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Go SaaS, Young Man

Venture capitalist Mike Fitzgerald says he's more inclined to invest in software startups that embrace the service model.

Fitzgerald, founder of Commonwealth Capital Ventures in Waltham, Mass., says SaaS is a win-win for the software company and customers. Sales cycles are shorter for SaaS startups because it's easy for potential buyers to try the product. And if a customer starts with a limited rollout, a department head can pay out of discretionary budget, or even use a credit card, instead of sending a purchase order through normal channels.

On the customer side, capital expenditures for SaaS are significantly lower than a traditional premises deployment, and the product gets into users hands more quickly. Customers begin extracting value right away.

A service model also provides a predictable revenue stream for the software company, because payments come in every month. That means the company can make more accurate predictions about its quarterly numbers.

By contrast, premises software vendors face more uncertainty. Because they get a large portion of revenue from the initial license sale, the timing of a purchase can make or break a quarter.

"Oracle taught the enterprise software crowd to buy at the end of the quarter to get a better deal," says Fitzgerald. "And if you miss an order, you blew a quarter and now on the Street you're a bum."

The downside is that SaaS vendors don't get a large chunk of license money up front. The number of new accounts a SaaS vendor has to open is a multiple of a traditional software company.

"You need to get an accumulation of payments to be large enough to support your operation," says Fitzgerald. "It forces a SaaS company to be more productive for every dollar of sales and marketing."

And as with any venture, SaaS startups need to identify an underserved market. Translation? Fitzgerald has no plans to invest in a CRM startup.

That said, Fitzgerald is bullish on the service model. "SaaS is the future of the software business."

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