software As A Service (SaaS), Sales Strategy, Cloud Computing, GAAP, Sales Force Management, Emerging Technologies, Sales

Josh James, CEO and co-founder of enterprise web analytics provider Omniture, revealed to an enthralled crowd at the SIIA On Demand conference this week the magic formula that helped his company sustain rocketing growth, dwarf its competitors and become the second-largest listed pureplay SaaS provider in the US, with 5,000 customers and annualized revenues approaching $320 million.

The key to understanding the formula is to recognize that SaaS companies bleed cash with every new customer they acquire — the complete opposite of what happens when a conventional software company lands a new account and pockets a huge upfront license fee. Especially if, like Omniture, the application requires significant infrastructure investment but the subscription is billed monthly.

“Every time we add an incremental customer, it costs us more money that quarter — it costs us more cash that quarter,” explained James. “When you multiply that by 250 customers in a quarter, that’s a lot of expense for no money.”

Some statistics illuminate the scale of Omniture’s infrastructure: it operates 15,000 servers for its 5,000 customers, and processes almost a trillion transactions per quarter — that’s a hundred times more than Salesforce.com’s proudly touted 10 billion. The average transaction rate is 125,000 per second, with spikes up to twice that amount. Those are truly petascale numbers (to use a word I learnt just last week) and every new customer means adding more capacity.

The financial consequences look exceptionally dire when Read the rest of this entry »

November 13th, 2008

Back up your online data. Now.

Posted by Phil Wainewright @ 3:30 am

Categories: Customer experience, Service level management, Venture capital

Tags: Data, Litigation, Business Operations, Phil Wainewright, Image, Software As A Service (SaaS), Storage, Emerging Technologies, Hardware

The dark side of the cloud is the risk of financial failure at your provider. At the end of October, Digital Railroad, a photo archiving and commerce site used by over 1,500 professional photographers, shut down without warning. Users had just 48 hours to recover images stored on the site. Even if all of them had been in a position to log on and tried to download their data, it’s doubtful there would have been enough bandwidth to service the demand.

But surely if a site has a paying, professional customer base of that size, someone will step in and pick up the business? Hosting companies I’ve spoken to in the industry who specialize in SaaS hosting have said they’d rather keep a service alive until another owner takes over than wipe the systems clean and start over. But it depends who owns the hardware. In the case of Digital Railroad, after two failed attempts to find a purchaser for its image storage and retrieval assets, company representatives on November 10 announced this devastating news for anyone still hoping to retrieve images stored there (I’ve bolded the chilling three words that sealed their fate):

“Without a commitment for the purchase of its assets, DRR’s senior secured creditor will move to take physical possession of the hardware on which the intellectual property of DRR and the copyrighted images of its customers and partners reside. The creditor will have all information erased from the storage devices and then sell the equipment at auction.

“Digital Railroad had hoped that it could preserve the images on the storage devices so that the owners of these images could recover them. Unfortunately, this was not achievable. We apologize for the difficulties that this has created but without additional resources we have no other recourse.”

Does this example mean we should all stop using cloud providers and go back to the ‘good old days’ of running our own software and servers? Read the rest of this entry »

July 21st, 2008

Sequoia bets on enterprise apps in the cloud

Posted by Phil Wainewright @ 3:27 pm

Categories: Ecosystems, Google, Integration, Venture capital

Tags: Google Inc., Google Apps, Professional Services, Sequoia Capital, Appirio, Cloud Computing, Phil Wainewright

Silicon Valley venture capital firm Sequoia Capital is well known for making smart bets on big opportunities (its track record of mega-exits includes Google, Yahoo!, PayPal and YouTube). So what are we to make of today’s news that it has led a $5.6 million series B investment round in SaaS pureplay integrator Appirio? Especially when, as The Industry Standard notes, it’s only a few months since Appirio raised a $1.1 million series A round from Salesforce.com and angels.

Sequoia’s bet is that Appirio will prove to have been an early mover in bringing the cloud to the enterprise, in the process carving a substantial slice of the $300 billion currently spent each year on traditional on-premise computing solutions. Appirio is a leader in cloud integration in three core ways:

• A strong focus on Google Apps projects alongside Salesforce.com
• Specialization in ’serverless’ (ie cloud-to-cloud) projects (more on that below, plus a controversial prediction on Exchange)
• Its combination of ‘trusted advisor’ professional services with productized on-demand services

The combination of professional services with productized offerings was a key part of the proposition that Sequoia has backed, co-founder Narinder Singh told me on Friday, as opposed to other potential funders that wanted to focus on either one or the other. “The Sequoia investment doesn’t change our business model, it just accelerates it,” said Singh.

The combination means that in addition to Appirio’s current 60+ enterprise customers for its professional services, there are another 1100 using the products. It’s effectively Read the rest of this entry »

June 10th, 2008

Want cash? Buy SaaS

Posted by Phil Wainewright @ 8:27 am

Categories: Business models, Venture capital

Tags: Software, Acquisition, Software-as-a-service, Europe, Software As A Service (SaaS), Cloud Computing, Emerging Technologies, Phil Wainewright

US software vendors that want to impress their stockholders with enhanced cash inflows should look to acquire SaaS vendors, according to Jérôme Fougerat, regional director of M&A specialist Corum Group, based in Seattle WA and Zurich, Switzerland. That’s why SaaS companies have been holding their value better than other software vendors during the rocky market conditions of the past year, he told delegates attending the SIIA OnDemand Europe conference today in Amsterdam.

“Valuation for SaaS is declining, but less fast than the overall software industry,” he said. “There really is differentiation in value between SaaS and the whole industry.” Revenue multiples (ie, the acquisition price compared to annual turnover) for SaaS companies were 3.99 in September last year, rose to 4.62 in January and were still at 4.0 last month, he said, compared to 2.6 for conventional software vendors.

Although the punishingly high euro-to-dollar exchange rate makes US acquisitions especially attractive for European buyers, Fougerat argued that it can also justify US acquisitions in Europe:

“With the weak dollar, America is almost for free right now. We see a lot of small and large companies in Europe buying companies in the US. But we also see US companies buying in Europe to get strong earnings in a strong currency. They are ready to pay more to improve earnings.”

Fougerat listed several factors that make SaaS vendors an attractive acquisition target, but the ability to generate cash came top of the list. “It’s not just technology. It’s a way of generating cash flow,” he explained. In comparison to on-demand subscriptions, conventional software license models are difficult to project and more prone to volatility, he said, especially when there may be a recession looming. In contrast, SaaS offers predictable recurring cash flow with forward revenue visibility and low customer churn: “SaaS providers have the challenge of making customers happy every day, otherwise they will leave.” All of that makes it easier to plan and manage growth, he added.

Venture-funded SaaS vendors that are eager to find an exit will be heartened by his message that acquirers still have reasons to buy. It certainly made for better news than his earlier statement that “the IPO market is almost dead.”