SaaS-y Predictions for 2013

Looking back at 2012, one thing is abundantly clear: all things SaaS were firing on all cylinders last year.  Based upon what we saw in 2012 – and what we’re seeing already in 2013 – the momentum around SaaS company creation shows no sign of slowing.

From seasoned enterprise executives, to entrepreneurs with consumer backgrounds, everyone seems to be thinking about SaaS these days.  The reasons for this increase in activity are numerous, but in part come down to market fundamentals, including:

• Public SaaS companies are killing it.  The performance of publicly-traded SaaS companies far exceeded that of the NASDAQ and S&P 500 indices in 2012, proving just how important the SaaS industry is in the technology sector today. In fact, according to William Blair, the performance of public SaaS stocks through Q3 of 2012 was nearly double the performance of the NASDAQ and bested the performance of the S&P by nearly 3x.
• SaaS exits are on the rise in a big way.  Over $1.3 billion was raised in SaaS IPOs in 2012 per a William Blair analysis.  SaaS M&A activity has also risen to sky-high levels, led by deals such as Oracle’s acquisition of Taleo for $1.9 billion, IBM’s acquisition of Kenexa for $1.4 billion, and Microsoft’s acquisition of Yammer for $1.2 billion. For SaaS businesses, the exit landscape has never been better.
• The venture pendulum is swinging back to the enterprise.  Because of the robust exit environment and the fact that VC interest in consumer technology has waned a bit, William Blair found that there is intensive interest in SaaS businesses among venture investors.  Over $3 billion in venture capital was invested in SaaS companies through the first nine months of 2012 year versus $1.7 billion in the first nine months of 2011.  For the first time in many years, B2B is again top of mind for many in the venture community.

With the excitement among entrepreneurs at an all-time high when it comes to SaaS, the logical question is “What’s next?”  As we gaze into our crystal ball, it reveals a number of noteworthy trends on the horizon for 2013, including:

• This will be the year of the enterprise mobile app.  Most investors are hardly thinking about mobile apps in the enterprise.  There has been a fair amount of investment activity in the area around mobile device management, but there few mobile-focused business apps have been funded.  We see the industry perched on the cusp of a revolution in business applications that are built specifically for mobile devices and take advantage of the unique features they provide. Built-in location awareness, on-board cameras, the relatively low cost and durability of mobile devices is opening new doors for use in a wider range of industries and applications to dramatically streamline operations.  For example, Doximity pioneered the first HIPAA secure mobile-based professional networking platform for physicians that improves the speed and quality of patient care.  DoubleDutch’s mobile-first CRM app makes managing the sales process easy, effective and even fun.  Roambi lets you turn boring business data into insightful, interactive graphics on any iOS device.  The next few years promise to be the era of the business application, and we starting to see many more entrepreneurs approach us with mobile-first business app concepts.
• Verticals are hot. We’ve seen a number of SaaS up-starts find tremendous success with vertically-focused solutions, including Veeva in life sciences, Top Hat Monocle in higher-education, and Xtime for CRM in the automotive service industry.  Further, we’ve seen first hand how a vertically-focused strategy can enable a company to build a business with high market share in a very capital efficient way. While health care and education seem to get all the attention when it comes to verticals, there are plenty of other opportunity outside these hot spots.  My partner Gordon wrote a great post on this topic.  I expect we’ll see many more entrepreneurs pursue vertical strategies in 2013.
• Defensibility is more important than ever.  With all of the investment activity in SaaS these days, there are many more companies being created in each application segment.  As a result, we may begin to see more price-based competition in certain application markets.  In order to avoid becoming commoditized, the best SaaS entrepreneurs are thinking about how to build a moat around their solution.  Whether it’s finding a way to create a network effect (like LinkedIn) or using the data on customers’ usage of your product to deliver more value than the competition (like our portfolio company Lithium), the pressure will increasingly be on entrepreneurs to build a defensible advantage into their SaaS offerings .

We’re extremely excited about what 2013 holds for the SaaS industry – and are looking forward to working with our existing portfolio this year, as well as many new entrepreneurs, to help build the next generation of SaaS leaders.