Gartner Gives the Nod to SaaS Model

In a report that was released this Wednesday, Gartner made some bold predictions around the near-term future of SaaS...

(from Antone Gonsalvez at InformationWeek)

SaaS Revenue Growing, Market Set To Double By 2012
Driving the growth in SaaS deployments is businesses' desire to reduce their IT capital expenditure budget and to rapidly implement software that supports a specific business need, Gartner said.

Worldwide software-as-a-service revenue in the enterprise application market is
on pace to surpass 2007 sales by 27% and to more than double by 2012, a market
research firm said Wednesday. Revenue this year is on track to rise above
$6.4 billion, compared with $5.1 billion last year, Gartner said. In four years,
revenue is expected to reach $14.8 billion.

While it is always a little dangerous to follow predictions from analysts with considering your specific market or application, this announcement is an interesting one given the current economic conditions. In essence they are endorsing that the SaaS model has increasing leverage over existing software models as the IT spending tightens.

We share this premise at Hummer Winblad and have invested heavily in the SaaS model...with over 15 portfolio companies to date including Omniture (web analytics), EmployEase (HR management), Aria Systems (Subscription Billing), etc. We see the model having some key strengths in this market:

1) Lower entry point customers - easier to get started, lower risk to trial, limited upfront expenditure. Also, the ability to buy or try without getting all the traditional enterprise sales points involved (IT, finance, etc)

2) Build vs Buy for business services - SaaS models become more interesting as companies debate if they should try to build out the service themselves via internal teams, or go with a known working solution where they can leverage existing best practices.

3) Lower TCO - often the best way to justify a SaaS offering is to have a customer lay out the true cost of the internal infrastructure

The SaaS wave appears to be continuing to gain momentum...lets hope we can really see the category double by 2012...

SlideRocket Now in Public Beta

This week one of our portfolio SaaS companies as launched into public beta - this means that now I can just direct all those email requests for accounts straight to this link.

SlideRocket is a rich Internet application that provides everything you need to design professional quality presentations, manage and share libraries of slides and assets, and to deliver presentations in person or remotely over the web. It also has analytics that tell you who spends time on each slide when they view the presentation.

SlideRocket announced this release at the Office2.0 conference in San Francisco. If the blog coverage of the show is any indication then they won 'best in show':

Finally, my favorite demo - and one I even signed up for. SlideRocket is like
Powerpoint on steroids. If you’re a presentation
builder, be sure to check this out. It went into public beta this week and will
head into a full-scale launch later this month

Full story at ZDNet.

Take a tour.
Like to learn more? Click here to take a tour of SlideRocket.

Sign up.
SlideRocket is now in public beta! Sign up for a free SlideRocket account and get started today.

YouTube...An Unexpected Enterprise Friend

A few months back one of our portfolio companies did something unexpected - the results were even more unexpected. At Hummer Winblad we often joke that we focus on the "boring side of software". By this we mean that many of our companies tend to be described with words like core, infrastructure, B2B, backend, etc. We believe that these companies provide the infrastructure under which the next generations of software are built. They will be interesting and successful companies but it is unlikely your mom will ever know their names.

What we don’t usually expect is for our companies to make YouTube videos.

The team over at vKernel did exactly that. Here is a company that is busy making the system management tools to help enterprises cope with the explosion of virtualization in their environments...and driving traffic from a YouTube video. The team made a quick parody of the now-classic PC-Mac advertisement to talk about the fight against companies that solve this problem with bloatware.

Bloatware companies (the PC) are big, cumbersome products that are IT intensive to use and packed with hard-to use features. Counter that with vKernel (the Mac) where they are using virtual appliances as their model for one product to solve one problem.

You can see the video here.

The message worked - they don’t have a huge volume of hits given that the average YouTube search is more likely to be "Britney Spears" not "virtualization system management". But in the first day they had prospects that jumped straight to the qualified lead status.

This kind of social media marketing is covered in a book by Charlene Li and Josh Bernoff called Groundswell. In the book I was introduced to another "boring" software company that has a whole series of successful YouTube videos. Greg the Architect is the new social media evangelist for the SOA vendor TIBCO. Greg happens to be a Ken doll but if you care about things like ROI around SOA then you might be one of the 75,000 viewers of his videos...an impressive following. [anyone looking for SOA, please take a look at Mulesource, the opensource ESB portfolio company]

My hat goes off to vKernel and TIBCO for riding the groundswell in their respective markets. I think you will be seeing a lot more social media from both companies based on this success.

If you are looking to do something similar at your company I would suggest reading Groundswell where the authors give lots of background on how to gauge your customers and target the community with the right tools.

ACM Ecommerce Conference

Last Friday I had the pleasure of attending the ACM Ecommerce conference in Chicago. I would like to thank John Riedl, the organizer, for putting the conference together and inviting me for the keynote. I had the pleasure of meeting members of the core technical teams from Amazon, Yahoo!, YellowPages, and researchers from great technical schools like Carnegie Mellon and Stanford.

