Given the flood of blogs and articles positing SaaS as pretty much the only bright spot in a declining economy (click here to read our recent blog on that subject), an apparently startling comment was made during a panel discussion at OpSource SaaS Summit in San Francisco in early March.
“70% of SaaS companies will not exist in twelve months’ time”.
Shocking news for investors and shareholders in SaaS companies? Well, before we fall down in a dead faint, let’s think about it for a moment…
Professional investors and informed shareholders in SaaS vendors are mostly aware they are in for a long, tough, and possibly terminal ride. They should make their investment decisions accordingly. Most of all, they should not get carried away by the cloudless-blue-sky views of some SaaS vendors.
“In God we trust; all others pay cash”, says Warren Buffett, the multi-billionaire Oracle of Omaha. Cash will continue to be king for the foreseeable future. If you have cash and want to invest in SaaS to surf the next big technology wave, either make sure you invest in a currently profitable company, or park your money somewhere safe for twelve months and then look around to see which SaaS companies are left standing. It will be a turbulent period and the landscape will likely look very different in twelve months.
In our view, cloud computing and SaaS (click here to see Dennis Stevenson’s right-on-the-nose definitions of those terms) represent a revolutionary step-change in technology that will inevitably replace the traditional high-investment, high-maintenance model of business software applications.
So what is the fly in the butter-dish that makes us accept the SaaS Summit statement that 70% of SaaS companies will go out of business in the next year?
The “fly” is the worsening condition of the larger economic environment within which this revolutionary technological step-change is taking place. It won’t prevent the revolution from happening – the revolution is inevitable – but it will drag out the process beyond the capacity of many SaaS companies to balance their burn rate with revenues and profits.
Burn rate will turn into burn-out for many SaaS vendors over the next twelve months. We hope the customers of those burn-outs have adequate escrow provisions in their service agreements; a reasonable possibility of migration to alternative SaaS providers; and the ability to withstand potentially long interruptions to their business processes.
Readers who regularly follow the Ubikwiti blog will know we see cloud computing and SaaS as a relatively small part of a very large canvas. We often write about such things as the depth and duration of the current global economic recession (nobody knows the answers to those questions), increasing unemployment, and the reducing purchasing power of individuals and businesses.
The current global recession appears to be morphing into possibly the single most significant recession in the last eighty years. The last such problem (the Great Depression) took ten years and a world war to resolve.
Political remedies promoted to date to solve a problem of unknown total magnitude are unprecedentedly expensive, huge in scope, and virtually certain to require more funding than currently envisaged. International cooperation will be required on an ongoing basis across such diverse matters as trade policies, central bank policies, reserve currency dependencies and flows, credit liquidity, tax policies and investment decisions. We all know from experience that international cooperation on such a scale is a tough proposition when national political interests like job creation and job retention are high priorities on national agendas.
Remedies for the recession are not just going to be costly. They are going to be high-risk and long in duration. The medicine not only tastes bad – it may have, like many medicines, a host of unintended and unpleasant side effects, not all of which can be measured or even predicted.
All recessionary remedies have to take place against a background of two significant multi-national peacekeeping efforts (Iraq and Afghanistan), the possibility of economic and even military conflict with uncooperative states such as Iran and North Korea, and not least, the virtual certainty of more violence by religious extremists in the U.S., the UK and Europe. Then add to the mix the almost universally dire predictions for global warming, and the increasing potential for international conflict over natural resources, such as fresh water.
Not a pretty picture, all in all – but a realistic one – and it’s the one that will ultimately determine the speed of mass-market adoption of SaaS.
Tags: cloud computing, global economic recession, low-cost business applications model, online accounting software, SaaS, software-as-a-service
Subscribe to Entries (RSS)
Quick update. My definition of cloud computing can be found here: http://it.toolbox.com/blogs/original-thinking/what-is-cloud-computing-a-simple-definition-30648
I think the 70% comment above is a bit disingenuous. It’s making a big deal out of a number that isn’t a big deal at all!
Think about it:
1) Most SaaS companies are startups. Whether bootstrapped or venture funded, they are doing something new. The failure rate for startups is generally higher than established businesses. This is not a surprising fact.
2) As startups, these SaaS companies will need capital. Yes, capital. The mysterious thing that is drying up all over the place. So this will further exacerbate number 1 above.
3) SaaS is new (relatively). It’s a very different risk profile than opening a nail salon. People are still learning what it is, and how to use it and developing trust behaviors. Yes. Again, this is to be expected.
The reality is that a lot of companies won’t be around in a year’s time. That’s just sort of the reality that we live in these days. The “Big Number” should not be used to imply that SaaS is a bad idea or that it isn’t viable. Timing sucks for a new approach to come out just now.
Dennis
Dennis: Thanks for your comment. We agree totally with your four points. Our blog was not intended to imply that SaaS is a bad idea or isn’t viable – as you know, we are a SaaS/PaaS company. We made the point clearly in our blog that in our view the transition to SaaS was inevitable. We agree with the comment expressed during the Panel Discussion because it affects the timing of the transition.
The excessively hype-filled and disingenuous atmosphere surrounding cloud computing projected by many SaaS companies and many SaaS supporters, if not properly balanced by investors understanding the points raised above by you and the points made in our post (which in the main, relate to No. 3 that “timing sucks for a new approach), has the potential to create a “post-SaaS-Crash” attitude that would be harmful to the progress of SaaS and to those companies that remain after market forces have trimmed the number of players.
We (and we are sure you are included in that “we”) do not want the entire concept of SaaS to be discredited because many SaaS companies won’t succeed, especially when the reason for failure is not the technology itself.
Then we are absolutely in agreement. My eyes are not closed – in either direction. I disappreciate the people who throw the baby out with the bath water.
70% may be accurate – and is a figure to understand risk. But it does not stand in judgment on the entirety of SaaS/PaaS.
People, especially the start-ups themselves and the investment community, need to clearly understand the downside as well as the upside of SaaS, especially those presented by the present global economic crisis. Better informed investors (at least theoretically) should ensure that scarce capital is available on acceptable terms to those SaaS players with the best chance of commercial success irrespective of their stage of development, not those that can generate the most hype. We still have memories of the overdone hype that led to the dot.com boom and bust…
I agree that 70% should not be a scary figure and shouldn’t be taken in isolaton. It’s one person’s opinion (not sure of the exact context it was taken from) and surely some of the shrinking will be due to consolidation in a market that’s evolving rapidly?
Thats all completely natural in my view.
I also think that there is not going to be a real shortage of investors willing to take the risk in the curent economic climate. There is funding to be had if the product and the pitch is right.
Investors are sitting on cash they’ve chosen to be prudent with over the last 12+ months and if there’s any truth in your opening statement that SaaS is the only bright spot in a declining economy, then where else are they going to be focusing their attention?
Besides, I think that any ‘professional investor’, whether that be a HNW, angel or VC, will go into every investmet with their eyes open. That’s purely the nature of investing in early stage companies – the risk is high because so many don’t make it, but so is the reward if they back the right horse.
Chris
http://www.blog.sopris.co.uk