Could the NetSuite IPO be the beacon for a sea of change between Software as a Service companies and Wall Street? Are the days of trepidation for the SaaS business model, security and viability waning?
As I watch the revenue and sheer number of customers for on-demand companies like Salary.com, DemandTec and NetSuite amass—I say yes. All three companies are demonstrating to the market the benefits of this efficient and cost-effective model and calling Wall Street to attention.
Sure, a lot of companies are founded on a pure SaaS model, but relatively few have reached the public markets successfully. Why is this? It’s because many people are still struggling to understand the SaaS model and failing to truly grasp the fundamental differences between SaaS-based and on-premise software offerings. Investors can't look at SaaS companies through the same lenses they have used for years with traditional enterprise software companies.
When I talk to investors, I tell them to focus on two main differences: customer renewal and the revenue dynamic. First, recognize that SaaS companies are built from the ground up around customer satisfaction and customer renewal. To survive, they must earn the customer’s complete satisfaction every year, and often, every month.
This focus is very different from traditional software companies whose first priority is to get to the next million dollar license deal in order to keep Wall Street happy, and whose second priority is to have these customers pay expensive ongoing maintenance and upgrade fees. The second major difference: because there is no million dollar license fee, the revenue trails traditional software companies.
This is actually great for investors because revenue SaaS companies earn is not an artifact from a relatively few very large deals, it comes from hundreds and hundreds of happy customers. This revenue dynamic is also the reason SaaS companies are so attractive and so much more predictable to Wall Street. Because of the business model differences, it takes a little longer for SaaS vendors to ramp to the revenues that will justify an IPO, but—have no doubt—they are getting there fast. Salary.com, DemandTec and Netsuite are proving that it can be done and are helping to move the SaaS IPO market forward.
From a customer perspective, why SaaS and why now? SaaS offers customers an undisputable value and time to market advantage over traditional enterprise models, including no hardware, no maintenance fees, minimal implementation fees and, most importantly, no software upgrades. This means new features are available to customers instantaneously, as soon as they are live, saving customers from expensive upgrade costs while ensuring they’ll never trail behind on older releases of software. SaaS is also breathing new life into technologies that were too expensive for the masses in a traditional enterprise model.
The fast growing Sales Performance Management market is living proof. Founded on a pure on-demand or SaaS model, Xactly Corporation has quickly amassed more than 70 customers including Salesforce.com, CNet and Polycom—all of whom are now utilizing an on-demand Sales Performance Management platform to create a strategic competitive advantage within their businesses.
For companies like Xactly and investors in the market, the SaaS IPO tipping point may very well be here, and I think it’s about time.