Scale Venture Partners has invested in the software as a service (SaaS) arena for more than a decade. Our successful prior investments in this space include Omniture, ScanSafe, FrontBridge Technologies and PlaceWare; current investments include Box.net, DocuSign, ExactTarget, HubSpot and Vitrue.
ScaleVP has a definite and aggressive perspective on what it takes to win in SaaS. We are looking for companies that have their products in the market and have early paid-customers. We want to invest in companies in markets that have good growth characteristics and where the SaaS model provides an unfair advantage over incumbents. Once the sales and marketing model is “baked”, we believe it pays to scale aggressively because disproportionate value goes to the winner in these markets.
The metrics for success in SaaS are just different enough from those in enterprise software to allow for confusion. That’s why we developed our “Magic Number” metric to help us pick winners. We like the Magic Number because it’s simple and can be calculated for any company with basic GAAP financials – including all the public SaaS companies. Despite its simplicity, the Magic Number is highly predictive of success.
SaaS is disruptive as a software architecture and as a business model. The SaaS architecture makes the browser the free client, with all the computing done in a shared cloud infrastructure. As a result, SaaS provides a significant unfair advantage to business applications where:
The business model then feeds on the architecture by using disruptive pricing and distribution strategies such as free trials, “freemium” offerings and cost-effective telesales to overtake existing software markets.
SaaS is not an actual software market. Customers don’t buy a SaaS; they buy an application to enable a business process. That’s why we focus on finding the software markets that, independent of SaaS, have good growth characteristics and then pick those markets where SaaS can use the architecture and the business model to maximum advantage.
Managing Digital Marketing: a great market for SaaS
The internet has transformed marketing by providing a level of tracking and optimization not possible before. This in turn has created an entirely new software market for applications to help marketers run their businesses. In this market, SaaS has the unfair advantages we look for. The cloud-based architecture is the perfect way to do Web analytics or manage email sending, while the SaaS business model works well for marketing budgets, which frequently include subscriptions and services. Over the past 10 years, we have invested in companies such as Omniture (Web analytics), ExactTarget (email marketing), HubSpot (small business Web marketing) and Vitrue (social media marketing), all of which use SaaS to help marketers manage and optimize their businesses in the digital market.
Freemium and consumerization
Freemium is best thought of as a marketing tactic; consumerization as a design imperative. For products that can be adopted organically by individual users in business, the offerings that are designed to be elegant and consumer friendly, and those that can be used free before being purchased for broader use will always win. Companies in our portfolio today that embody this concept include Box.net and DocuSign. Both of have free offerings, as well as paid versions sold to large enterprises.
SaaS, PaaS and someday IaaS
As the ability to rent technology as a service moves down the stack from application software to the platform and infrastructure levels, SaaS and PaaS are starting to merge. In general, when we talk about SaaS, we mean the cloud-based, multi-tenant architecture described above and a business model focused on selling a single application on a subscription basis – usually to a business buyer. We think of the cloud and PaaS/IaaS further down the stack and as being focused on the IT department. However, as PaaS improves, the line between package applications in the cloud (classic SaaS) and custom-built applications by the customer (PaaS) will further erode. We believe that the ability to integrate and move seamlessly between package and custom applications will be a key differentiator. We are interested in meeting with companies that drive this trend and solve the problems (security, single sign-on, integration) it creates.
Filling in the gaps
Business software really is the land of myriad niches and verticals – many of them surprisingly large. As the SaaS model becomes more accepted, it is spreading across all verticals, functional areas and company sizes. We believe this trend will continue.
The trend we haven’t thought of
Finally, we’re always open to seeing something new. If you think you have the next big thing in business software, tell us about it. Because scaling game-changing innovations into winning companies is what we do.