This conference delved deeply into the algorithms and science underlying ecommerce. There were talks ranging from combinatorial auctions, revenue optimization and game theory applied to ecommmerce. My talk, which can be found on SlideRocket here, was titled "Investing in Algorithms". Below is an excerpt from my abstract:

In 2008, the software market is rapidly evolving towards Software-as-a-Service
and Cloud computing, and away from the on-premise delivery model. In exploring
these new models we will see that this is more than a business or delivery model
phenomena affecting ecommerce - it is a shift that fundamentally changes
expectations of what software can accomplish. In this model data is king.
Algorithms and analytics become significantly more relevant as the data is now
housed in a central location.

The talk let me highlight several key areas of investment for Hummer Winblad through the lens of a few of our portfolio companies. Because I gave the presentation in SlideRocket I was able to show how SaaS drives new sources of data compared to on-premise solutions. During the presentation I pulled up the historical data of a previous presentation that I had emailed to a different group - and show how many times the presentation was viewed and which slides the audience spend the most time reviewing. Hard data to collect with PowerPoint!

I then talked about Baynote as an example where SaaS companies can use their own products as part of the sales cycle. Baynote requires only a few lines of code to be integrated to a customers site to be up and running. Data is then fed back to the Baynote SaaS application and quickly the recommendation/search results can be surfaced. Baynote quickly gathers A/B testing to show the uplift of revenue. If you attempt this type of solution on-premise there is a limit to the data that a vendor will see, and you have many steps (procure hardware, configure hardware, install software, integrate product, etc) before these uplift effects could be shown.

The last theme I touched on in my talk was the ability of SaaS to provide closed loop actionable analytics. I highlighted our companies Omniture and Signal Demand as examples where the SaaS vendors can both make recommendations and stick around to quantify the results.

Upcoming Talk on R

UPDATE - The slides from this presentation are now awailable here courtesy of SDForum.


For those of you interested in R - the open source analytics platform - I have copied an announcement for a great event in Palo Alto next week hosted by SDForum.

At Hummer Winblad, I have noticed that many of the companies we talk to and many of our portfolio companies are using R as a core technology in their product. It allows for developers to use statistical and data analysis tools without paying money to SAS or another vendor for each copy of their software. I think that we are seeing an increasing use of these type of tools with the SaaS model because in general the applications have more data available to them. For example, SaaS allows application vendors to also use analytics across their customer set to watch for usage trends.

Jim Porzak and Michael Driscoll will present...

A Gentle Introduction to R and its Applications in Business Intelligence

R, the open source environment for statistical computing and data analysis, has been adopted by over one million users worldwide since its V1.0 release in February, 2000. Although primarily used within academia, the life sciences, and financial engineering firms, R has promise in areas overlapping with "Business Intelligence."

Specifically, R is a powerful tool for marketing applications such as customer segmentation and cluster analysis, and can be used to achieve a better understanding of business data in general.

We will start with a brief history of R and its present areas of use.

We will then position R's functionality within the BI space and highlight its strengths compared to classical BI tools.

For the techies, we'll show R in action and discuss some of the language's powerful features. Most of the presentation, however, will be a series of brief case studies showing concrete uses of R in our respective practices. After the formal presentation, we invite interested R users to stay for a few minutes to discuss forming a local "Use R" group.

SPEAKERS:

Jim Porzak

Jim is the Senior Director of Analytics at Responsys, Inc. in San Francisco. He has been doing Business Intelligence for the last 20 years, focusing on marketing applications for the last decade. He has actively used R, since 2002 and last presented R to the BI Sig in October, 2004. Next month Jim will give one of the dozen invited tutorials at useR 2008, in Dortmund, Germany - "Using R for Customer Segmentation" a sequel to his 2006 presentation in Vienna on Customer Intelligence.

Michael Driscoll

Michael is a Principal at Dataspora, Inc. a business analytics consultancy in San Francisco. He has a decade of experience using large-scale databases and data mining algorithms within industry, government, and academic institutions. He founded and since 2000 has served on the board of CustomInk.com, an Inc. 500 e-commerce firm.

Michael has a Ph.D. in Bioinformatics & Systems Biology from Boston University, where he used R for the analysis and visualization of genome data.

6:30 PM - 9:00 PM July 15, 2008

SAP

Building D, Southern Cross Room

3410 Hillview Avenue

Palo Alto,, CA

94304

FULL INFO AT

http://www.sdforum.org/index.cfm?fuseaction=Calendar.eventDetail&eventID=13118

SaaS - Multitenancy Debates

There has been a really interesting discussion started by Phil Wainwright on Why Multitenancy Matters for SaaS companies...the latest post with a response from the Intacct CTO, Aaron Harris, is very enlightening. Harris points out that many of these decisions on infrastructure are made both on the technical merits but also with a strong emphasis on the impact to the economics of the SaaS model. It is worth a read.

Phil in his earlier post walks through the various back-end definitions of what a SaaS multitenant solution could look like. If you look at the 15 SaaS portfolio companies of Hummer Winblad you can see that we have a pretty strong religion on the approach that is best...this includes Intacct, Omniture and Aria Systems. The approach outlined by Harris - few instances of the back end and every customer on the same instance of the code - is the one where we see the best patterns for success.

