Drury disputes US analyst’s take on SaaS

The profit-making potential of SaaS, and therefore the value of SaaS ventures to share-market investors, has been overstated, says analyst

US market analyst Ken Bender’s pessimistic analysis of SaaS’ growth prospects has drawn criticism from high-profile tech entrepreneur Rod Drury, who says Bender doesn’t realise that some of our enterprises are very small indeed.

Bender recently told the NZ Stock Exchange (NZX) that the profit-making potential of SaaS (Software-as-a-Service), and therefore the value of SaaS ventures to share-market investors, has been overstated. Bender, an investment-bank managing director, and head of the Californian Software Equity Group, was keynote speaker at the NZX’s “Tech and the Markets” forum, held earlier this month.

SaaS holds particular appeal for small- to medium-sized enterprises (SMEs), who want to be relieved of the problems associated with installing, running and updating a software application suite, he says. But bigger buyers are less keen and there are still some fears even among SMEs about letting business information “outside the firewall”, he says.

However, Drury, chief executive of local start-up Xero, which offers a SaaS-based online accounting service for SMEs, disagrees with Bender’s pessimistic evaluation. He believes the US expert’s comments apply more to the United States than here, as he hasn’t fully taken on board the small size of some of our SMEs. These can be one-person only companies, which means they are much more inclined to hand over IT responsibility to an outside organisation, Drury believes.

“He’s talking about SMEs from a US perspective. What we call an SME, he’d probably call a microbusiness,” says Drury.

Bender had some interesting comments to make on the SaaS market, though. On the supplier and investor side, the SaaS way of operating results in a continuous stream of revenue coming from existing clients. SaaS also offers a lower barrier of entry for small customers. However, the distinction may be an illusory, says Bender. There is no reason why an in-house software licence could not be structured using a similar instalment payment plan, he says.

“Right now, everyone [the markets and suppliers] is in love with SaaS — that won’t necessarily be so in a year’s time,” Bender warns.

Also, the buyers — the CIOs and IT managers — aren’t so positive, at least not yet. SaaS ranked just 18th on a list of 37 IT investment priorities, according to a recent survey by Goldman Sachs.

But Bender believes the road to success will be long for most SaaS vendors. “It takes between 70% and 100% more capital to fund an SaaS company to break-even point” than it does for a conventional software vendor, says Bender.

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