(Updated)
“It takes 70% to 100% more capital to fund a SaaS company to break-even than a traditional perpetual license company. It also takes 2 to 3 times longer to get there.” said Michael Skok of North Bridge Venture Partners at a Mass Technology Leadership Council session yesterday. Don Dodge reports in a detailed post, which is well worth reading in full.
- SaaS companies need an average of $35M in VC capital, versus $20M for a similar perpetual license company.
- It takes 6 to 7 years to get to break even
- Public equity markets pay a 10% to 20% premium for predictable revenue streams
- SaaS companies move faster than big companies. They can introduce new features instantly versus waiting for the next major release. Think years.
- SaaS requires an architecture that supports end user customization
- Industry standards are critical for interoperability
- Steady state business models require 15-18% for engineering and 30-35% for Sales and Marketing.
Obviously this comparison is about Enterprise Software, Consumer applications are faster to develop, startups often don’t even take VC investment and get to market or get acquired after limited Angel investment – if any at all.
The above points are fact-based, learned from NBVP’s investment in 8 SaaS companies. Yet I feel comparing enterprise software startups with the SaaS (Software as a Service) model vs. the traditional perpetual license model is an academic exercise, since it does not represent a real choice. I’m meeting VC Partners weekly at various SVASE and other events, and I’m hearing a consensus: no software VC in the Valley invest in the traditional enterprise license model.
There are estimates that about 10% of all software sold is SaaS today, but investors have look out years ahead, and the writing is clearly on the wall: only SaaS gets funded today.
Related posts:
Update (5/23): Hello “On Demand” hype machine by SiliconBeat’s Matt Marshall list some of the lates On-demand investments, at ever-increasing valuations.
Tags: SaaS, On-Demand, Enterprise Software, Venture Funding, VC funding, VC Investment, startup, startups, SVASE
Hi,
To compare the to models may be academic from the VCs point of view, but not from the endusers point of view.
We have a hell of a job explaining the difference. Once our clients do understand, they love the concept. So I have to agree with the VCs points made in you posting.
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Stefan,
Let me be clear, I also agree with those points, they are, after all based on facts. The point I am making is that whatever the numbers say, VC’s or entrepeneuers here (California) don’t really go through a comparative exercise, SaaS is about the only software model (other than open source) that gets funded nowadays.
I had an interesting experience recently, pitching a European SaaS company to VC’s here. Their original business plan and presentation was 80% about explaining the benefits of SaaS in general. Here if you start explaining it to VC’s, it almost feels patronizing – they will tell you to skip that part… so I ended up re-doing the presentation.
I think there are three distinct levels of acceptance here:
1 – You guys in Europe still have a “hell of a job explaining the difference”
2 – Here in the US, SaaS is mainstream, still in minority in terms of software sold, but anyone in the industry knows about it
3 – VC’s invest into the market several years ahead, so the prediction is that in 2-3 years it will be increasingly difficult to sell perpetual licences, which is why they only fund SaaS.
Zoli,
That was an interesting reply.
We did use 1/3 of our homepage until last week to explain the benefits of SaaS. We only changed last week and now talk about our products instead.
I have offered SaaS for five years, and it is only now that poeple slowly start taking notice.
Thank you for your insight. Europe is behind the curve again!
Oh, well, then look at Mobility, Europe is way ahead of the US…
Zoli,
We are not behind with product development. Our products have been around for a long time, but the acceptance by clients is much better in the US. We do very little marketing in the US, still over 50% of our clients are from the US.
Oh, I didn’t realize you were actively doing business in the US – ignorant me. Perhaps we should talk a bit – would you like to ping me with your email address? (mine is avail. from the “About Me” section under my photo.
I’m not as pessimistic as Stefan about take up and being ‘behind’ or ‘in front’ of any particular curve. There is no doubt that explaining SaaS is not easy to many who are rooted in the on-premise world but it is much more about attitudes towards services that should be commoditized, where SaaS fits well for both investors and users.
I started a SaaS company a little over 10 years ago and managed to make it to breakeven in about 6 years and profitable 1 year later. I love the model. Deployments and updates are very easy. In the beginning we had to explain the model all of the time. Now it almost never comes up with our prospects.
Oh, and we got about $18M in VC funding