There was also a post by the constant instigator, our own Dave Rosenberg, CEO of Mulesource (one of our portfolio companies and a regular ZDNet blogger). He argues that customers dont care. At the risk of setting off a fiery debate with Dave I will respectfully add some thoughts...that customers care because of the derivative effects of good backend choices.

Why customers DO care...

Market Leadership

Market leadership in a category can be a derivative of the efficiency of the SaaS providers organization. If you read the response provided by Harris on their multitenancy choices it boils down to economics. With a lean and mean back end infrastructure the SaaS provider has less administrators, less mixed hardware, less outages, etc and an overall lower cost to provide the service - do the customers care?

I would argue they do - most companies want to partner with the best companies in their category. The derivative reasons are a safer vendor choice, less risk of having to change later, often better pricing and usually a stronger product development capability.

Support

There is often a temptation for SaaS companies to bend to large customers who want separate notification and processes for upgrading code. If you play out this scenario for the SaaS provider you end up in a situation quickly where a few customers don't want the upgrade, or delay it by six months, or advocate for a different feature mix...and the small decision to allow different upgrade paths blossoms into a large subset of code versions across customers a few years out. I believe the saying is that if you let the nose of the camel in the tent and it wont be long before he is sitting beside you.

If you play out the scenario, every support call starts with the old software model question "what version are you running" and "was it Bob who knew how to deal with this"? This slows down support, diverts development resources to support and slows down the innovation at the company. Not good.


I don't expect all customers will start asking all these questions about how a SaaS company manages their back end infrastructure during the sales process...but I do expect them to make choices based on market leadership, support time, pricing, product development, etc.

SaaS Platform Wars

Chris Keene (CEO of our portfolio company WaveMaker) pointed me to a recent McKinsey report on the SaaS Platform Wars.

The reference, and link to the McKinsey report are on Chris' blog entry called SaaS Platforms For ISVs - Who Wins? from May 21st.

It was very thought provoking and gave our firm a basis for examining our work in SaaS. We have been very active SaaS investors with about 15 companies including Omniture, Employease and Aria Systems. The latter is a great example of the common services layer being delivered as a SaaS infrastructure layer as described as one of the core areas of the stack.

I think the internationalization piece related to SaaS is another core asset that platforms can provide worth noting. For instance Aria provides other SaaS companies with the ability to do business in many countries and currencies with one integration - to date they have done a billion transactions in over 150 countries. Without good SaaS platform components each vendor would have this complicated mess to untangle for each area that they want to do business - and it slows down the adoption.

The battlefront that I see as the one developing the most quickly in SaaS platforms is the one around cloud computing. We are seeing different approaches and different levels of the stack exposed by all the vendors…Amazon is a utility model (but proprietary queuing and other bits), Google forces Python and the persistent storage, Opsource wants to build lock-in through application peering, etc. We still don’t know where Microsoft, IBM and others will enter…it will be a dynamic market for a bit yet. We are investors in Elastra that provides a third party layer for working with cloud computing environments.

BusinessWeek on SaaS

Someone forwarded the recent BusinessWeek article on SaaS Myths found here. I wanted to include it below as a time capule of the market adoption of SaaS - something for us to look back on in a few years and laugh at the market FUD that is being generated to combat the SaaS wave that is pushing through the market.

UPDATE - This BusinessWeek article was written by Jeff Kaplan (Managing Director of THINKSTRATEGIES, and one of the best sources of all things SaaS that I know.) back in April of 2006. I applaud him for catching these trands two years ago.


A few other notes on the space that support the viewpoint for SaaS growth:

1) OnDemand market is currently 6B and growing at a 32% CAGR. The combined market cap of the ondemand vendors that are public is over 17B.

2) It is a fragmented market...the top 10 vendors still are less than 50% of the market. And these are big players like Cisco/WebEx, Microsoft, Salesforce, Citrix and Omniture.

3) This is a broad trend:
HR - Authoria, Taleo, SuccessFactors, Salary.com, HireRight
Finance/Accounting - Netsuite, DealerTrack, Concur, Intacct
Marketing - DemandTec, Vocus, RightNow, Omniture, ConstantContact
CRM - SalesForce, Aria, Genius, Entellium,
Content/Collaboration - Arena, WebEx, Citrix
Supply Chain - Ariba, TradeBeam, ClickCommerce
Just to name a few categories that are working...


Software-as-a-Service Myths [text from BusinessWeek article]

A consultant explains why this new breed of Web-based software has staying powerFor years, organizations of all sizes have suffered the hassles and unexpected costs that accompany deploying and maintaining a variety of traditional software applications that, ironically, were intended to make them more productive. Now a new breed of Web-based services are pushing legacy applications aside and finally giving users the business benefits they've been seeking. This new form of software-as-a-service, or SaaS, has been spearheaded by Salesforce.com's (CRM) customer relationship management and salesforce automation applications, and NetSuite's "net-native" enterprise resource planning applications. These companies have recognized the inherent inefficiencies of the traditional software market, including the tremendous time, effort, and cost that organizations -- especially large-scale midsize businesses -- have to expend to install applications and keep them up and running. Despite the success of these companies, many people are still skeptical about the long-term success of SaaS. Others are concerned that recent Salesforce.com outages represent a fundamental fault line in the SaaS landscape. As someone who has consulted with a variety of SaaS users and vendors and manages a rapidly growing directory of SaaS players, which can be seen at saas-showplace.com, here's my response to some of the most common myths associated with SaaS.

