Huddle ~ Work Better Together

How much does it cost to build a successful SaaS business?

I was privileged to be asked to speak at Huddle at On-Demand Europe this week in Amsterdam.

It was a great event, just 150 people but all high caliber SaaS practitioners or commentators including the likes of Werner Vogels (Amazon CTO) Paul Daugherty (CTO Accenture), Sean Poullney (VP IBM) and many others. There was some great networking and good drinking – in typical Huddle style! My thanks to Connor Halpin, a fellow start-up founder who recently sold his billing business to OpSource, for the opportunity to be there (and the many, many beers on Tuesday night)…

As ever at one of these conferences it was the discussions in the coffee breaks, in the bars and after the panels that were the most interesting. As an early stage company it was refreshing to hear everyone (big and small) wrestling with the same issues and striving to move the SaaS industry forward into maturity as quickly as possible. I’ve tried to summarise some of the thinking/conclusions below, apologies if it is a bit long but I hope it’s useful. Enjoy!

Pricing:

• Low cost monthly subscriptions does not have to be the only way of charging for SaaS businesses. Yes delivering lite services over the web is a great opportunity to reduce the cost-to-serve and access new business sectors who are highly price sensitive, but increasingly SaaS companies are looking at annual up-front billing and even perpetual licensing to drive cashflow. Lesson: the old rules still apply!

Sectors & Partners:

• SME’s (that’s SMB’s for our US cousins) were initially thought as the hallowed ground for SaaS vendors. However take-up is actually strongest amongst the enterprise. Why? Well SME’s have always been hard to get to, and just sticking stuff on the web and making it cheap is not necessarily making it any easier. Build it and they will come? Apparently not. Lesson: the old rules still apply!
• Partners, long derided as being of no use to SaaS vendors, are increasingly important. Especially for reaching sectors where deep domain knowledge is necessary, or for tapping SME’s. And a partner approach can deliver scale faster than direct sales (even via the web) alone. Lesson: the old rules still apply!

Security (perception & reality):

• If you want to sell into large enterprises it will come as no surprise that security is still a big issue, even if it is only perceived. Not only that but as SaaS vendors start to sell into large enterprises globally the location of data-hosting is increasingly important. To counter this companies are starting to develop innovative strategies that host people’s data in different regions depending on the customer’s location – thereby conforming to local laws around data protection and portability. The biq question is, of course, what is this ‘data’. Is it documents (in which case this is easy) or is it all the meta-data around the application, which is equally if not more important (which is much harder) Lesson: Regional data laws, whilst out-dated, are not going away. And if you’re selling into Government (as we are increasingly at Huddle) you need to be even more careful.

Funding & Spend:

• Guess how much the average amount of money invested in SaaS businesses to take them from Start-Up to Public IPO, over the last 5 years……how close you get will depend on whether you are reading this in the Valley or Europe……It’s around $72m. Yes that’s $72m. And it’s $240m if you are NetSuite! Now for some of the big boys this is a pretty small amount of money (well apart from NetSuite anyway) but for us European’s it’s a lesson in choosing VC’s with deep pockets and having the courage to push to build the biggest business you possibly can. However it does make us feel kind of smug here at Huddle, who have raised $4.5 so far and built a product with revenues growth and functionality that ‘should’ have cost at least double this. Lesson: You can build great business from a product add-on or infrastructure component quickly and relatively cheaply and then sell up, but to build a sustainable ‘real’ software business, even in today’s world, takes time and money. A lot of it.

SaaS 1.0 vs SaaS 2.0

• Another guesstimate for you. What percentage of overall turnover do you think a typical, large, SaaS company spends on sales and marketing. (And we’re talking Salesforce.com size here). 30%? 50%? Nope, its 75%. At least. 75%!!!! Given that SaaS is supposed to be a highly cost-effective delivery mechanism and for ‘old’ software companies like Oracle this number is closer to 30%, it’s no surprise to see that we have yet to see a $1bn SaaS company taking on the established guard. Apart from Google that is…
• At Huddle we have long contended that most SaaS companies (including poster children like SalesForce.com and even, dare I say it, 37 signals) are effectively ‘old’ software companies that have simply started delivering their software over the web to take advantage of cost and scale benefits. SaaS 2.0 companies (apologies for the terrible moniker, but it serves its purpose) leverage the cloud properly not only to achieve much greater delivery cost reductions but also to significantly reduce this 75% that I mentioned above. Let’s take Huddle; being invited into a Huddle (the viral connectivity that is helping us grow at 40% per month at the moment) is a far more powerful way to experience Huddle and therefore possibly buy it. Our customers do our selling for us (thank you!). However a traditional SaaS company like SalesForce relies on a huge and expensive team of sales people to sell to each and every customer. No wonder it costs them so much! Lesson: whilst web 2.0 and social media companies have known it for years, we are only just starting to see the true application and therefore benefit of the cloud in enterprise/business SaaS products and services. However it could well mean the emergence of the first $1bn SaaS company – but it won’t be the current crop. And it won’t be a traditional ISV either…to see more on that read Phil Wainewright’s excellent presentation from the conference….