Major PE/VC Investors
Major Funding activities
2017 SaaS Investments:
2016 SaaS Investments: 525 deals @ 46.7M
1. Vertical SaaS companies tend to have lower Customer Acquisition Costs (CAC) than Horizontal SaaS companies
Focusing on a more targeted customer base, vertical SaaS companies maintain their experienced sales teams to connect with industry professionals and make the sales. Although maintaining the sales teams requires more money, vertical SaaS companies ultimately spend less on marketing than its horizontal counterparts, who try to market products to a much broader market. According to Blossom Street Ventures, vertical SaaS companies can realize 8x cheaper CAC than horizontal SaaS companies.
2. Vertical SaaS companies tend to have lower churn rate, higher upsell opportunities, and more referral conversions, translating to higher revenue stream
Vertical SaaS companies tailor their products to meet specific-industry needs. Once a customer gets on board, it’s less likely for that customer to switch products, since the costs of moving businesses/operational platforms around is higher than those appear in the horizontal SaaS market. The upsell opportunities are also high for vertical SaaS companies, because industry professionals prefer to use an operational system that can meet all their needs rather than multiple individual services without much integration between them. Moreover, by establishing the reputation in the industry, personal referrals could replace part of the company’s sales efforts and further increase upsell opportunities. Based on Blossom Street Ventures, the median of all publicly traded vertical SaaS companies was at 6.8x revenue compared to 3.8x for horizontal SaaS companies. The mean EBITDA margin for vertical SaaS was 14%, compared to -3% for horizontal SaaS as of March, 2017.
Depending on the type of services offering, the competitive landscape in the software category (CRM, BI & Analytics, or HR, etc), and the market size of the business, horizontal SaaS companies adopt the following most common business models to increase customer base and revenue streams:
1) Freemium model
Freemium model refers to the strategy where the SaaS company offers its product to its customers for free and expects a portion of its customers to upgrade to the premium version. This business model typically works for SaaS companies that appeal to a broad market base and are in a competitive environment where product differentiation is limited. Companies that succeeded with this model include Dropbox, Cloudflare, and Evernote. These companies expect to dominate their respective market first and then slowly convert their free users into paying ones. However, this strategy doesn’t work on every SaaS company.
2) All-service-at-an-expense model
For other SaaS companies either offering somewhat differentiable products or are in a more narrow market, a good strategy to boost up their revenue is the all-service-at-an-expense model. By eliminating the free option, SaaS companies force their users to do more research before signing up their services. If the products that they offer can really differentiate themselves from other market competitions, customers will be willing to spend money for the better service. By offering everyone a limited service for free under the freemium model, SaaS companies are risking the chance of showing their customers the full services that they can get once they pay. First impression matters significantly in the competitive SaaS market, so if customers have a good experience using the paid service for the first time, they will be more likely to stick with the product in the future. This way, SaaS companies can enjoy steady revenue streams without worrying about supporting their large groups of free users. However, it is always easier said than done. Distinguishing which strategy is good for the SaaS startup is very difficult, but if a company struggles to get customers through freemium model and believes that its premium service offers much more, it might be time for that company to remove the freemium model for a try. After adopting the all-service-at-a-charge model, it is important to provide good added-value services and good customer service for customers to stick around. Examples of companies successfully earning more revenue by stearing away from the freemium model are demonstrated by Basecamp and Bidsketch.
3) Sophisticated and expensive enterprise offering model
For most vertical SaaS companies and some horizontal SaaS companies (such as Workday) offering sophisticated products tailored to big corporations, above two business models would not work. Since these SaaS companies are offering integrated solutions to a specific industry or some big corporations, software development, maintenance, and marketing expenses are all very large. Without experienced industry sales teams and strong connections to industry professionals, it is very hard for SaaS startups to convince their customers to move away from their traditional platform and adopt the new ones. These SaaS companies can charge very high monthly subscription fees to their corporate customers for tailored features and better integration with existing platforms.
