Venture capitalist sold on SAAS

Hummer Winblad co-founding partner on its heavy investment in SaaS

Hummer Winblad Venture Partners was established in 1989 as the first venture capital fund to invest exclusively in software companies. These days, 12 of the 30 companies in Hummer Winblad's portfolio are SAAS ventures. We spoke with Ann Winblad, co-founding partner, to better understand the extraordinary momentum of SAAS and her company's relationship with IBM.

How did Hummer-Winblad get so heavily invested in SAAS?

A fourfold thing was going on. We had service-oriented architecture becoming real, and our belief was that the first applications that would come out of SOA would be delivered on-demand. Plus, people were using a pure LAMP [Linux, Apache, MySQL, and Perl/PHP/Python] stack, so new entrants didn't have to go buy a whole bunch of expensive infrastructure to build new applications. Also, true multitenant applications were being developed. And finally, we went to a subscription basis for these companies versus the old enterprise software model, so we could address the midmarket.

What was your first SAAS company?

One of our earliest investments was a company called Employease, which is outsourced benefits management. It's probably the most profitable private on-demand software company today. Employease was a great first company, because with the providers, the employers, and the employees, the application lives naturally outside the firewall.

I understand that IBM provides technology assistance and in some cases the platform for some of your companies. What else exactly can IBM bring to startup companies to help them succeed?

They can do a variety of things. First of all, they can directly bring it to their marketing organization so in over-arching campaigns that might be in platform plays. On-demand computing is a great example.

I suppose IBM can also bring them into Global Services engagements as well.

Absolutely. And they do.

Would you say that IBM is building an ecosystem similar to the AppExchange model?

They have the opportunity to build that. But if you go to their Web site now you'll find 8,000 vendors you can buy from. That's not AppExchange, that's a directory.

In selling SAAS to the enterprise, you're dealing with some pretty entrenched IT interests -- people who want to keep control of their fiefdoms and have been running things the same way for years. Does that make a lot of this stuff a business-side sell rather than an IT sell?

Not necessarily. Besides the entrenched interests, the other thing that you have is smarter customers. People say gee, you know, how much am I continuing to pay for these in-place products? I think that large vendors want us to believe that once entrenched, always entrenched. But once the meteorite hits, there are fewer dinosaurs walking the earth.

Page Break

What about those outages?

The first objection to SAAS, particularly among enterprise IT customers, is that reliability and availability are in someone else's hands. So when customers experienced significant service disruptions in December and January, it's no surprise that its execs were reluctant to comment and that other SAAS companies downplayed the incidents.

"I think these Salesforce outages have shaken things a little bit," says Robert Jurjowski, CEO of SAAS ERP provider Intacct. "They may have been overplayed, but ... because the nature of this game, if you have a SAAS company with lots of customers, there's this whole single-point-of-failure angle, and it's going to get a lot of press no matter what." CEO Marc Benioff puts the problem in perspective. "We had some reliability issues in January that we've bounced out of now. And in the last seven years, of course, we've had excellent reliability." As a show of good faith, last month the company launched, which provides a running account and history of system status. And in addition to a $US50 million investment in a new redundant datacenter architecture that began rolling out in November, the company has committed to spend an additional $US1 million to $US1.5 million per quarter on that architecture's ongoing R&D.

Nonetheless, some customers have headed for the exits. Last December, Charlie Crystle, CEO of nonprofit fund-raising software developer Mission Research, vowed to cancel his subscription, not only because of the outage but also because of what he described as repeated system slowdowns. Since then he has switched to a homegrown, in-house sales management system.

But, as Intacct's Jurjowski says, it's a little unfair to hold to 100 percent availability when no internal IT organization can claim that, either. In fact, one Intacct customer in Florida considered SAAS to begin with because it appeared less risky than running an ERP system in-house.

After weathering Hurricane Andrew, Abraham Elias, CIO for Circle L Roofing, decided, "We didn't necessarily want to house the data ourselves. The first thing we looked at was possibly colocating some rack space, and then started looking into the cost of doing that, along with the cost of acquiring the software licenses. And it started getting very convoluted."

Instead, Circle L Roofing selected Intacct -- both as an ERP service and as a de facto business continuation solution.