[repost from larsleckie.blogspot]

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.