SaaS is disrupting how we live our lives and how we do our businesses. It deeply penetrates our lives, quickly becoming one of our biggest necessities. The global market for SaaS software is $33.4 billion in 2015, and is projected to double by 2019, to $67.2 billion.
Horizontal SaaS, similar to horizontal integration, refers to SaaS companies aiming to reach as many customers as possible in their areas of expertise (mostly focusing on providing one or two types of services such as analytics, sales, and distributions.) Horizontal SaaS addresses broad business functions, the three currently with the largest market sizes are customer relationship management (CRM), Business Intelligence & Analytics, and Sales performance management, etc. Famous horizontal SaaS companies include Salesforce, Zenefits, Workday, and Slack, etc.
Vertical SaaS, similar to vertical integration, refers to SaaS companies aiming to provide comprehensive services to cover a particular market or a specific group of customers. Most focus on providing integrated solutions to solve industry-specific problems. Vertical SaaS penetrates industries such as healthcare, energy/utilities, real estate/construction, legal, and fintech, etc.
1. Hybrid cloud adoption rate will continue to soar, and more enterprises experience private cloud
2. Cloud integration will be seen as a top strategy to remove entry barriers in non-IT industries
3. Cloud based spending will represent more than half of global IT spending, but private data centers will still exist
4. Cloud computing companies will compete more narrowly in niche services than more broadly defined markets. Differentiation is key
5. “Conservative” industries will adopt cloud
6. Public cloud will become safer, and eventually the end state for most cloud adoption
Threat of New Entrants: MODERATE - HIGH
Different type of cloud service model has different levels of entry barrier.
For Infrastructure-as-a-Service, entry barriers are high due to the high fixed costs of developing and maintaining the infrastructures. Also, the type of services IaaS provide are more difficult to differentiate than those of PaaS and SaaS, which can tailor more towards certain industries or certain functions. There are fewer players in the field, and successful startups tend to be acquired by industry leaders to eliminate competition. As of June 2017, Amazon Web Services and Microsoft are the two top leaders that dominate all levels, Google, Oracle, IBM, and Alibaba Cloud trailing.
Similar to IaaS, entry barriers of Platform-as-a-Service are also high. Although most PaaS do not need to develop or manage its own infrastructures, they need to build the code or meta-data supported platforms for software application developers to utilize. The high development and maintenance costs and the relatively limited service types made PaaS field also dominated by major players, many of which coincide with IaaS dominant players.
For Software-as-a-Service, the entry barriers are very low. There are many new entrants every day, in every industry, and targeting serving nearly every possible function. The low expense and expertise requirement of developing software continuously reduce the barriers of entry. Yet, since SaaS has already reached the plateau of productivity, only startups with top technology, best market integration, and consistent revenue streams will continue to survive the battle. The majority of other startups either fails or gets acquired by other bigger players.
The overall cloud computing landscape is characterized by high competition, decreasing profitability and prices, high customer churn rate, frequent technology upgrades, and decreased creativity for a unique business.
Bargaining Power of Suppliers: LOW - MODERATE
IaaS and PaaS : LOW - MODERATE
Only a few years ago, bargaining power of suppliers could be from moderate to high, but not anymore today. With frequent mergers and acquisitions activities, major players become bigger than ever, with their services covering all aspects a customer can possibly ask for. Before, suppliers might have the bargaining power as they can still threaten to leave one cloud company, but now all suppliers lure to do business with AWS, Microsoft and Google.
SaaS : LOW
Bargaining power of suppliers to SaaS companies is limited. The IaaS and PaaS industries offer almost interchangeable services and charge for similarly low prices. SaaS companies have a variety of suppliers they can choose from. The more developed IaaS and PaaS industries are, the more limited the bargaining power of suppliers will be.
Bargaining Power of Customers: MODERATE - HIGH
IaaS and PaaS : MODERATE - HIGH
For IaaS and PaaS companies, although the threat of new entry is somewhat low, they are still in an extremely competitive market. Competing on fees and features, companies could easily lose new customers by not being on the top of the game.
