The Economics of SaaS Companies

Will Price of Hummer Winblad did some interesting analysis of the relative economics of 1990s software businesses and the current generation of Software as a Service businesses:

While the SaaS companies grew up in a different IPO market, the results suggest that SaaS companies take:

  • 1.6x longer to get liquid
  • 3.65x more capital
  • 1.75x more revenue to hit profitability
  • Salesforce, for example, raised $64.52m in equity, to Peoplesoft’s $10. Websidestory raised $43m to BOBJ’s $5m.

Click HERE to see data behind analysis

Now the conventional Web 2.0 wisdom is that it costs less to launch a new software business, and there’s a lot of data to support that position. What Will’s analysis suggests, though, is that it costs more to get those businesses to IPO-scale profitability. This divide suggests, along with all the anecdotal data, that acquisition rather than IPO is the more likely exit for many Web 2.0 companies.