TWIS#18 This Week in SaaS- Is SaaS Cloud and Bessemer SaaS update
TWIS#18
In this week’s TWIS:
- A response to Phil Waignright’s post- Is SaaS the same as Cloud?
- Fred Wilson’s Ten Golden principles of Succesful Web Apps
- IDC thinks SaaS and Cloud is “Crossing the chasm”
- Bessemer’s updated public SaaS benchmarks- interesting strategies revealed including Customer Acquisition Costs
- Google releases Apps Migration for Exchange- even easier to transition now
- In other news, Enomaly, Google Apps Marketplace, Appistry and more
TWIS#18
Phil Waignright beat me to following up the EuroCloud event yesterday with his post Is SaaS the same as cloud? – I guess he wasn’t stuck in the traffic on the way home like I was 
From the customer’s perspective, it’s all the same. If it’s provided over the Internet on a pay-for-usage basis, it’s a cloud service. Within the industry, we argue about definitions more than is good for us.
I disagree.
The specific example I was talking about in that discussion was a legacy app that has been re-engineered to run on EC2. Each customer has it’s own instance and associated tiers to support that application instance. Yes that’s cloud but not necessarily SaaS- I think that some degree of multi-tenancy is an essential component of SaaS- I don’t want to re-open the technical debate but look at the business reasons.
The reason the vendor is offering this on-demand version is because “customers are demanding it”.
Of course they are!
Who wouldn’t like to purchase your lovely established legacy software, packaged up as a subscription offering fully managed by the vendor? Oh and at 30% of the original purchase price too…
Of course customers are demanding it. In the short term, it’s a win-win for them.
The reality is somewhat different. The reality is that SaaS is a business architecture and you can’t pick and choose the parts you like.
If you’re not multi-tennant, you’re going to end up managing a huge amount of instances. Imagine every customer needs three tiers (Web, App, DB) and each tier needs a virtual machine. Say you’ve got 100 customers- that’s 300 virtual machines. How many administrators are you going to need to manage those instances? What about patching and upgrades? Likely you haven’t got meta-data driven customisation, so each instance needs to be tested before it can be upgraded, shifting this burden onto the vendor from the customer. Then you need monitoring, security, access control, etc etc. Your reliability suffers because of sheer volume of maintenance and configuration that needs doing and your margins suffer because of the sheer number of instances.
Nightmare!
The customer and you are then in a lose-lose situation. The solution isn’t reliable enough to meet their needs and they decide to move elsewhere.
If you’re a traditional software vendor, you need to resist the temptation to “SaaSify” your existing application, and not just for the reasons above. The most important reason is that you actually need to be able to sell your SaaS app for less than the customer pays you in their first year (known as customer acquisition cost). Emptying out your existing pipeline by offering more services for 30% of the current price isn’t a sustainable strategy.
When moving to SaaS, you’ve got to think of two key things: Product / Market fit and Customer Acquisition. If you get one of these wrong, you’re going to fail.
Well what constitutes great product / market fit? I can’t tell you what will create “market pull” for your sector, but I can share the Ten Golden Principles of Successful Web Apps by Fred Wilson:
- Speed
- Instant Utility
- Voice
- Less is More
- Programmable
- Personal
- RESTful
- Discoverable
- Clean
- Playful
Can you honestly say your legacy app can compete on all of those items?
Andrew Mager covered the actual talk:
Fred Wilson from Union Square Ventures opened up Future of Web Apps in Miami this morning with his top ten tips for creating a successful web app:
Speed
Speed is more than a feature, it’s the most important feature. This goes for power users and mainstream users. Power users will give more sympathy for you if you are slow, but make it as fast as grandma can stand. Use Pingdom to keep an eye on your speed.
Instant Utility
This means the service is instantly useful to you. If you build a service and the user has to spend an hour configuring the service, importing contacts, and data entry, people aren’t gonna wanna use your web app. There are lots of tricks to use for instant utility like Facebook Connect or letting the user import data from LinkedIn.
