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?
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
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
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.