The Salesforce IPO in 2004 was just the beginning of a massive revolution in the technology industry and the revenue models for software companies. The market has thrived ever since, as Gartner predicted SaaS will reach $22.1 billion as an industry in 2015.
Part of the reason for this high valuation is the encompassing nature of the term: “SaaS” is a very simplistic label that covers an incredibly diverse marketplace. There is no “average” company, as “SaaS” can be a everything from $30 a month, consumer-facing apps to Human Capital Management systems deployed in the cloud like Workday, which cost hundreds of thousands of dollars a year, are highly complex to implement and represent foundational business software.
Despite this wide variety of companies in the marketplace, there are still some broad trends that can be expected throughout the SaaS industry in 2015.
SaaS Will Flourish Even More in the Enterprise
SaaS is often mistaken for a homogenous market, but, in reality, it’s an extremely complex space. Despite the wide range of products offered, though, one clear trend is the proliferation of all types of SaaS apps, particularly in the enterprise space.
In a discussion with a friend who runs marketing at Netskope – a company that helps CIOs discover the SaaS apps in use in their enterprise – I learned the average enterprise is utilizing hundreds of SaaS applications, with more coming every day. This doesn’t just mean IT-sanctioned apps like Salesforce for CRM or Marketo for automation, as individual workers are increasingly utilizing cloud apps like Dropbox to try and boost their own personal productivity.
Examining the enterprise space more closely, this trend reaches all levels of the organization due to an increasingly segmenting SaaS market. Individual departments, for example, are incredible consumers of lower-cost apps that are designed to help individuals or small teams do their work. While that’s happening, we’re also seeing organizations using SaaS apps to a greater extent by running core business functions through apps. Workday is a perfect example of this, as it’s primarily replacing on-premise solutions that are complex, expensive, include integrated suites of apps and requires heavy IT department involvement.
Hybrid Models Will Abound
There used to be a very clear demarcation between on-premise and SaaS — and it was an all-or-nothing model. The on-premise version would be deployed to the site and be sold with a perpetual license; SaaS products would be deployed in the cloud and have a subscription payment model.
Today, the lines are being blurred, and a hybrid business model is gaining momentum. Many IT solutions that would have historically been on premise are moving to the cloud, where a lot of the functionality resides — and this hybrid integration is how many legacy technology providers are becoming cloud-enabled. A provider might be selling something on-premise with a subscription, which is a dramatically different business model with different requirements than what these businesses are used to.
This applies to a wide variety of hardware, including servers, storage and security devices. Take, for example, the Sophos security appliance, which many businesses use. The main product has moved from where all the functionality and features lived on the hardware to a product where the device is still installed on-premise but the compelling features live in the provider’s cloud.
VCs Will Value Metrics Beyond Growth
In 2015, the average venture capitalist will only invest in a software company that’s cloud-based, with very, very few exceptions. Consumers increasingly prefer subscription-based software and developers are also choosing to embrace the flexibility and capabilities that the SaaS model offers.
In the past, SaaS startups were valued solely by how quickly they can grow their new customer acquisition and the top line. Now, because of the proliferation of SaaS offerings, expect a more nuanced approach to valuation: the average VC will start to look at SaaS investments in more complete fashion in respect to double-clicking on important metrics like customer retention, customer growth rates, lifetime value, and key adoption metrics. These metrics give investors insight into type of customer loyalty products create. Because of this, Customer Success (retention, satisfaction rates, etc.) matters more with each passing year in terms of valuation and the product’s perceived viability.
Beyond private investments, also expect public markets to start to value SaaS providers in a more nuanced fashion. A company like Box hasn’t seen as welcoming of a market as it might have hoped because it is still attempting to create a completely new class of enterprise software, so the “grow market share at the expense of profitability” approach makes sense. Savvy public investors will start to understand which SaaS companies are in the virtually unlimited growth categories versus those in the displacement business of already-existing markets. Make no mistake, we’ll see an explosion of SaaS companies filing for IPOs: In 2013, for example, 45 of the 222 companies that held IPOs were SaaS companies.
These predictions don’t cover the hurdles the industry will face in the coming year: though there are no barriers to adoption to individual tools (and they will proliferate), complex business apps will continue to require IT involvement at an increasing rate to support their implementation and maintenance. The average IT department will be managing an increasing number of SaaS apps, which could place a burden on the organization.
However, the future for SaaS remains bright. Here’s to more enterprise adoption, hybrid model integration, robust VC valuations and another growing year in the SaaS industry.
