Considerations for Early Stage Startup Opportunities in SaaS and Cloud Computing

by Evangelos Simoudis, Ph.D., Senior Managing Director at Trident Capital

 

Until about 2005, almost any SaaS company was viewed as something exceptional and worthy of investment attention, and with good reason — in 2014 the SaaS market is projected to reach $75B. Corporations of any size are aggressively adopting SaaS applications, and within two to three years, 18% of all enterprise applications will be cloud-based. Today the use of cloud infrastructures and subscription models has become table stakes for any software company.

However, now that the market is maturing, venture investors are transitioning from being SaaS technology-centric to becoming problem-centric.

Today, to be interesting for an investment with the potential of venture returns, a startup developing application software needs to utilize a variety of technologies — for example, single instance multi-tenancy and cloud delivery — to solve a big and important problem for which a buyer would be willing to pay significant amounts to have it solved.SaaS startups that question the status quo and create innovative solutions for these problems will capture investor attention.

The New Generation of SaaS Applications

Perhaps this is a sign of the model’s maturation process. As is shown in Figure 1, we have entered the third phase of business SaaS applications, which is characterized by applications that are data-driven and mobile-centric. These products also have the characteristics of consumer applications, particularly in user experience. They encapsulate more easily consumable pieces of functionality, and many enable broad collaboration and other social features. Examples include RoamBI and Tonic For Health.

Figure 1: Phases of SaaS Applications

Figure 1: Phases of SaaS Applications

Today’s developers of such applications have to address a few simple questions:

  1. On top of which layer of the cloud (IaaS, PaaS) will you start building your application?
  2. What flavors of the cloud you will support (private, public, hybrid)?
  3. How strict you will be in your definition of the cloud applications (single-instance multi-tenant or single instance single-tenant)?
  4. What business model you will adopt? A minimum per seat monthly fee and a usage fee, an all-inclusive monthly fee, a usage fee only, or some other variant?

Considerations for Startups

New startups have to keep several trends — and some long-standing concerns — in mind when creating solutions. The most important areas in early-stage SaaS and cloud computing companies include:

  1. Enterprise SaaS and vertical applications:Enterprise SaaS has emerged as a separate category of cloud-based applications. These applications address large enterprise problems, many of which are industry-specific. For this reason they may automate complex, industry-specific business processes and include extensive industry- and domain-specific knowledge. They are developed differently since they need to be deployable in public, private and hybrid clouds. They need to have richer APIs, as they have to interface with other enterprise applications, many of which may be on-premise. Finally, they are sold differently, typically by hybrid teams that consist of field and inside sales personnel that use novel technology-driven demand generation, lead tracking and communication solutions. Examples include solutions for customer understanding, mobile commerce — particularly as it impacts industries such as retailing — travel and financial services, and sales enablement.
  2. Security: Security remains the biggest impediment to the broad adoption of enterprise SaaS and cloud-based solutions. CIOs list trust (secure and managed access, user authentication) and data security as their top issues in moving more of the applications and IT workloads to the cloud. These issues are even more central in regulated industries such as financial services, insurance, and utilities where customer data needs to be moved to the cloud. I expect that these concerns will continue to drive CIOs to adopt hybrid and private clouds, rather than public clouds.
  3. Mobile:With the increasing use of mobile devices by consumers, employees and partners, mobile applications have become a big issue for the enterprise. Corporations are working to determine which mobile applications will develop on their own, which third-party mobile applications they will adopt, and how many of their existing enterprise applications they will need to mobilize.
  4. Integration:While the adoption of stand-alone social applications will continue, these applications will need to be integrated with the existing enterprise platforms (CRM, ERP, HRMS, eCommerce). This integration will be the first step in the seamless and necessary integration between the enterprise systems of record with the systems of engagement. Such integration will also enable companies to start achieving their multi-channel marketing goals.
  5. SaaS management platforms: As SaaS applications and cloud-based infrastructures proliferate, enterprises will need better ways of managing them. Such management platforms include SLA managers with multi-cloud capability, API managers, SaaS application managers, and security managers.Interestingly enough, uptime alone is no longer as big of an issue. CIOs have come to accept that like every system, cloud-computing systems will also have issues and breakdowns.

Evangelos Simoudis, Ph.D. is a Senior Managing Director at Trident Capital, where he focuses on investments in Internet and software businesses. Find him at blog.tridentcap.com and on Twitter: @esimoudis.