Garibaldi Capital Advisors

One thing we know for certain: SaaS is hot. 2013 sustained roughly one SaaS IPO per month on the NASDAQ, alone. That does not account for the multitude of similar IPOs on other global public exchanges, nor the transactions involving SaaS based businesses that increasingly dominate private equity and venture funding in general. With all the attention recently paid to the space by the capital markets, it is increasingly attractive for those businesses with more traditional business models to re-cast their revenue in SaaS terms. So it’s worth asking the question: what are the enduring hallmarks of a legitimate SaaS business, and is this delivery method here to stay?

I think it’s worth defining what doesn’t qualify: a software business with reoccurring license revenue, but with a user experience that is not delivered via a web browser out of the cloud. For example, there exist many business that earn some form of recurring revenue that fall into this category: either they involve the installation of a heavy client on the desktop and are sold as a one-time license plus annual maintenance for upgrades and support, or they are simply one-time licenses of shrink wrapped software which is purchased annually or upgraded periodically (personal income tax preparation software, for example, or even the Microsoft Office Suite, prior to the advent of Office 365). There are also those streams of revenue available to SaaS based businesses that are ultimately services oriented, such as ongoing consulting and support, but which are not ultimately tied to the delivery of the underlying SaaS subscription.

As a delivery model, the benefits of SaaS are clear: there is no shrink-wrap; no installation. With HTML5 continuing its evolution ‘closer to the metal’ with extensions like WebRTC, DeviceOrientation and the Canvass element, the browser-imposed limits of functionality are simply melting away. The notions of ‘installing’ something, and then having to upgrade and maintain it, re-install it on new hardware, and protect against malware, are increasingly as antiquated as floppy disks and dot matrix printers.

We tend to agree with Marc Andreessen when he said that ‘Software is Eating the World’. Although his thesis also quite clearly applies to the vast and largely untapped ‘network of things’ and the disruption of established ‘old economy’ businesses, the enterprise software space is now clearly 100% about SaaS: there is not a single mainline vertical software suite that does not have an alternative available in this form. Increasingly, several offerings vie for their share of spend in the category. Indeed, the very last bastion may yet be the horizontal desktop enterprise productivity apps bundled and sold as the venerable Microsoft Office franchise. But even those appear destined to fall to the inevitability of browser-based delivery. To the extent we are still in the early phase of the secular shift to SaaS delivered software, it seems likely that valuation multiples will sustain at the high end of the historical range — which is great for sellers, at the very least.