Myth #1: SaaS is still relatively new and untested.Salesforce.com has been in business over five years, has more than 399,000 subscribers at 20,500 companies worldwide, and is growing at about 80% a year. NetSuite has been in business eight years, and company officials say it has thousands of customers globally using its online applications. The oldest and biggest SaaS purveyor? ADP (ADP) -- the world's largest payroll application outfit -- has been in business for nearly 60 years, generated $8.5 billion in revenues last year, and served about 590,000 clients worldwide.

Myth #2: SaaS is just another version of the failed application service provider, or ASP, and hosting models of the past, and will suffer the same fate as its predecessors.While SaaS isn't a new idea, the economic climate and rapid advancements in application development tools have combined to make today's SaaS providers more successful than their predecessors. The ASPs and hosting companies of the dot-com era failed for two reasons. First, they did not fundamentally change the architecture of their software applications, but simply resold legacy applications to organizations that didn't want to house them on their own systems. The up-front and ongoing costs of hosting legacy applications proved to be too much for the ASPs to withstand. The second reason the ASPs and hosting companies failed: Only a small segment of the market was willing to outsource their application needs to relatively untested outfits because most companies during the dot-com era felt that their IT operations and business applications were a strategic asset. Times have changed. Today's economic and competitive pressures make nearly any form of outsourcing fair game. Many companies now consider various IT functions and business applications commodities and not core competencies. This has made SaaS, essentially an outsourced application management business, more attractive today than ASPs and hosting services of the past.

Myth #3: SaaS only relieves companies of the up-front costs of traditional software licenses.SaaS not only alleviates the costs of traditional perpetual licensing fees but also eliminates the need for additional IT infrastructure investments to support new applications. A variety of enabling technologies, such as service-oriented architecture and Web services, permit SaaS to be more easily provisioned and metered based on actual usage levels. This means companies no longer have to pay for excess capacity. The bottom line? Lower total cost of ownership and quicker time-to-value.

Myth #4: SaaS is only for small- and midsize businesses and will not be accepted by large-scale organizations.Companies of all sizes are taking advantage of SaaS. The scalability of the new generation of SaaS solutions enables users to test the reliability and performance of on-demand applications in limited deployments, and expand their adoption incrementally. Many SaaS vendors have emulated Salesforce.com's market penetration strategy of appealing to individual users with free trials or low-cost single-user subscription fees with the intent of permeating the market, and then winning business unit and enterprise-level adoption in major corporations. Today, Salesforce.com counts a growing number of Global 2000 and other brand-name companies as its customers, including AOL (TWX), Avery Dennison (AVY), Nokia (NOK), Perkin-Elmer (PKI) and SunTrust (STI). Myth #5: SaaS only applies to applications such as customer relationship management and salesforce automation.While SaaS certainly makes sense for many front-office functions and team-oriented collaboration purposes, SaaS solutions are emerging to address nearly every business application need. These range from accounting and financial applications to supply chain and channel management solutions. For example, Aramark (RMK), Dow Chemical (DOW) , HP (HPQ), Honeywell (HON), Hyatt Hotels, Roche, and Wachovia (WB) rely on Taleo's (TLEO) SaaS talent management solution. On-demand supply chain management vendor Click Commerce (CKCM) boasts Arrow Electronics (ARW), Delta, Tyco (TYC) and Volvo (VOLVY) as customers. Myth #6: SaaS will only have a minor impact on the software industry and will fade over time.A third of the respondents to THINKstrategies' recent survey said they are already using SaaS, and another third said they are planning to adopt SaaS in 2006. Other research firms have generated even higher ratios. As SaaS gains mainstream acceptance, it is becoming an important disruptive force in the software industry. And as long as the quality and reliability of SaaS solutions continues to improve, the appeal of SaaS isn't going to go away. In response to these numbers and other industry trends, Microsoft Chairman Bill Gates stated in an internal memo that became public last fall: "This coming 'services wave' will be very disruptive....Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses."

Myth #7: It will be easy for the established software vendors to offer SaaS and dominate this market.Nearly every established software vendor is being forced to determine how to revamp their legacy application business models to join the SaaS movement. This isn't a small challenge. Legacy software companies have to re-architect their applications to make them work on the Web. They also have to redesign their sales and financial models to accommodate the pay-as-you-go SaaS fee structures. And they have to rebuild their corporate cultures to make them more service-oriented rather than product-centric. It could be argued that Siebel was acquired by Oracle (ORCL) last year because it wasn't up to the task of fighting off Salesforce.com. Now Oracle, Microsoft (MSFT), and SAP (SAP) must respond to the SaaS movement while trying to avoid cannibalizing their existing software business in the process.

