Software Investor: Software as a Service Beyond Tipping Point

The consummate software investor Ann Winblad talks about emerging trends, and what's missing with on-demand software.

Ann Winblad, a co-founding partner of Hummer Winblad Venture Partners and to many in the software industry a bellwether of successful trends, believes that software as a service is beyond the tipping point of customer adoption.

With SAAS no longer the domain of small companies that cant afford on-premises software implementations, users extend across a broad swath of small, midsize and enterprise companies, according to Winblad.

And adoption is continually on the rise. Winblad points to several recent analyst reports to underscore her point: a survey by AMR Research that says 40 percent of companies are using hosted CRM (customer relationship management) applications, while 49 percent intend to use on-demand applications on an incremental basis; an IDC report that shows SAAS growing at 29 percent annually; and an Aberdeen Group report that said 70 percent of 631 companies surveyed are looking at or planning to use SAAS.

Whats not in place for the nascent industry is traditional channel partner adoption. That model—one promulgated by the biggest software companies in the world, such as Microsoft and IBM—relies on partners and integrators to both develop on top of and resell another companys software products to customers.

"VARs and SIs [systems integrators] have lived off this model for the past 30 years—thats why they exist," said Winblad, from her San Francisco office. "That channel is gradually changing."

Winblad said she is seeing companies such as Accenture and IBM start to play a bigger role in the SAAS market—but they are just at the beginning. Its only when those "old-fashioned" channel partners have figured out how to play in the SAAS paradigm of subscriber license fees (versus perpetual-license fees), and quick ROI (return on investment) versus months-long projects, that the SAAS market will see another point of acceleration.

Winblad is in a unique position to understand the trends and vicissitudes of an emerging market. Her company, founded nearly 20 years ago, was the first venture capital fund to invest exclusively in software companies.

Over the years, Winblad and her partners have funded companies based on distributed network computing, the Internet and SAAS, as well as desktop software, embedded systems and client/server technologies.

Hummer Winblads first SAAS investment was in 1998, with Employease, a company that today has more than 1,500 companies using its on-demand human resources software. All told, Hummer Winblad has invested in 11 on-demand companies.

In sussing out on-demand companies to invest in, Winblad said she looks for "true" SAAS companies.

"We see a lot of fake SAAS companies," said Winblad. "They are not multitenant; they have not done the hard technical work to build the applications. This is not easy to build. They have to have management thats thought this out before; they have to be truly multitenant."

Multitenant occurs when a software company puts all its customers on a single server so that software upgrades—which happen frequently in the on-demand world—can be distributed at once, to all users.

/zimages/3/28571.gifClick here to read about security issues with SAAS.

The on-premises model, on the other hand, calls for a single-tenant model, in which each customers software implementation is on a separate server from other companies that may be using the same software.

In addition to multitenant capabilities, Winblad said on-demand software must be built using a services-based architecture that supports open standards, which in turn facilitate easier integration.

Then Winblad looks at market opportunities—underserved markets (such as the midmarket, which does not have the breadth and technical staff to take on on-premises software) and new categories such as business intelligence for Web analytics.

She rattled off a number of companies under the Hummer Winblad umbrella—Five9, Infopia and Employease—that represent specific processes that could not have been done with on-premises software.

Next Page: Some misconceptions about on-demand software.