When Youtube first started there would be a message saying, “come back in a week or so”
Voice
Software is media today. Just as media has a voice and personality, so does your software. The failwhale is a good example of this; it gives the company personality, attitude and it made Twitter media-saavy.
Less is more
Over time, you can grow the utility of your service, but start simple. Think about Facebook in 2004. Union Square invested in Delicious because the service was simple, but powerful. If you can do one little thing really really well, then you are building a successful web app.
Programmable
Make your application programmable. You have to give others the ability to build upon your software. If you launch without a read/write API, then you are living in the dark ages. More users developing on your software makes the experience richer for all.
Personal
You want want to infuse your application with your user’s energy and personality. The more they can contribute, the more ownership they have in it. Make your app more personable for everybody. Let people customize everything if you can. This can also be a bad thing though, don’t let your users have too much control.
Make it RESTful
Everything in your application has a clean, comprehensible URL. Think Twitter lists: http://twitter.com/mager/design. It’s really simple. This makes your app way more portable because the namespace of your application is memorable. LinkedIn does a poor job of this.
Discoverable
There are millions of web apps out there, so you better understand SEO. You have to build your application from the ground up to be optimized for Google. It has to also be discoverable by social media; this is more important than search.
Clean
The application cannot be busy on the page. You can’t be bothered with a bunch of crap. Big fonts, inviting, and people should know right away what they need to do. Tumblr’s login is perfect.
Playful
Mobile, social, global, playful, and intelligent. Playful is the fun part of making software. Your users want to have fun.
The ability to play in an application is very important. The game mechanics will lure people back in. Think about how Weight Watchers works; it’s a game. You establish goals, measure yourself against those goals, and get rewarded for executing on those goals.
Your web application should have some fun baked in.
Extra tips: don’t hire a marketing person. It’s gotta come from your team. Keep product marketing and guerilla marketing separate.
The other interesting thing to note is the blurring of the lines between SaaS and web apps- is there any apart from perception? It feels like the web app community is coming more from a design standpoint and doesn’t necessarily align themselves to SaaS, but are executing fantastic apps whereas the SaaS people seem to be coming from a traditional software background. Comments?
It was interesting to read in Peter Cohen’s post that IDC thinks SaaS and Cloud has nearly crossed the chasm:
On the “big trends,” in a presentation entitled, “ The Maturing Cloud: What It Will Take to Win,” Frank Gens explained that the most significant growth opportunities in the IT market will be in cloud computing and software-as-a-service (SaaS) solutions. He contends that this mode of computing has nearly “crossed the chasm” from early adopters into mainstream adoption, and both users and vendors should now focus on how best to capitalize on these opportunities.
Another interesting post- reproduced in full below- was Phillipe Botteri from Bessemer Venture Partners public SaaS company analysis update. It’s great that people are taking the time to analyse and share the data, because it’s certainly not shared very often in the private SaaS company space…
As we are entering a new year, I thought it would be interesting to publish every quarter an update on the state of the 13 public SaaS/Cloud companies in the Index. So, here is the first edition, including the recent Q4 2009 earnings and the updated 2010 forecast.