Myth #8: SaaS is only for corporate users.Anyone who uses McAfee (MFE) or Symantec (SYMC) antivirus software to protect their home PCs likely uses their subscription and 'live update' features, which represent another example of SaaS. Microsoft's new "Live" version of its popular Office productivity applications is aimed at small and midsize businesses and the home user. And don't look now, but online gaming and video-on-demand also can be considered forms of SaaS.

FountainBlue Event - Enterprise 2.0

Earlier this week I was invited by the FountainBlue Forum to take part in a panel discussion about Enterprise 2.0 (how web 2.0 is influencing/penetrating the enterprise market). I have attached the summary of the event written by the organizer, Linda Holroyd.

I wanted to comment on one topic that came up during the discussion relating to the classification of Enterprise 2.0. I view the definition of Enterprise2.0 (if this really is a category) as much more than online collaboration tools for inside the enterprise. The definition needs to be broad enough to encompass some of the really interesting trends that are happening:

SaaS - People who work at companies are consumers when they leave the office. These people want the same quality and user interface at work and at home. No one wanted to use green screens at the office and client-server at home. Today, no one wants great web2.0 style interfaces at home and clunky desktop solutions at the office.

Next Generation Marketing - Lyle Fong of Lithium who joined us on the panel has an interesting company that helps large brand companies identify the key users/influencers/evangelists of their products and engages them. This is a new world of marketing and engagement with your customers - and I think one of the best examples I can think of for a definition of Enterprise2.0. Afterwards Lyle pointed me to the new Forrester book, Groundswell, for more background.

Social Science - We have a company, Baynote, which leverages the science behind the wisdom of the crowds to bring deep product search and recommendation engines to ecommerce sites. I think this is another great example of Enterprise 2.0 - an underlying technology engine that enterprises are using to keep up with the expectations of their customers.

Now to the official summary of the event. Email me if you have further thoughts or questions.

Thank you for attending FountainBlue's High Tech Entrepreneurs' Forum on the topic Web 2.0 - from Consumer to Enterprise Opportunities and Business Models. Please join me in thanking our sponsors at Pillsbury Winthrop Pittman & Shaw LLC for their sponsorship and support.

Please join me also in thanking our knowledgeable, informative, and entertaining panelists for sharing their knowledge and advice on the topic:

· Facilitator Gary Benton, Partner, Pillsbury Winthrop Shaw Pittman LLP

· Dr. Cheemin Bo-Linn, CEO & President, Peritus Partners

· Lyle Fong, CEO and Co-Founder, Lithium

· Anand Iyer, Developer Evangelist, Microsoft Corporation

· Lars Leckie, Partner, Hummer Winblad Venture Partners

· Eugene Lee, CEO , Socialtext

Web 2.0 solutions have centered around personal communities and consumer solutions. But as the solutions have evolved and the technologies have advanced, business professionals are adapting solutions previously targeting consumer audiences, to investigate enterprise opportunities and business models. Below is a summary of notes from our conversation:

The Evolution of the Web:

· Enterprise Web 2.0 is not just for the consumer, it’s for corporations and businesses.

· Business Models for Enterprise Web 2.0 are evolving, but may include page-view payments funded by corporations rather than by advertising.

· There is a groundswell of people using Web 2.0 consumer solutions demanding the same functionality in corporate contexts, which, among other factors, is leading to a convergence of consumer and enterprise solutions. Forward-thinking companies are thinking creatively about how to leverage this opportunity.

· The demand for Enterprise Web 2.0 solutions is triggered in general by the younger generation and those also adverse to traditional enterprise software.

· Web 1.0 is about presented structured information in a structured format. Web 2.0 is more about taking unstructured information and putting it into a structured format. Perhaps Web 3.0 is more about taking unstructured information and leaving it in an unstructured format.

Characteristics of Successful Enterprise Web 2.0 Solutions:

· They solve business needs:

o They may turn customers into assets and advocates and channels working in community.

o They create a community which connects customers and supporters and others with each other.

o They make it easier to support customers, partners and other stakeholders.

o They increase productivity and/or build connections within an organization.

· They have sophisticated technologies which make the solution broadly accessible, with inter-connected elements and back-end components.

· They address an identified pain in specific, measurable ways

· There is a fun, social, yet result-focused objective for having people join and participate in a community. It’s not just about having fun (like in Second Life), it’s also about serving a purpose which can be measured in ROI reports (like collaboratively solving technical problems with a project for example, or gathering innovative ideas in community).

· They create high-trust communities with similar interests:

o They encourage communication and collaboration between members both to build connections and to solve business problems.

o Members make suggestions which others act on.

o Users remain engaged in the community

o Users continue to drive value for the company (see above).

o There is a viral element which supports on ongoing growth of the community.

· They may make it easier for companies to connect traditionally silo-ed groups through sharing of information, resources, connections, etc.,

· Collaboratively-created content creates value and helps build the community, thereby adding value to the corporation.

Advice on Selling Web 2.0 Solutions to the Enterprise:

· The culture of an organization is a key factor on which Enterprise Web 2.0 solutions will take hold and how it will be used internally for the company, and externally for creating and supporting communities partnering with the organization. Factor this in when planning your sales strategy and approach.

