|Home - Industry Article - Jul 03 Issue
Calling all 'Software as a Service" Deals
By Sharon Wienbar, Director, BA Venture Partners
BA Venture Partners (BAVP) is actively seeking new deals with companies offering software as a service, both for investment and research. We went so far as to issue a press release to this effect late last month, an unheard of tactic in the venture world. But we're big believers that you have to have strong convictions to be good investors so we went out on a limb to publicly state ours. "Software as a service" is an application delivered to customers over the Web from vendor-hosted infrastructure as opposed to traditional software licensing models that put the installation and management burden on customers.
BAVP was the largest shareholder of PlaceWare Inc., the web conferencing provider recently acquired by Microsoft. We initially invested in PlaceWare in 1999 when the "ASP" (application service provider) hype was at its peak—but over the years came to believe that the service provider model is better for both investors and customers for several classes of applications. As we became more and more convinced that the service model works we consistently supported that strategy at PlaceWare, and consistently increased our ownership in the company in each subsequent round of financing.
We Mean It!
We continue to put our money where our hypothesis is; we've made three new software as a service investments so far this year, out of a total of five software investments and eight total new investments. We think of software companies in three big different buckets based on who their target customer is: CIO/IT operations, line of business owner, or end users. [This bucket strategy should probably be the topic of another story—our thought is that the target customer base drives sales and marketing strategy, which drives startup spend, which determines investment outcome. Stay tuned.] In fact, our three new investments have been "one of each" in both target customer and stage of investment:
Bellamax: We led the first institutional round in this consumer-focused company. Bellamax provides an Internet service to automatically enhance digital images for a low cost ($1-3 each). www.bellamax.com
Biz360: We led the C round of this line of business service. Marketing execs use Biz360 to analyze and drive their media results, bringing data driven marketing intelligence to the PR world based on the similar quantitative metrics traditionally used by advertising departments. www.biz360.com
Player to be named later: BAVP led the C round investment in a messaging gateway service purchased by enterprise messaging and security operations execs to block bad incoming mail, primarily Spam, but also viruses and inappropriate content. This investment has closed, but has not yet been announced.
Advantages for Customers
Software applications offered as a service deliver a number of advantages over traditional software licensing models. CIO's are able to outsource standard internet based activities to more experienced specialists and focus their resources on mission critical internal applications. Line-of-business executives do not need to rely on IT to spec, purchase, implement and integrate diverse technologies to deliver a solution. They save money by eliminating maintenance, service and training agreements while reaping the benefits of instant access to the service and flexible, pay-as-you-go pricing plans. Consumers gain access to communities and technologies that are unimaginable as home applications.
These customer benefits have resulted in differentially higher revenue growth for software as a service companies relative to the overall software market. According to IDC, the software as a service market is $2.3B in 2002, growing at 30% per year. The top providers in the sector are growing even faster, at an average rate over 60% per year. This compares with an overall software market that's seen flat to low single digit percentage growth in the past several years.
BAVP Research Project
Our partnership likes primary research—facts come in handy. We like the software as a service sector so much that we are kicking off a significant research project this month that we're excited about. The project has two key deliverables:
A refined view of which types of applications are best suited for delivery as a service.
Granular best practices on sales and marketing operations within software as a service companies, which we've come to appreciate given our experience with multiple portfolio companies in this sector.
At the 100,000-foot level, our view is applications that derive a lot of value by being "in the cloud" are best suited for services delivery. The first phase of our project will refine and define this view. Examples of "cloud value" include:
Connect many people across business boundaries. PlaceWare's great product differentiator is the ability to connect tens of thousands of participants across many locations, firewalls, etc. The conference "happens" in PlaceWare's data center, not an enterprise server, so there are no connectivity issues. This contrasts with Microsoft's long-standing product NetMeeting, which is crafted to support small internal workgroups.
Collect and crunch data from many disparate sources. Biz360 builds a giant data warehouse in the sky for its customers every day—they bring in data from content aggregators such as Factiva and Lexis-Nexis, spider the web for proprietary content, and add text translations from broadcast media. This would be a daunting task for any enterprise, requiring complex text processing and data warehousing technology as well as business relationships with dozens of content providers. With the service, all customers have to do is log onto their private URL and run custom reports without worrying about the back end at all.
Deliver intense image processing power and aesthetic judgement. Bellamax is like having a personal "PhotoShop guru in the sky" who fixes your pictures "automagically," using a lot of complicated image processing algorithms and some human touch to make sure the algorithms deliver the best possible picture quality.
Block the bad stuff before it gets in. Spam now takes up about two-thirds of business email bandwidth, clogging both mail servers and users" mailboxes. A gateway service provider blocks spam, viruses and inappropriate content before it gets on the corporate net. It takes a lot of refinement in rules and implementation to let the good through, but block the bad, and a service provider can leverage expertise across many shared customers. My recent prior company, an email service provider, had a staff of 5 full time spam analysts, an investment few individual enterprises can make.