The Next Stage in the SaaS Revolution: 3 Key Trends

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A few weeks ago, I came across a report from Jon Guido and his team at AGC Partners — an M&A technology investment bank that has worked acquisition deals with tech giants like Oracle, Akamai, and Twitter. You can dive into the meat of the report here, but there were several stats from it that got me thinking about some key trends for 2015 — some of which I’ll touch on now, others I’ll share in a future post.

For starters, here are some interesting numbers from AGC’s report:

  • Since 2012, SaaS M&A deals nearly doubled — from 333 in 2012 to 621 in 2014
  • SaaS companies are, on average, 2-3 times more valuable than perpetual license software providers
  • Vertically-focused SaaS companies trade at a premium of 35%

The one thing that’s clear from AGC’s report is how quickly SaaS is becoming the de-facto software delivery model — and the gap between it and other delivery models will only widen in coming years.

3 Key SaaS Trends from 2014 (and Why SaaS Founders Should Care)

That being said, there are certain trends in SaaS that are worth paying attention to as we move forward. Most notably, here are three that stand out from AGC’s report:

1) Continued Rise in Vertical SaaS

Horizontal SaaS vendors provide solutions for functional areas (sales, finance, HR, etc.). Vertical vendors provide solutions for a specific industry (healthcare, financial services, etc.). The latter is particularly appealing because its narrower focus typically results in more efficient sales and marketing effort, and there’s significant white space for those types of vendors to replace legacy on-site solutions. Going forward, AGC forecasts an increase in vertical SaaS companies with successful exits.

2) More “Land and Expand”

The traditional way of selling software to enterprises is to go through corporate IT departments or senior-level decision makers. Today, more and more SaaS companies are leveraging a “land and expand” model for growth — gaining traction within enterprises by recruiting individual users, and then leveraging that base to create enterprise-wide deals.

This strategy is essentially a spin on the freemium model, and it’s been particularly effective for productivity-related SaaS companies like Box that offer both individual and group-level solutions. Several of OpenView’s portfolio companies use this approach, as well.

3) Rise of Integration-as-a-Service (IaaS)

As the number of SaaS solutions continues to grow, AGC is seeing an increased need for products and services that integrate cloud-based and on-premise solutions. In fact, AGC cites a Gartner study that estimates the annual spending for cloud-integration to be around $1.5 billion. Given that growth, I wouldn’t be shocked to see a big jump in “Integration-as-a-Service” providers.

In fact, as OpenView VP Mackey Craven explains in this post, that’s precisely one of the reasons we were so excited about investing in IT monitoring company Datadog.

Where Will SaaS Go in 2015?

The beauty of SaaS is that, for all of its growth, there’s still huge chunks of the software market it has left to capture and a large amount of freedom the “as a service” model offers that entrepreneurs haven’t yet taken advantage of. I’ll address some of my own projections for SaaS in 2015 in a later post, but I’d like your input, as well.

Where do you see SaaS heading? Which trends are you most excited about and what other software delivery methods do you think have serious potential? Feel free to leave your thoughts in the comments section below.