SaaS seeds ready to bloom

SaaS seeds ready to bloom

One expected benefit from the shift to the cloud is the emergence of a refreshing new crop of innovative software suppliers.

The enterprise software market, after all, has withered as the biggest developers consolidated control through acquisition. But when the big guys resisted the shift to software as a service for fear of cannibalizing their lucrative maintenance annuities, just enough light got through for thousands of SaaS seedlings to take root.

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It's hard to know exactly how many new SaaS companies are growing out there because many startups are staying private longer because of the economy, says Justin Perreault, a general partner at Commonwealth Capital Ventures. But Commonwealth is investing heavily in the category and he's sure the company isn't alone.

In fact, Perreault says SaaS, along with developments in mobility and other corners of the cloud market, is driving a renaissance in venture capital.

"The perception is that the venture world has fallen on hard times because of poor showings over last 10 years," he says. "A lot of capital was incinerated in '01, '02, '03." But it began to turn around in 2004. "When we look back at 2012, we'll say it was a phenomenal year for venture capital."

Timing is everything. While venture money has been flowing into SaaS for 10 years, only in the last year have large enterprises recognized SaaS as the way forward, says Elliot Katzman, another Commonwealth Capital general partner.

"This is the deployment mode of the future," Perreault says. "It will take a while to migrate, but it is clear now that more software tools will go to the cloud than we ever thought possible just a few years ago."

For buyers, SaaS offers the usual benefits of sidestepping upfront costs for premise-based software tools, the need to invest in infrastructure to support the apps, and ongoing management and maintenance headaches. What's more, you know you'll always have the latest product enhancements and updates.

But there is a big upside for SaaS suppliers as well, Perreault and Katzman say. The supplier can monitor usage every day so, if its tool is being underutilized, it can step in to investigate and help the customer address the problem, possibly by upselling the customer on a module that addresses an unforeseen need. With the traditional "install the software and throw the customer the keys" mode, nagging little implementation problems or gaps in training can result, over time, in a product dying on the vine.

A robust crop of new SaaS suppliers will inevitably lead to a round of consolidation, Perreault and Katzman agree, but that is some time off, leaving plenty of time for new ideas to flourish.

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