Phil Wainewright continues on the theme of financing SaaS. I agree that, presently, many SaaS companies can get started with very little outside financing, and that many don't and will never need institutional money from VCs. But it's an over simplification to say that this applies to all SaaS, and imply that it will always be so.
The SaaS software we're now enjoying has been developed in a fashion very much like the software generated by the "three-guys-in-a-garage" operations of the early 1980s. The amount of capital required to put out a new software title at that time was pretty minimal. A couple of PCs, a cheap compiler (probably from Borland), and a lot of sweat.
What gives SaaS the ability to deliver new apps so quickly and with such low initial investment is a combination of
- (really good) open source software, without which much of SaaS would be very labor intensive and require major investment in licenses or personnel.
- use of infrastructure that's available "by the drink" (like Amazon's AWS services S3 and EC2), which reduces the first cost (capital investment), and permits a reasonable approach to scalability, so long as the application is architected with scale in mind.
- end-user tolerance for the "one size fits all" multi-tenant application with limited ability to customize
- end-user tolerance for reliability and availability that's less than enterprise class (i.e., the eternal "beta" release)
- and, quite frankly, rather narrow, niche offerings.
What's likely to change?
- consolidation of the smallfry and the formation of the juggernauts (Salesforce comes to mind).
- serious demand for IaaS (infrastructure as a service) providers, that may require venture funding. The giants (Amazon, Google, or maybe Sun) are offering reasonably priced infrastructure on demand. But all of them have their limitations and constraints. Not every SaaS will have the up-front capital required to build out their own data centers. So, where will they go for this?
- development efforts required to ruggedize SaaS offers, complete with SLAs that meet the requirements of a more demanding, enterprise customer base.
The amount of money needed by these companies will not reach the astronomical levels of years past, and probably favors the smaller venture firm that doesn't need to immediately put tens of millions to work as quickly as possible. But, I can't and won't believe that somehow SaaS is the deathknell for application software investing by the venture community. SaaS ventures will definitely rely on VCs, if only indirectly on their investments in the infrastructure on which SaaS must run.
» Do SaaS ventures need VCs? | Software as services | ZDNet.com
... In other words, a properly run SaaS company is not a risky enough proposition for venture funding. VCs want to invest in companies that have a higher risk factor than most good SaaS players, which allows them to extract a greater share of the equity in return for providing funds. Their reward for taking on this risk is the ‘hockey stick’ growth of a handful of good bets, which provides enough return to make up for the failures.
Technorati Tags: SaaS, venture capital
Technorati Tags: SaaS, venture capital