Building a Recurring Revenue Business
Converting from licenses to a SaaS model can be lucrative for software vendors. Here are several tips to make a successful transition.
By Javier Rojas and Maximilian Bleyleben, Kennet Partners
Jun. 23, 2008
The founders of many software companies want to make the transition to becoming a SaaS vendor. The operational challenges of making this shift are significant, impacting every part of the company: technology, sales, services and pricing. Not least, the transition can have a dramatic impact on cash collection which, if not managed appropriately, can sink the business.
We have worked with a number of software vendors that have made the transition to SaaS and have found some useful lessons to insure success. In several cases we have been able to complete the shift fairly quickly, migrating to a recurring revenue model for the majority of the business in as little as two quarters. Below are some key lessons learned that have worked well for these companies.
The SaaS Explosion
The market for on-demand software pricing and delivery (also known as Software-as-a-Service or SaaS) has gone mainstream. Corporations are increasingly open to buying software in this way. As a result, revenues are growing rapidly for the right sort of application vendor in virtually every segment. Aggregate turnover for stand-alone public SaaS companies has reached nearly $750 million annually. What is more, there are significant financial incentives for entrepreneurs to shift to a SaaS model. The public equity markets are placing a high premium on SaaS vendors, with market values averaging 5x forward revenues. A company with expected revenues of $50 million in 2007 and a median growth rate may well command an IPO or trade sale valuation of $250 million or better.
As a result of this dramatic shift, private investors are focusing on promising SaaS vendors and are highly selective regarding license software companies in which they are willing to invest. In both the private and the public markets, SaaS companies are being valued at a premium because of the visibility afforded by the recurring revenue model, the low marginal cost afforded by the multi-tenancy delivery model, and the reduced cost of selling on-demand solutions.
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We have worked with a number of software vendors that have made the transition to SaaS and have found some useful lessons to insure success. In several cases we have been able to complete the shift fairly quickly, migrating to a recurring revenue model for the majority of the business in as little as two quarters. Below are some key lessons learned that have worked well for these companies.
The SaaS Explosion
The market for on-demand software pricing and delivery (also known as Software-as-a-Service or SaaS) has gone mainstream. Corporations are increasingly open to buying software in this way. As a result, revenues are growing rapidly for the right sort of application vendor in virtually every segment. Aggregate turnover for stand-alone public SaaS companies has reached nearly $750 million annually. What is more, there are significant financial incentives for entrepreneurs to shift to a SaaS model. The public equity markets are placing a high premium on SaaS vendors, with market values averaging 5x forward revenues. A company with expected revenues of $50 million in 2007 and a median growth rate may well command an IPO or trade sale valuation of $250 million or better.
As a result of this dramatic shift, private investors are focusing on promising SaaS vendors and are highly selective regarding license software companies in which they are willing to invest. In both the private and the public markets, SaaS companies are being valued at a premium because of the visibility afforded by the recurring revenue model, the low marginal cost afforded by the multi-tenancy delivery model, and the reduced cost of selling on-demand solutions.
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