1) Slightly improved sentiment for 2010, but companies are still planning for a long recovery
The following chart compares the median growth rate for the SaaS 13 group both in November 2009 after the Q3 reporting season and in March 2010 after the Q4 reporting season. Given the predictability of SaaS GAAP revenues on a quarterly basis, the fact that the 08/09 projections were unchanged is not a surprise. However, despite healthy Q4 results (most companies were at or above plans) few have increased their 2010 guidance and the median moved only from 15% (same as 2009) to 17%. If we consider that 2009 was probably the worst year in the past 5 years, forecasting the same growth for 2010 is not very encouraging. You could argue that it takes some time to restart the SaaS flywheel after a slow year, but an acceleration in 2010 should at least translate into a stronger 2011 guidance, which is not really the case (10/11 growth median is 18%, so barely above 2010). The SaaS growth recovery does not seem to take a “V” shape
2) Sales productivity is ramping up: bottom was hit in the first half of 2009
However, the sales and productivity of the group, measured by the median “Customer Acquisition Cost ratio” or “CAC ratio”, seems to be recovering more steeply. Given the lag in GAAP revenue recognition, the Q4 09 revenues are indicating an increased productivity in Q3 2009 (we have unfortunately to look backward due to the GAAP revenue recognition model), but the trend is very encouraging. Given that the revenues are not growing very fast, this means that most of the companies have reduced their sales force and focused on productivity improvement. Also, even if the productivity is increasing, it is still far from the 0.75-1.0 range where you would expect companies to start pumping more investment in sales and marketing to drive growth
3) Focus on profitability
It is interesting to see that the improving sales and marketing productivity is not pushing companies to be more optimistic on their top line but on their bottom line. While the group sentiment for 2010 did not improve significantly vs. November 2009, the projections for 2011 are now a lot more optimistic – 42% higher 2011 aggregated EBITDA announced in March 2010 vs. the November 09! This is a significant guidance revision, which shows the current focus and mindset of the management of these companies. A sign that the SaaS industry is already maturing or a reflection of the public investors expectations?
4) Cash balance increase indicates a focus on M&A to drive further growthThe past few months have also been marked by a few high profile equity and debt announcements – most notably SuccessFactors, Taleo and Saleforce.com. In total, the cumulative cash balance of the group increased by 64%, or more than $1B! As this cash will not be used to fund organic growth initiatives, we can expect several acquisitions in the coming 24 months. To date, Salesforce has been focused on small tuck-in technology acquisitions, so it is an interesting move for them. There aren’t any companies at scale built on Force.com that would justify such a raise, so either Salesforce will have to buy a light technology at scale (email marketing?) that can easily be ported to Force or they will have to breach their platform credo.
All in all, an interesting start for the year!
Gosh! The key take-aways:
- Public SaaS co’s are having trouble acquiring new customers (as seen by revenue projections) and have focused on reducing cost of customer acquisition and as a result the number of customers acquired, therefore increasing bottom line profitability. They’re probably trying to figure out which 50% of their marketing budget is working
- Because of the issues in acquiring new customers, they’ve realised that it’s probably cheaper and better to acquire smaller companies with great products and excellent customer acquisition. They’ve raised a huge amount of cash to fund this M&A- this is BRILLIANT news for SaaS companies- potential exits are on the horizon!
Thanks to Bessemer for giving their valuable analysis out again- consistently positioning themselves as one of the leading SaaS VC’s.
I’m so glad I’m not competing with Google- their innovation is absolutely relentless:
Today Google is taking another swipe at Microsoft with a new tool
that makes it significantly easier to make the switch over to Google Apps from Microsoft Exchange.
Google Apps Migration
This is clearly a play at showing businesses how simple it is to move from from Microsoft products, such as Exchange, that may not be hosted in the cloud to the cloud-based Google Apps product. Google product Manager Matt Glotzbach told me that the search giant wants to make it as simple as possible for potential customers to make the switch to Google Apps, and many potential Google Apps’ clients are using Microsoft Exchange to host and power email, calendar, and contacts. Google also launched Google Apps Migrator for Lotus Notes and aConnector for BlackBerry Enterprise Server
When I moved from Exchange to Apps, it was a total pain because I had a massive mailbox. This would have made things much simpler 
In other news:
- Enomaly teams up with Soasta to deliver load testing from regional data centres- regional here we come!
- Krishnan has some follow up thoughts on the Google Apps Marketplace
- Appistry announces better strorage options for clouds- hadoop support first out of the gate
- AT&T got the message and delivered decent phone coverage for SXSW, now all it needs to do is roll that out everywhere else… Oh how wonderful it is to live in the UK where there is a choice of 4 decent carriers
- Microsoft confirms app marketplace – the “App Store”- will be only way to get apps for Mobile 7 phone. Do walled gardens really work? They might do for Apple…
- Google envisions using 10 million servers
Have a great weekend!
Justin