Notice, I said ‘NEW’ customers, because once a customer is on board with one cloud provider (IaaS or PaaS), it is more difficult for it to get “off board.” IDG Enterprise had its surprising discovery in its 2014 Cloud Survey, that when asked if switching cloud providers is less difficult than switching on-premise provider, 29% of IT leaders said negative compared to 22% of non-IT leaders. Moreover, more than 40% of the non-IT leaders simply did not know. Most cloud providers have different network bandwidth provided to their virtual machines. Switching network bandwidth can have a direct impact on the software’s performance, and the re-integration process is expensive and tedious (just considering the amount of data a customer needs to move from one provider to the other). Therefore, for existing customers, bargaining power of suppliers is still quite high.
SaaS : HIGH
I recently saw a really good description about the SaaS market on SaaScribe, and it is true. The SaaS market is one of the paradigm of how to hand over as much as power to the customer as any industry could possibly achieve. First of all, many SaaS products are free of charge to users, or at least have a free trial before deducting money from users’ accounts. The amount of information available to users before payment means that if the product cannot meet the satisfaction of the user, it is unlikely for the company to get any revenue from that user in the future, because switching to an alternative SaaS provider with similar product is so easy. In this situation, product differentiation is the key. Yet, technology does not have patent. Once you had a successful launch of product, there will be 20 identical SaaS products on the market the next day, and with cheaper price! This is all due to the draining power of SaaS suppliers, those IaaS and PaaS companies. With lower cost of software development, new SaaS companies will blossom like flowers in the spring. But how long can each of them last?
Threat of Substitute Products of Services: LOW
The main substitute for IaaS, PaaS, and SaaS is the traditional on-premise IT products. IDC predicts, that by 2018, at least 50% of all global IT Spending will be cloud-based, with 60% of all IT Infrastructure and 60-70% if all software, services, and technology spending on cloud by 2020. Cloud computing is entering into our main life as a necessity to survive the competition or to live an easy life, rather than some new high-end technology that only the tech people can enjoy. In 2017, of the fortune global 50 companies, 48 have publicly announced their cloud adoption plans. Therefore, the external threat of substitute products of services is minimal.
Competitive Rivalry: HIGH
Jason Lemkin, founder of SaaStr, once said, “competition-to-the-almost-death seems the norm in SaaS.” One step behind, the entire enterprise is risking the fail next day. For the overall cloud computing industry, competitive rivalry is extremely high.
Cloud computing industry is not a new one. In fact, it is reaching its saturated stage. New cloud computing startups emerge every day, and fundraising and M&A activity is a commonplace.
According to Gartner, leading IT research and advisory firm, the lifecycle of a technology follows these six development stages: Trigger for a technology, Hype stage, Peak of inflated expectations, Disillusionment stage, Slope of enlightenment, and Plateau of productivity. The overall cloud computing industry has already entered its slope of enlightenment, reaching its plateau of productivity. Yet, various aspects of the cloud computing industry are at different stages depending on its development.
Cloud computing adoption rate has reached a new level on all aspects. In the 2016 RightScale State of the Cloud Survey, 95% of respondents are using cloud products, up from 93% in 2015. Adoption of public cloud products has increased from 88% to 89%, and adoption for private cloud has dramatically increased from 63% to 77%. Hybrid cloud adoption has seen the highest jump, from 58% to 71% in just one year (State of the Cloud Survey focused on the use of IaaS).
According a BDO marketing survey, 74% of tech CFOs chose Cloud computing as having the most measurable impact on their businesses in 2017. It is now generally agreed that in order to maintain leading position in an industry, to break the entry barrier of an industry, to reduce cost and increase operational efficiency, or to expand existing markets, companies need to adopt cloud and constantly integrate its businesses with cloud computing strategies. Cloud computing has never become so essential.
Depending on their deployment model, most cloud computing companies can be categorized as: Public cloud, Private cloud, or Hybrid cloud. Other categories include Community cloud, Distributed cloud, Intercloud, and Multicloud.
