SaaS is emerging from the recession as a software sector “at the forefront of the economic recovery,” says a report by the Software & Information Industry Association (SIIA). To find out more, IDN spoke with the report’s author, Lauren Kelley, CEO and founder of OPEXEngine.
SaaS is emerging from the recession as a software sector “at the forefront of the economic recovery,” and is enjoying a big jump in profitability while SaaS capital requirements are decreasing, according to an industry report.
The 2011 Software Benchmarking Industry Report was issued by The Software & Information Industry Association (SIIA) and OPEXEngine, a leading benchmarking firm for small and mid-size software firms.
An excerpt from the SIIA/OPEXEngine report states:
Over the past five years, we’ve seen the SaaS business model mature and become more efficient. Five years ago, even many of the $100M+ public SaaS companies were unprofitable, unlike today where almost all are profitable. And SaaS companies are taking less capital to get to profitability.
This year, almost all of the small SaaS companies we benchmarked are venture backed with an average of $10M in investment capital under their belts, whereas the larger private SaaS companies had taken an average of almost $40M in venture investment.
To find out what’s behind these healthy cloud-driven numbers, IDN spoke with the report’s author, Lauren Kelley, CEO and founder of OPEXEngine.
“Overall, SaaS companies are achieving profitability earlier and requiring less capital to get there than five to seven years ago for several reasons,” Kelley told IDN.
One major factor is the improvements in cloud-based infrastructure for SaaS. Kelley called this improvement in cloud “a definite meta-trend affecting SaaS vendors,” which is the availability and improved services offered in the area of IaaS and PaaS. [This] helps bring down the cost of hosting and supporting an increasing volume of customers,” she told IDN.
These improvements have delivered measureable benefits to SaaS providers, most notably through their ability to minimize required capital and extend burn rates, Kelley added. “VCs that I’ve worked with estimate roughly that it took approximately $50M in capital to bring a successful SaaS vendor to profitability five to seven years ago, whereas today, depending on the software application, it can take only $25M-30M, or less, in invested capital,” she said.
“Definitely the cost of infrastructure for hosting a SaaS business is going down, but it is difficult to give concrete numbers as it varies widely with different applications and different security and redundancy requirements,” she added.
Kelley also noted these other important factors:
- SaaS Integration. The ability to integrate a SaaS application hosted in the cloud with on-premise assets, is improving all the time, she added. “Given the increasing acceptance of SaaS applications within the enterprise, many of the ‘soft’ integration issues are being overcome, such as resistance by internal IT departments to SaaS, security concerns, and so on,” Kelley told IDN. Despite the recent advantages SaaS enjoys from the maturing of cloud integration, Kelley said there are still many “hard” technical challenges to integrating SaaS applications with internal assets.
- Maturing Business Models. The SaaS business model overall has matured and evolved because there are more experienced entrepreneurs and VCs in the sector today, who know what metrics to track, how to build and execute on SaaS business models, and manage cash flow for a SaaS subscription business as compared to traditional software sales models where a vendor is paid largely up front.
- Discipline. The recent recession forced much greater spending discipline on software companies. “For example, most VCs told portfolio companies to sink or swim without expecting much more capital, and most swam pretty well,” she said.
In summary, two eye-popping metrics indicate that SaaS will continue to attract investments, from VC as well as legacy software firms.
“If you look at the software IPOs of the past couple years, almost all are SaaS vendors, indicating these are the most profitable and showing the most promise for future growth,” Kelley told IDN.
Moreover, research shows “sales to the enterprise are increasing all the time,” she added. “In the 2011 Software Benchmarking, we found that revenue growth rates for vendors selling primarily to customers with over $1B in revenues was a median of 20% from 2009 to 2010; and we expect that revenue growth rate to increase in 2011.”
The SIIA/OPEXEngine 2011 Software Benchmarking Industry Report surveyed firms with up to $350 million in revenues. OPEXEngine’s benchmarking reports are key tools used by senior operating executives to support the budgetary, strategic planning and investment processes.
Pulled from original/Sourced: idevnews.com by Vance McCarthy
Tags: cloud integration, Cloud-Based SaaS Solution, ISVs, SaaS, saas integrations, SIIA
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