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You don't have to go home but you can't stay here.mp3

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thanks Mercedes

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Is it better than Mercedes?

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Software vendors across the world are embracing the software-as-a-service (SaaS) cloud-based business model in growing numbers.

According to Software Equity Group, SaaS software revenues will likely represent about 25 percent of the overall software market in the next five years. Research firm Gartner estimated that global spending on SaaS will reach $22.1 billion by 2015.

Some software vendors are converting their software delivery and revenue models to SaaS, while others acquire SaaS companies to gain access to this market. SaaS mergers and acquisitions transactions grew 25 percent last year, and the median SaaS exit multiple was more than double that paid for traditional, on-premise software targets, according to the Software Equity Group.

While the majority of software businesses today - especially those catering to large enterprise clients - still generate most of their revenues from traditional, perpetual licenses and maintenance revenues, the valuations of SaaS companies are about twice those of traditional licensed software companies generating the same revenues (Software Equity Group, 2013 survey).

Traditional software companies have an average enterprise value of three times revenue, while SaaS companies trade at a much higher multiple of 6.5 times revenue.

What factors are contributing to high SaaS valuation? Here are five worth considering:

1. SaaS Companies have a higher percentage of recurring revenues

In order for SaaS companies to maintain profitable, accelerated growth, they must consistently generate higher recurring revenues (MRR) from the same subscriber base. It is easier to upsell additional services into an existing subscriber base: Salesforce and NetSuite are two examples of successful SaaS vendors following that path.

2. Cloud delivery is gaining ground with enterprise customers

Enterprise customers become more comfortable accessing their software in the cloud. As the global computing industry is becoming more diversified in terms of networking platforms and access devices, software delivery is slowly morphing into a subscription service that can be accessed anywhere, at any time, on any device. Users receive timely, automatic upgrades rather than having to wait for the next version to be released and pay an additional fee for maintenance.

3. SaaS companies are growing faster

Data released by venture capital firm Redpoint Ventures show that from 2004 to 2009 the average revenue growth for SaaS companies was around 25 percent. From 2010, SaaS companies started reinvesting about 50 percent of their profits in growth, and as a result average growth rates have increased to 35 percent in the past three years.

4. The SaaS business model is disrupting the traditional software cash flow

While recurring revenues are usually preferable to providers and investors alike, the nature of the monthly SaaS subscriptions - as opposed to a one-time transaction fee - shifts the emphasis to customer acquisition cost (CAC) and retention (churn) as keys to the survival and success of SaaS companies. High, upfront payments (with annual maintenance fees of about 18 percent to 20 percent) are substituted by a longer stream of smaller, periodic (mostly monthly) subscription payments. While this results in a cash 'squeeze' in the early period after the launch of a SaaS product, investors still prefer recurring revenues as they lead to higher lifetime value (LTV) per customer.

5. SaaS companies manage churn to a minimum

Churn, which is defined as the rate of subscriber attrition (measured as a monthly percentage, typically under 2 percent for a healthy SaaS company) is one of several key performance indicators (KPIs) that are closely monitored by investors, especially in early-stage SaaS ventures, where they serve as a precursor for survival. In order to sustain profitable growth, SaaS companies need to minimize churn, increase MRR and keep CAC down.

The SaaS segment of the software industry is still young and growing, so any empirical conclusions on valuation trends will have to go through a longer observation cycle in order to establish a solid pattern. SaaS companies will need to keep balancing ratios such as churn, MRR and LTV in order to keep their profitable growth and high valuations.

Efrat Kasznik is a Silicon Valley-based expert, entrepreneur, speaker and author, specializing in intellectual property monetization and valuation. She has 20 years of experience advising IP holders from Fortune 100s to startups. Kasznik is a lecturer on IP strategy at the Stanford Graduate School of Business and an advisor at the Stanford Venture Lab, as well as several other startups and incubators in the U.S. and in Europe.

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How the SaaS business model affects software company valuations - The Business Journals

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Software vendors across the world are embracing the software-as-a-service (SaaS) cloud-based business model in growing numbers. According to Software Equity Group, SaaS software revenues will likely represent about 25 percent of the overall software market in the next five years. Research firm Gartner estimated that global spending on SaaS will reach $22.1 billion by 2015.

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Podcast: Play in new window | Download

Video Transcript:

Paul: Hi, it's Paul Clifford from Disruptware, and I want to talk about why the SaaS model is growing in popularity at the moment, and why it's such a great business to be in.

First of all, from the customer perspective, remember that any customer buying into your service recognizes it's a very low risk. Basically they'll use it for a month and if they don't like it they can leave, which means that customer acquisition is a little bit easier then it is to try and get software onto a customer's desktop.

Secondly, remember that there is no installation headaches, so there is no IT to worry about. All they've got to do is just log in and they are up and running. Thirdly, they can access it anywhere, so from any country or whatever as long as they have a web browser then they're taken care of. Because it's a recurring revenue model then the long term value that customer's worth quite a lot. You can make the entry price reasonably low to get them in - to get them hooked in.

Remember software is a service, which SaaS is basically a rental model. You are renting use of your software to them, where as traditionally it used to be a perpetual model where they would have to install the software but they would own the license. Where in this case you're renting it to them and you're taking care of all the IT for them.

Now from a vendor perspective, or from your perspective, why is the SaaS model great? Well, first of all it's one application you have to maintain and support, so it's got quite a low overhead. Once it's developed and built then most of your cost is really on the marketing and getting the customers in, but in terms of the operation it's a lot easier to support and maintain than a traditional software business.

You're also selling to the end user, the people that are actually using it, and you're solving their problem directly. You don't have to get IT involved, or deal with any of the installation headaches, or compatibility with their desktops, or with Windows, or Macs, and all that other stuff. You don't have to worry about that as long as they can access it and access the web then they're up and running.

Remember the SaaS model is a recurring model and that the subscription model is built in, so all you've got to do is focus on growth and get as many customers in as possible using your application as much as possible too.

Lastly, it's all about the valuation, and should you choose to go down a sale route, an exit route then you might be focused purely on how much can I make my company worth at the end. Valuations are directly related to growth. If you look at all the IPOs, trade sales, anything like that and look at the valuations they've achieved it's a direct correlation between the valuation and the growth rate of the company not the profit. It doesn't matter how profitable your thing is. What really matters is how quickly you can get customers on board and build your revenue as fast as possible.

Okay, so I hope you found that useful. This is Paul Clifford from Disruptware.

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What Is SaaS And Why Is It A Great Business Model | Disruptware

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Podcast: Play in new window | Download Paul: Hi, it's Paul Clifford from Disruptware, and I want to talk about why the SaaS model is growing in popularity at the moment, and why it's such a great business to be in.

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How is SaaS disrupting traditional software business models?

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How is SaaS disrupting traditional software business models?

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We don't know yet...but we're learning