· It is essential to work with IT departments who may feel threatened by Enterprise Web 2.0 solutions. The decision-maker/advocate is likely not in that department.

· It is easier than ever to set up an infrastructure and create a web 2.0 solution, but because of that, there are a lot of web 2.0 solutions, and you must be able to define your niche and your potential enterprise customers and the pain which they need to have addressed.

· Have ROI reports and case studies to present to your prospects.

Advice to Web 2.0 Founders:

· Know the problem you want to solve and why you are passionate about solving it. Keep focused on that.

· Know which customers and partners will help you focus on that objective and work with them, rather than continually chasing the low-hanging fruit.

· Remember that it’s not about the technology, it’s about the whole solution and the problem you’re solving.

· Consider the market size.

· Build an experienced team that can deliver.

SaaS Economics Panel – SaaS Light and SaaS Heavy

Yesterday I moderated at panel at the SaaS Economics Conference in San Mateo. The organizer, John Cargile, had asked me to pull together a panel on the topic of Raising and Spending Capital in SaaS companies. Our goal was to talk about fundraising, budgeting/allocating, dealing with bumps in the market and overall capital strategy. I will try to summarize some interesting points below.

First, I want to thank the panel members who took time away from running their SaaS companies to share their experiences:

Lyle Fong – CoFounder and CEO of Lithium Technologies. Lithium is a very successful and profitable SaaS company that builds online communities and a social customer engagement platform for some of the biggest brands (Dell, Nokia, Blackberry, etc)

Ed Sullivan – Founder and CEO of Aria Systems. Aria is the market leader in Subscription Revenue billing and the associated infrastructure. Phil Wainwright just covered them with an excellent post on ZDNet.

Brad Peters – Founder and CEO of SuccessMetrics. Brad’s company has some great traction, in his words, “six and seven figure deals” selling a SaaS platform for deep analytics around revenue uplift.

A few takeaways from the discussion:

SaaS Light and SaaS Heavy

One interesting point that came up in the discussion was that the SaaS market is not homogeneous in nature. An interesting segmentation that I want to put forward is SaaS heavy vs SaaS light.

SaaS light, which I think much of the dialog on SaaS refer to, is one which has a large number of end customers and has some crossover into consumer type companies. Examples of this would be WebEx and SalesForce. These companies tend to be price per seat level.

On the other end of the spectrum lies SaaS heavy applications such as Omniture, Aria, Lithium and SuccessMetrics. These companies tend to have fewer (but larger)customers, more integration requirements, sell into core enterprise functions and a more enterprise-like sales model (direct and channel). The pricing here tends to be more on a usage or value metric. One can almost extend this segmentation to B2C vs B2B companies where B2B is SaaS heavy and B2C is SaaS light. In this case the C would be individuals and groups who may be businesses but don’t buy/engage that way.

The economics and capital allocation for these two categories is different. Our panel leaned more to the SaaS Heavy side but we were able to talk to both sides.

SaaS Light SaaS Heavy
#1 Marketing Infrastructure
#2 Marketing Sales

Bumps in the Road

During the discussion we talked about how the current economic conditions could impact the spending plans for SaaS companies. While there is a general feeling the SaaS companies perform well during tighter budget cycles and that the recurring revenue model helps ease this problem from an operating side – it is the roll of startup founders to be optimists – the key point was that these companies should be gauging their success more by market share. If the overall market/economy is struggling but the companies continue to be able to increase their relative market penetration they will continue to invest for growth. It is too much of a short term perspective to only look at the company revenue growth.

Areas of Investments

Two of the companies on the panel listed their primary reason for seeking external financing was to keep pace with the market. Both had built their business in a bootstrapped manner but saw signals that the market timing for the company had arrived – and they wanted capital to enable them to capture as much of the market as they could. Venture financing also gave the SaaS heavy companies more credibility with their enterprise customers who have a robust enterprise purchasing process that includes due diligence of the vendor balance sheet.

The areas of investment for the companies on the panel post funding varies a little bit with infrastructure/product at the top followed by sales investment. Marketing was next on the list, but given the SaaS heavy nature it was lower than investing in the sales team.
From the venture perspective, our goal is to invest in the areas that make and keep the company number one in their category. Brad pointed out that in traditional software markets, and he hypothesized for SaaS too, that the market leadership position will yield the best companies. Number one in the market tended to end up with 60% of the market, number two ended up with 20% and the last 20% was a clutter of the companies that didn’t quite make it. If market share is a good proxy for enterprise value then it makes sense to set market leadership as the guiding principal for setting company budget allocations.

Thanks again for all those who attended the panel. Let me know if I missed any part of the discussion that you thought was important.

DaaS - Data as a Service

I have been preoccupied lately with a software model that is a cousin of Software as a Service (SaaS) - one that I will call Data as a Service (DaaS). Much like SaaS it is more of an evolution of an existing model than something completely different - it just seems to me that the new generation of data delivered as a hosted service are breaking new ground in terms of access to data and analytics. I think more interesting companies will be built around this model.

Definition - DaaS
A software as a service or web service offering that provides customers with access and analytics around a set of proprietary set of aggregated data. The most interesting of DaaS offerings are ones which collect this data from individuals or companies by providing immediate value back for these efforts, but that the aggregated data is able to be resold to a different set of constituents.

