SaaS-y Capital

As SaaS companies start to mature and go public (there were several in 2007 and a flood expected in 2008 and 2009) there is starting to be some interesting discussion about the real economics of a SaaS business.

A new debt financing firm named SaaS Capital recently released a white paper titled Understanding the Financial Implications of the Software-as-a-Service Business Model.

My experiences don’t agree with everything they say, but I find it fascinating that there is now a dedicated SaaS debt financing company.

  • Mike

    Certainly an interesting perspective.

    From page 3 of their report:
    “Bottom line, a Saas company can take 50-70% more capital to grow than a perpetual license model company”

    I just can't believe that is true

    • http://www.feld.com Brad Feld

      Correct – it is not true. It's a bad (and self serving) conclusion off of several data points. We have plenty of counter examples – e.g. Postini becoming profitable and cash flow positive on $25m of invested capital.

  • mark

    There are a bunch of these types of companies out there now. We do development work for software companies (some of ho offer SaaS products) and I get calls every week from these companies who want to partner with us to offer “SaaS financing”

  • Don Jones

    SmartFundIT.com also does this type of financing.

  • Adam

    This paper makes a huge assumption: That saas style business has the same economics (cost) as boxed software. If a company cannot gain efficiency by managing multiple implementations centrally and charging a premium for it (over the amortized boxed cost) then this model could hold otherwise I think the economic assumptions are a bit off.

    • http://www.feld.com Brad Feld

      Adam – I completely agree.

  • http://intensedebate.com/people/don_jones3607 don_jones3607

    SmartFundIT.com also does this type of financing.

  • http://intensedebate.com/people/bfeld bfeld

    Adam – I completely agree.

  • mark

    There are a bunch of these types of companies out there now. We do development work for software companies (some of ho offer SaaS products) and I get calls every week from these companies who want to partner with us to offer "SaaS financing"

  • http://intensedebate.com/people/bfeld bfeld

    Correct – it is not true. It's a bad (and self serving) conclusion off of several data points. We have plenty of counter examples – e.g. Postini becoming profitable and cash flow positive on $25m of invested capital.

  • Mike

    Certainly an interesting perspective.

    From page 3 of their report:
    "Bottom line, a Saas company can take 50-70% more capital to grow than a perpetual license model company"

    I just can't believe that is true

  • Adam

    This paper makes a huge assumption: That saas style business has the same economics (cost) as boxed software. If a company cannot gain efficiency by managing multiple implementations centrally and charging a premium for it (over the amortized boxed cost) then this model could hold otherwise I think the economic assumptions are a bit off.