| For those interested in getting a good overview of perpetual vs. SaaS business model I highly recommend Dave Kellog's post on the topic. He discusses both the operational and valuation impacts and walks through an example of a hypothetical startup under both models. kellblog.com/2011/01/26/perpetual-money-vs-perpetual-license-subscription-saas-and-perpetual-business-models Summary: 1. Wall Street "sees through" the differences in models and value perpetual and SaaS companies roughly equivalently. SaaS companies are worth 1.8x the revenue multiple of perpetual companies (he walks through the math in the post) 2. There are many good reasons for perpetual companies to move to SaaS models but valuation isn't one of them 3. You get roughly twice the EV/R multiple as a SaaS model but building the revenue stream is just about twice as hard. CEOs who have done the transition from perpetual to SaaS say it takes 3 years to makes the transitions and it must be a top 3 company goal for that entire period. 4. SaaS dampens revenue volatility - for better and for worse. Makes it harder to grow the revenue stream quickly and makes it harder to change once established. (This has an impact on investor psychology and reactions to a bad quarter can be very different in a SaaS model vs. perpetual) 5. Sales compensation is a tricky issue with SaaS model. Sales people still want dollar compensation similar to a perpetual sale despite ratable revenue profile of SaaS. 6. The implicit assumption that an annual subscription to use a service should cost less than equivalent perpetual license can be invalid when looking at the product from a customer Total Cost of Ownership viewpoint. (Companies are also outsourcing the capital intensity of having perpetual software) |
Since, 1) VCs are more sophisticated than the typical customers, 2) have more bargaining power - Are founders being diluted more in SAAS companies (Box.net) vs enterprise companies (e.g. Oracle)?