Example - Salary.com
Salary.com collects data by offering individuals the ability to benchmark their compensation levels against others by sharing data into the system. This data is then aggregated and anonomized to be resold to companies (usually HR managers) for hiring and compensation related usage. Salary.com went public in 2006 and has a market cap of 100M.

Example - Dun and Bradstreet
Dunn and Bradstreet (D&B) is a 165 year old business that provides credit and commercial information. I have used their service in the past to research the credit history of customers and partners before extending them credit. D&B has a team of people who call companies to gather the data and then they resell it back to other companies - both on individual companies and for industry segments. D&B also sells this data for several other uses, for example, to marketing professionals to cleanse contact lists.

Why the DaaS model works

- Virtuous cycle on data - as the DaaS company acrues more data, it can provide increasing more useful data back to both the contributors and the purchasers. The data becomes a competitive advantage that an upstart would have trouble replicating. This is especially true if the data needs scale across different geographies.

- Analytics and actionable business drivers - the data is the basic asset, but it is significantly enhanced by wrapping analytics into the offering. Some DaaS companies pull their data from publically available sources but an idividual user would have trouble pulling the data, navigating the data and building analytics to make it useful. A DaaS company can make this investment as they can sell the data many times over.

Unfortunately I think that the acronym is still up for grabs with a few alternative software meanings:

Development as a Service - Salesforce
Datacenter as a Service - Cloud Computing
Database as a Service - LongJump
Department of Aging and Adult Services - US Government
Data as a Service - StrikeIron (this one is closest to my definition, but is actually DSaaS - Data Service as a Service)

The message for me is that all companies, SaaS or otherwise, should look at what data assets they have (or could easily have) and consider a DaaS offering. If it can provide useful insights - it will be well worth the development costs.

Magic Number for SaaS Companies

Guest post on Will Price's blog - reposted here.

Josh James, CEO of Omniture (a Hummer Winblad portfolio company), gave an inspiring talk on building a SaaS company last week at the Opsource summit. Josh walked through the history of Omniture as a case study for building a SaaS company. He talked about the need to invest in the company with a firm hand on the wheel as the recurring revenue slowly built up over time. He outlined the different stages of evolution of the company:

1) Product: build a rock solid product. Prove you can sell it as founders before moving past this step.
2) Sell: Sell like crazy, build out a team, hire some QBSRs (Quota Bearing Sales Reps)
3) Retention: focus on churn and retention issues, hire more QBSRs
4) Marketing: spend on marketing, hire more QBSRs

The next phases, not surprisingly, also included hiring more QBSRs but interestingly it is not until later that investments in efficient infrastructure and operations hit their ToDo lists. This outline displays a strong focus on finding a product market fit and then adding gas to the fire as the market opened up. The key metric that Omniture used to decide how much gas to pour on the fire was the Magic Number.

The Magic Number

The magic number ("MN") is a metric that can be used to tell you the health of your company from the perspective of growing monthly recurring revenue ("MRR"). It is a common mode metric to compare companies MRR scaled by sales and marketing spend. The MN provides insight into the effectiveness of previous quarter Sales and Marketing spend on MRR growth. Your MN will be penalized if the spend is wasted (bad marketing, bad sales execution), if your churn is high or if the market has issues (saturation, competitive forces). It also has a very high correlation with Q/Q growth rates so in general, high Magic Numbers are good.

To calculate:

QRev[X] = Quarterly Recurring Revenue for period X
QRev[X-1] = Quarterly Recurring Revenue for the period preceding X
ExpSM[X-1] = Total Sales and Marketing Expense for the period preceding X

Magic Number = (QRev[X] – Qrev[X-1])*4/ExpSM[X-1]

For example, consider a hypothetical company with the following financials

Q1 Q2 Q3
Revenue (recurring total) 1M 1.2M 1.5M
S&M Expense 800K 900K

Then the magic number is 1.0 for the end of Q2 and 1.33 for Q3.

Fundamentally, the key insight is that if you are below 0.75 then step back and look at your business, if you are above 0.75 then start pouring on the gas for growth because your business is primed to leverage spend into growth. If you are anywhere above 1.5 call me immediately.

Josh provided the following gas-pouring throttle chart for SaaS companies to evaluate how much to invest in their go-to-market spend. The data on the charts if from Omniture and other public SaaS companies.



Calculate yours…and get back to me if it is interesting! For fun and extra credit take a look at difference in Magic Number for some of the public SaaS companies like Omniture and SuccessFactors. I can be reached at lars@humwin.com

Eat Your Own Dogfood - SaaS vendors
aka Drink your Own Champagne


Repost from my guest entry on Will Price's blog.

Guest post by Hummer Winblad's Lars Leckie.....Lars drove our firm's investment in Aria Systems and, most recently, vKernel.

Last week Phil Wainewright wrote a great post (as he always does) called SaaS vendors, eat your own dogfood, or die. In the post, he describes how SaaS companies need to embrace the SaaS services available in the ecosystem.

