Anyone who knows me reasonably well knows
that I tend to be a structured (albeit non-linear) thinker and that I
have a penchant for semantics. Words have meaning and are not to be
trifled with. Words with different meanings should not be used
interchangeably; they have different meanings for a reason.
So when I got a call from a “adviser” to a growth stage business today promoting a “software company
in the human capital management space” , I near about turned it down on
the spot. You see “software” doesn’t fit in my investment thesis;
“SaaS” does. You can imagine me saying:
I’m sorry, I don’t invest in software companies. I don’t
like product company economics, including software license economics. I
do however invest in SaaS. You see, I like recurring revenue businesses
that have a long-term relationship with their customer. I like to sell
something once and get paid many times over that long customer
relationship. I like businesses with economies of scale, where the
“next customer” has a higher contribution margin than all prior
customers. I want to invest in businesses that have operating leverage
and can be built into meaningful stand-alone businesses.
Thank goodness I’ve learned that all too many people use the terms software and SaaS interchangeably. So I asked the adviser.
How does the company deliver its solution, through software or SaaS?
His response:
SaaS.
Now we’re talking!
Old handles die hard
The adviser who called me isn’t the only person who’s made this mistake with me. Heck, one of my current investments, IP Commerce,
once pitched me that they were a “software company”. I had to turn
them around on that notion; “no, you are an on-demand service”. More
recently, I had the a conversation with a cloud-services executive who
made the same error; “no, you do not deliver a product, you deliver a
service”.
I don’t begrudge anyone whose has used the
words interchangeably. It is understandable in some ways; it is hard to
let go of the past, and software is clearly the past when it comes to
SaaS. People are clearly finding it difficult to shed the
product-orientation of software for the services-orientation of SaaS.
But let go we must! Why?
More than semantics
There are huge distinctions between software and SaaS. This isn’t just semantics. My Partner Doug Holladay would
call this a ”distinction with a difference”. Which is to say that
software and SaaS are two fundamentally different business models with
fundamentally different:
-
underlying economics
-
key success factors
-
operating skill sets
-
capital formation needs
The point is that the differences between software and SaaS are more
important than what they have in common. About the only thing that SaaS
and software have to do with each other is that SaaS service-delivery
infrastructure is software-based. But can you think of an on-demand
services business; telecom, CRM, payments, cloud, securities trading,
etc, etc. where that is not the case? I can’t (at least not one where
I’d invest); its all software on the back-end. You don’t hear telecom
companies proclaiming that they are “software based telecom”.
Yes, SaaS and software compete for market
share in the vertical markets in which they overlap; which is just
about every vertical market. And that is where the distinction really
matters. Selling yourself as software when you deliver via SaaS is like
pitching a netbook as a mainframe. It is a step backward. In most
application verticals, SaaS has such overwhelming advantages against
software from just about any perspective you can imagine (customer,
operator, or investor), that any SaaS operator who utters the words
“we’re a software” company is seriously degrading the value proposition
of their solution.
So don’t do it. Be proud of the merits of
on-demand operating model you’ve chosen. Sell against software; not
side by side with it. You have a distinction with a difference!
Disclaimer: The views expressed in this post are solely those of the author and should not be attributed to Meritage Funds or any other person.
Cross Posted At Non Linear VC.
Derek,
I agree with you differentiating the terms. Just like it wasn’t a horseless carriage, it was an automobile, the same is true with software and SaaS. Companies that started by developing and delivering a service have a different mindset than those who develop and deliver software. I find that SaaS is more than a just a difference in product, but a cultural one within the business that sells it.
I really like the horsless carriage/automobile analogy Ron. Logging that in my memory banks for future use.
And the point you make about culture is insightful. This and the operational complexities of trying to do both (SaaS and software) are reasons we venture guys like pure-plays. Too hard to manage SaaS and software delivery simultaneously and can pull an organization apart.
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Nicely succinct explanation (and comments). However, I would also add that there is a distinction within SaaS as well. Specifically there are hosted apps which fit the recurring revenue model, but remain “walled-gardens” when it comes to collaboration.
The next level of promise for SaaS is cross-organizational collaboration where my instance of the service allows my people to collaborate with your instance and people via invited permission (self-service). This is not only something software doesn’t do, but also a model that can emulate real world business situations and commerce.
Just my two cents.
Thanks for the additive comment Joe. I agree with the vision of cross-organizational collaboration enabled by SaaS that you’ve outlined. In the long-term view, I’d go so far as to say SaaS vendors must execute on this vision if they are to create sticky relationships with their customers.
One of the most wonderful things I find about SaaS is what Phil Wainwright has insightfully titled the “community of interest” which leads to a win-win convergence of objectives between vendor and users.
- The vendor has instant access to usage data, which it can use to improve application performance and support.
- The vendor can monitor usage across customers, and share best practices.
- The user communities thrive, because they share a common application, and it is in the vendor’s interest to promote these communities.
- The vendor wants to keep continually improving the application (to retain your business on an ongoing basis), you want the same (of course!)
Thanks Derek. I’m betting on it, so I hope you’re right. Furthermore, APIs that extend the SaaS application to mobile companion apps on one end and other APIs for the back-office applications on the other are what we think will make a true “cloud” solution.
Keep spreading the word, because you’re dead on. Some of this will take time, but some of the fruit is ripe right now.
Great comment Pankaj. The alignment of interest between vendor and customer and between customer and customer is one of the truly unique elements of the SaaS business model that; (i dare say); software companies have not had to manage. I use the word “manage” with clear intention because identifying this issue is only step one in the process.
[..] SaaS and Software: A distinction with a difference (cloudave.com) [..]