“How many SaaS companies are there?” At the recent On Demand conference in San Jose, I asked several key members of the SaaS community this seemingly simple question. “Around 2,500,” one said. “Most of whom you’ve never heard of because they’re too small to attract much notice.” Other estimates I’ve heard in the past few weeks give the current number of SaaS players at 1,600 to 2,000. More companies are entering the SaaS ecosystem every day, as existing software manufacturers create on demand versions of their applications and new companies are formed. That’s the good news; the bad news is that there is going to be some significant shrinkage in the coming months. Those SaaS firms who have failed to get cash-flow positive will sooner or later hit their “fume dates” when they run out of operating capital. Asking the numbers question only opens the door. Now it’s time for those who want to succeed to deal with queries that should have been answered long ago, and to spark a strategic discussion of vital importance to all concerned.
What’s a SaaS Company?
To some, any entity that makes an application available over the Internet is a SaaS company. Others maintain that only “pure-play” SaaS operations, where the applications are offered as a single-instance with multi-tenancy ought to be counted. While I favor the pure-play definition of SaaS because it alone enables the gathering of hugely valuable metadata about all users of the application, I’m moving towards drawing a more important distinction between vendors of SaaS applications, and SaaS companies. Any software vendor can offer an application accessible over the web. It’s becoming increasingly apparent that not all management teams can create a successful company built only on the SaaS model.
In the course of the research into SaaS & Support, I noticed that those respondents who identified themselves as SaaS-only gave much the same answers to my questions about corporate strategy and structure as did traditional software companies and hybrids — firms who offered both perpetual licensed products and SaaS, or both open-source applications and SaaS plays. The implications of the lack of differentiation are ominous; the assumption that SaaS is only about a different delivery method will blind a management team to some crucially important differences. The traditional software industry is about technology. A SaaS company, to be successful as such, needs to be about profitability through relationships, and everything about its strategy, process, people and internal technology suite must be in alignment with this very different direction and purpose.
An Opportunity for Realization
There have been a number of changes in the management teams of existing SaaS entities in the last year, and more are to be expected. Some of those decisions, perhaps most, were due to the standard venture capital firm playbook: If at first you don’t succeed, replace the CEO. But changing the team captain isn’t going to accomplish much when the game is being played by the wrong rules, nor will the consequences be limited to just the ousted executives. There are indications that the coming churn in the SaaS ecosystem will extend deep into the VC sector as well. The SaaS vendors that run out of money will either close their doors or be acquired in some form. If the latter, will the acquisition be a change for the better or merely extend the duration of the failure?
Are you a SaaS vendor, or a SaaS company? If you’re ready to think beyond the traditional in order to be counted amongst the latter, and the winners, let’s talk.