I support the viewpoint from the post that SaaS companies need to have religion and leverage SaaS in everyway they can – further, I believe if they don’t they leave themselves open for other SaaS companies to disrupt them. From discussions with the infrastructure management of many leading SaaS companies I often hear how they are forced to use some on-premise pieces on the back-end reluctantly. This has provided the motivation for a few of our SaaS infrastructure investments (eg. Aria – SaaS billing and customer management).

Phil’s title had me thinking along another important vein for SaaS companies…literally to eat THEIR own dogfood and use their own product. For example, Salesforce aggressively uses Salesforce to manage prospects, Omniture eats their own analytics for online marketing, Teleo uses their own product for recruiting and SuccessFactors brags about their own talent management. Luckily we don’t all work for tobacco companies…

My belief is that SaaS companies must use their product for a few reasons:

1) Point of View: it puts everyone in the company in the seat of the customer. This means that the internal teams will live the same pain, the same experience and the same leverage that you are espousing as a vendor. This POV extends the advantages SaaS has of bringing the vendor closer to the customer by putting the customer in the office next door.

2) Analytics: By using your own product you will think about the product extensions and depth of how to apply the benefits of analytics to build stronger products and best practices. SaaS companies have a huge edge with analytics so it makes sense to use them internally as well.

3) Sales Roadblock: a fair question for a prospect to ask would be, “if your solution is so great, why aren’t you using it?" SaaS vendors can do their sales team a great favor by getting ahead of this question.

Any interesting SaaS companies that are using their own product and want to reach out – I’d love to hear from you. Please email me at Lars@humwin.com.

VKernel and Hummer Winblad Join forces on Virtualization Infrastructure

This is a repost of a blog entry I contributed as a guest writer on Will Price's blog.

Hummer Winblad is pleased to welcome Alex Bakman and his VKernel team to the Hummer Winblad family. We are very excited for the opportunities ahead and look forward to working together. The recent press release and further details can be found here.

Enterprise IT environments are undergoing one of the biggest shifts in 25 years – shifts that have not been seen since the move from mainframes to client-server. Big shifts in infrastructure open up large gaps in the current management solutions. Virtualized environments provide many benefits to the enterprise from flexibility to lower TCO but along with that have introduced a few headaches too…

- “vmotion” – servers growing legs and dynamically moving
- “vm sprawl” – servers multiplying at unmanageable rates
- Shared resources – performance, monitoring, resource accounting, etc
- Cost visibility – no longer tied to physical resources

vKernel is a new platform for system management in enterprises that are embracing virtual infrastructure to power their businesses. Enterprises IT managers face increasing challenges as virtualization spreads within the datacenter. vKernel provides an essential suite of virtual appliances tailored to meet the virtualized datacenter including chargeback and capacity planning management. These appliances require zero installation, are quick to deploy and provide insights within minutes.

More information can be found on vKernel’s website and webinars – or download the latest virtual appliance to try it out today.

Hummer Winblad’s enthusiasm in virtualization is captured by our investment in vKernel as well as several other companies including Scalent and Akimbi (acquired by VMWare).

Aria Systems Raises Series A - Leave the Billing to Us




This is a re-post from a post I did on Will Price's blog.

Last week, Hummer Winblad Venture Partners announced the Series A funding for Aria Systems, the leading on-demand billing and customer management provider.
HWVP’s investment in Aria is the firm’s fourteenth SaaS investment (others include Omniture, Adforce, Employease – some of which date back to 1998).

The investment in Aria is a double down on the SaaS market – Aria is not only itself a SaaS ISV, but also the company is a core component of any SaaS company trying to efficiently scale. RBC Capital Markets predicts that the SaaS market will grow at 43% CAGR to be $28bn by 2010. That’s a lot of billing.

As the SaaS market grows, the need for ISV’s to make bespoke investments in data center operations, billing infrastructure, and other core, but non-differentiated, functions is lessening by the day. Providers like Aria allow ISV’s to focus 100% of their human and financial capital on differentiated application logic, while using best-of-breed platform vendors for infrastructure services. The company puts it best when it tells customers it will help them, "get customers, get paid, get control."

Why invest in Aria? Simply put, traditional billing solutions, independent of expensive on-premise software, are not well suited to subscription and usage based billing models. New revenue models bring about the need for new billing architectures. Emerging SaaS companies who don’t use Aria can either choose to build a billing system themselves, thereby diverting engineering resources to a non-core engineering function, or they can use existing on-premise solutions with a myriad of spreadsheets and manual accounting. Aria is a solution that can scale and provide the best infrastructure through a strong focus on the billing market.
The Aria solution is a complete turnkey SaaS (single instance, multi-tenant) solution to manage recurring revenue billing. They manage the quote-to-cash system for a company including hosted customer sign-up, customer service, provisioning of service, dunning and all the other components needed for a full billing solution.

Aria is already in the market with strong customer traction and key partnerships in place. The vertical markets that Aria addresses today are SaaS, On-line Gaming and Telco. A few of their partners in these markets are Opsource and GNi but you can see the full list of over 25 partners here.

Congratulations to Ed Sullivan and the rest of the Aria team - Welcome to the Hummer Winblad family.