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Succeeding with SaaS: Four Hot Tips For Start-Ups

Mark MacLeod, General Partner, Real Ventures, discusses four tips of how to succeed with a Software-as-a-Service (SaaS) start-up. Real Ventures is a Montreal based venture capital and private equity partnership that specializes in early-stage investments in web, mobile, software, digital media, social and casual gaming. The majority of its investments are at the seed level, between conceptualization and the validation of the business model. Funded companies include Fabric Technologies and MConcierge Systems. Typical funding rounds are below $500K with $1M being at the higher-end. 

Key take-aways from Mark MacLeod’s discussion on SaaS revenue models include the following key points:

  • Stakeholders and investors prefer recurring billing over one-time licenses – Investors in SaaS start-ups and seed investment rounds prefer recurring revenue models, as this approach reduces risk by providing greater revenue forecast accuracy. For customers, being able to forecast monthly costs makes recurring billing the most popular model on SaaS today. Mark also mentions how this fuels the dynamic of operating expense (OPEX) versus capital expense (CAPEX) budgeting on the part of customers. He makes the point that investors like the recurring revenue model because the lifetime value of customers can be more accurately tracked.       
  • Be data driven – The best-managed SaaS start-ups rely heavily on standard metrics and many of their own unique measures of performance to better understand and predict revenue and costs. Mark contends that all SaaS start-ups need to be data-driven to not only understand their existing customers, but also see how their levels of use and satisfaction are influencing potential new customers.  The best SaaS start-ups measure every aspect of application use and customer experience. These in-house custom analytics are a competitive advantage for any SaaS start-up, as these application-specific metrics can provide insights for further product development and customer loyalty programs.
  • Pricing decisions are the most complex to make– The greater the hard benefits in terms of measurable, recurring cost reduction or revenue generation, the greater the price that can be charged, according to Mark’s experiences funding SaaS start-ups. He also mentions the cost of a direct sales force, market position, and relative benefits delivered as factors in making a pricing decision.
  • Always go for customer prepay options when possible – Prepayment is critical for a SaaS start-up, not only for cash flow but more importantly because it shows that customers trust the application to deliver value over the long-term. It is a great proxy for how much value a customer sees in the application over time.

Perspectives on Open by Tim O’Reilly and Their Implications on Cloud Computing

Tim O’Reilly, Founder and CEO of O’Reilly Media, recently presented the following keynote at the OpenCourseWare (OCW) Consortium Global 2011 Meeting held in Cambridge, Massachusetts earlier this month.  OCWC Global 2011 is hosted by the OpenCourseWare and the Office of Educational Innovation and Technology at the Massachusetts Institute of Technology,  OpenCourseWare at Tufts University, and the University of Massachusetts, Boston.  The OpenCourseWare Consortium event consisted of three tracks including the Impact of OCW; Producing OCW; and Next Generation Open Learning.

This is the type of conference that Tim O’Reilly excels at being a keynote speaker for, as many of the conferences and publishing initiatives of O’Reilly Media focus on open source software and open courseware development.

Here are several key take-aways from his keynote:

  • Watch the Alpha Geeks.  Screen scraping apps have led to the development of Web Services, wireless community networks predict universal Wi-Fi and open source software is a predictor of greater collaborative development.
  • Open source needs a more rigorous methodology than traditional development tools. The key to effective open source application development is a rigorous and replicative methodology.  This extends to Web Services that seek to unify cloud computing apps as well.
  •  Trends of commoditization, customization & collaboration accelerating. Three trends he sees impacting software include commoditization of low-end processes, user-customization of systems and architectures, and network-enabled collaboration, which are all catalysts of cloud computing growth and adoption.

Bottom line:  Open source serves as a strong catalyst for cloud computing vendors to escape commoditization by creating applications customizable to users’ needs, including support for real-time collaboration with immediate and extended teams.

Thoughts on How to Out-Innovate Bigger Enterprise Competitors with SaaS

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One of the most interesting and intriguing companies that are quickly gaining enterprise customers is Box.net.

In speaking with friends who are directors of IT and a few CIOs, the buzz on Box.net has grown so fast that they are looking at enterprise licensing for it.  They’re also saying it is becoming the portal of choice for highly distributed teams that have already logged hundreds of hours using it globally.

In the following video clip CEO and Co-Founder Aaron Levie explains how his company has been able to out-innovate larger competitors in the enterprise market by relying on what appears to be Agile-based development methods and the SaaS platform to launch applications faster than entrenched competitors.  His insights into competing on speed using the SaaS platform while outflanking larger, and slower moving competitors is worth listening to.

The full talk this clip is taken from is 59 minutes long and titled Delivering Innovation for the Enterprise.  The video content at the Stanford Technology Ventures Program (STVP) Entrepreneurship Corner is also worth subscribing to as the center periodically brings in excellent speakers and records them for the public’s benefit.

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