Public cloud is the one that most people think of when they talk about the cloud. Public cloud is hosted by a service provider who rents space on the cloud to its many customers, or tenants. Those customers generally only pay for services they actually use. Public cloud let you offload management where you don’t mind giving up some control. That’s why they are a popular choice for hosting everyday apps like email, Customer Relationship Management, HR, and other business support apps.
Private cloud is private because it only has one tenant. The single tenant can get all the goodness of a cloud, and can also control and customize it to fit the needs. And the control is why many companies are migrating their data centers to private clouds to run core business apps that provide unique competitive advantages like research, manufacturing, supply chain management, and more. Yet, private cloud still relies on on-premise IT rather than a third-party cloud provider. Managing a private cloud can be more expensive than owning on-premise infrastructures due to the additional cost of virtualization and cloud management. There are several cloud providers that can deploy private cloud infrastructures and thus lower the cost for enterprises.
Hybrid cloud is a combo of both private and public clouds. Users can create new innovative apps with uncertain demand. Apps the user can deploy on private cloud can burst to the public cloud during demand spikes.
Cloud computing stack is built on the service-oriented architecture, which advocates “everything as a service.” Depending on service models, most of the cloud computing companies generally fall into the three categories: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS) based on their intended functions. Although these three categories all aim to provide on-demand access to centralized services over the Internet, their targeted end users are different. The rest of the categories include but not limited to Security-as-a-Service (SECaaS), Mobile “backend”-as-a-Service (MBaaS), and Identity-as-a-Service (IDaaS.)
IaaS is the delivering of cloud computing infrastructures such as servers, storage, network and operating systems as an on-demand service. IaaS targets Application owners, IT Operating Systems, and Middleware and application support. These users typically need to manage and process huge database, and would need to get access to servers, datacenter space and network equipments. Before the invention of IaaS, the conventional way is to run the entire database through on-premises infrastructures, which are costly, inflexible to change of market demands, and cumbersome. With the adoption of IaaS, users no longer need to worry about the development or maintenance of any virtualization, servers, storage and networking equipments; Instead, users can purchase or cancel the service according to their market needs, allowing for dynamic scaling and elasticity.
Core characteristics of IaaS
--- Resources are distributed as a service ---
--- Allows for dynamic scaling ---
--- Has a variable cost, utility pricing model ---
--- Generally includes multiple users on a single piece of hardware ---
Amazon Web Services (AWS) Elastic Compute Cloud (EC2)
Microsoft Windows Azure Virtual Machine
Google Compute Engine
VMware vCloud Suite
PaaS is a computing platform on which software applications can be developed using on-demand virtual tools and infrastructure services. PaaS targets software application developers, who just want to focus on coding rather than taking care of the underneath supporting software and infrastructures.
PaaS is in many ways similar to IaaS, both providing the base equipment for users to develop applications on. However, PaaS is different from IaaS by the addition of value added services and comes in two distinct flavors:
Core characteristics of PaaS
Amazon Web Services Elastic Beanstalk
Microsoft Windows Azure Cloud Services
IBM Smart Cloud
Red Hat Cloud’s Openshift
VMware’s Cloud Foundry
Google App Engine
SaaS is software that is deployed over the Internet, allowing end users to purchase services on demand. SaaS can be subscription based or at no charge, if there is opportunity to generate revenue from streams other than the user, such as from advertisement or user list sales. SaaS targets software application end users who can just pay for using the service when needed without worrying about developing, maintaining and updating the services.
Compared to IaaS and PaaS, SaaS enjoys the biggest market, because it managed to revolutionize the way people live their lives every day.
Core characteristics of SaaS
--- Web access to commercial software
--- Software is managed from a central location
--- Software delivered in a “one to many” model
--- Users not required to handle software upgrades and patches
--- Application Programming Interfaces (APIs) allow for
integration between different pieces of software
Microsoft Office 365
Amazon Web Services
Adobe Creative Crowd