New VC Rules for On-Demand Software
Expansion round specialists, Insight Venture Partners, provide their list of must-haves for investing in on-demand software companies.
By Deven Parekh and Peter Sobiloff, Insight Venture Partners
Sep. 23, 2005
On-demand is the big game in software today.
We're bullish about the prospects for recurring-revenue software solutions. Whether you call them application service providers (ASPs,) on-demand vendors, or even a subset of software-as-a-service (SaaS) companies, the opportunity is the same: a growing company with streamlined operations that provides a hosted, pay-as-you-go software solution which earns them a steady revenue stream, as well as a satisfied enterprise client base.
But not every software vendor can play successfully in this emerging field. We use a new set of criteria we use to analyze on-demand software vendors as VC investment opportunities.
The Potential for On-Demand
There is a new and emerging market for best-of-breed ASPs. The underlying business model shift away from perpetual licenses to recurring revenue will enable smaller vendors to compete and grow in today's world of software megavendors.
The recurring-revenue model has several advantages for customers. Turn-key implementation. Low maintenance efforts. Continued vendor attention. These advantages will spawn a host of vendors that offer today's enterprise applications via an ASP or recurring-revenue business model.
After these recurring-revenue vendors grow, you'll begin to see ASP rollups: on-demand vendors who team up to offer best-of-breed, on-demand suites of enterprise solutions.
You'll also see some vendors - Salesforce.com for example - emerge with a much bigger footprint in the enterprise. These early movers will develop new products or acquire them and expand both vertically and horizontally. The product capabilities and nimble business nature of these ASP roll-ups will create an offering to rival that of the big guys.
Today's Software Entrepreneur
At Insight Partners, we focus on expansion round venture deals. The software vendors we investigate as potential investments already have products and customers. This is both good and bad.
The good part is that we are seeing a new caliber of software executive at the helm of these young companies. Compared to the throngs of startups which blossomed during the Internet Bubble, today's entrepreneurs are savvier. The past decade of high-profile tales of the highs and lows of the VC world have educated them about the investment process. They understand risk-reward balance of raising capital.
Startup executives are also very rational. They understand their exit options in today's market. They're not opposed to partnering or merging at the expense of a long-shot IPO. These leaders are focused on profitability and making the business decisions necessary to improve the bottom line.
The bad part is that sometimes companies have been established in a way that makes it difficult to transition to an on-demand model easily - if possible at all. These vendors are hamstrung by their operations or their products in such a way that the cost to move to a new model degrades the investment opportunity significantly.
We're bullish about the prospects for recurring-revenue software solutions. Whether you call them application service providers (ASPs,) on-demand vendors, or even a subset of software-as-a-service (SaaS) companies, the opportunity is the same: a growing company with streamlined operations that provides a hosted, pay-as-you-go software solution which earns them a steady revenue stream, as well as a satisfied enterprise client base.
But not every software vendor can play successfully in this emerging field. We use a new set of criteria we use to analyze on-demand software vendors as VC investment opportunities.
The Potential for On-Demand
There is a new and emerging market for best-of-breed ASPs. The underlying business model shift away from perpetual licenses to recurring revenue will enable smaller vendors to compete and grow in today's world of software megavendors.
The recurring-revenue model has several advantages for customers. Turn-key implementation. Low maintenance efforts. Continued vendor attention. These advantages will spawn a host of vendors that offer today's enterprise applications via an ASP or recurring-revenue business model.
After these recurring-revenue vendors grow, you'll begin to see ASP rollups: on-demand vendors who team up to offer best-of-breed, on-demand suites of enterprise solutions.
You'll also see some vendors - Salesforce.com for example - emerge with a much bigger footprint in the enterprise. These early movers will develop new products or acquire them and expand both vertically and horizontally. The product capabilities and nimble business nature of these ASP roll-ups will create an offering to rival that of the big guys.
Today's Software Entrepreneur
At Insight Partners, we focus on expansion round venture deals. The software vendors we investigate as potential investments already have products and customers. This is both good and bad.
The good part is that we are seeing a new caliber of software executive at the helm of these young companies. Compared to the throngs of startups which blossomed during the Internet Bubble, today's entrepreneurs are savvier. The past decade of high-profile tales of the highs and lows of the VC world have educated them about the investment process. They understand risk-reward balance of raising capital.
Startup executives are also very rational. They understand their exit options in today's market. They're not opposed to partnering or merging at the expense of a long-shot IPO. These leaders are focused on profitability and making the business decisions necessary to improve the bottom line.
The bad part is that sometimes companies have been established in a way that makes it difficult to transition to an on-demand model easily - if possible at all. These vendors are hamstrung by their operations or their products in such a way that the cost to move to a new model degrades the investment opportunity significantly.
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