Growing saas market doing well

Chartered Accountants are well equipped to investigate the viability of the supplier.  This is especially important in the downturn.  Is the SAAS provider actually making profit? Profit is a good sign that their business model is viable and they are likely to be around for the long term.  The stark truth is a LOT of SAAS and web2 businesses aren't making profits.  Their aim is to get outside investment and sell on.  Some do and do very well, but they are the exception rather than the rule in the downturn.

@philip - that's not strictly true, There have been no major M&A deals in the last 2 years in this space and it doesn't look as though there will be any in the next two years either. The current attention is on cash - not profit. That's as it should be because saas companies ought to be highly cash generative due to the subscription nature of their business.

@Dennis - I was thinking of web2 businesses that had been sold, but time does fly and even YouTube was back in 2006. 

I certainly agree about cash and given the model much of the sales are on monthly subscription which should mean low debtor days.  The problem these businesses have is the subscriber base needs to be pretty big because the subscription rates are low.  So the upfront cost of development is large compared to the initial income generated.  Looking at companies like Twinfield and Xero you can see that in their financials.  These are companies with good products, but the upfront financing to get to this position shouldn't be underestimated.  Twinfield now makes profits, but this is only in recent years when the subscriber base has tipped it into this position. So if I was a user of a SAAS product and thinking more than short term I would be looking at the financial position of the company.  If the subscriber numbers aren't there to make it profitable then is there finance to support it?  In the current climate getting finance is a serious question.

 

 

 

@philip - all valid points but then we're into 'chicken and egg' conversations. Xero has been a concern on burn rate but then I've had a number of conversations with them recently and they say that customer acquisition is accelerating and that is allowing them to get closer to cash break even. We'll see what that means when the next results come through.

With the larger players like NetSuite, what we're looking for is annual contract but possibly with different settlement terms. That way we can see the deferred run rate. Much harder with the smaller players where the market has settled on month to month.

FWIW, I do know that some of the smaller players have successfully bootstrapped to reach a respectable level of customers. Pushing on may be problematic. As always, ask the RIGHT questions when evaluating.

@dennis  Good point about the chicken and egg.  I guess as a typical risk adverse accountant I tend to worry about these things - especially in the downturn.  That said there are companies now making money out of SAAS and still giving their subscribers a good deal.

@philip - the ones I am looking at are all in solid double digit growth and cash burn isn't really an issue when you run the projection models.

@dennis - mmm I would rather see the cash in the bank than in the projection models.  I've seen to many hopelessly optimistic projection models.  That said I'll be delighted if I see a flock of successful SAAS next year.

@philip - I was thinking projections based on deferred revenue flowing through via cash. The way they do it in the US is to book the contract, cut the amount they're allowed into P&L and record the cash. The new reality means the same annual deals are being struck with the same accounting treatment but the cash flow is metered along the way. I'm OK with that when the rest of the expense side is under control. It also makes the relationship between earnings/likely outflows and cash much easier to understand.

That's why I run models ;)

Dennis, I completely agree that with any new software product or service the user needs to fully assess whether the package caters to their needs and is fit for purpose. Speaking on behalf of Clear Books, our system is currently in beta as a lot of development has gone into the system and we want to be certain the system is watertight before our official launch. Our core accounting system is robust. It's more a case of ironing out nuances of the user experience. That said, being focused on small businesses means we are not faced with the complexities of a full scale accounts solution. We have a simple solution as that is what is required by our target market. We are fully intending on having our software accredited by the ICAEW to give us the stamp of approval from an independent organisation. We will look to start this process shortly. Tim Fouracre Clear Books

@Tim - I question the value of ICAEW accreditation. Yes, there are plenty of things they can capture as 'requirements' but at the end of the day that's a cookie cutter approach that doesn't reflect value driven into the market place. I can think of many products and services where ICAEW has been eschewed but which have gone on to fame and glory.

Hi Dennis. I have only just caught up with your reply. Granted accreditation from the ICAEW or ICB is not going to make any difference to our product, however, I think it is important for perception. People are more confident when things have been validated externally in much the same way that stakeholders want to know company accounts have been validated by an auditor. That gives confidence in the product whether it is a set of financial accounts or an accounting product. We certainly get the impression that this is the case with some of the bookkeepers and accountants we have spoken to. If they request those third party assurances and we want their custom, then we have no choice but to go down that route. Of course I'd rather we didn't have to because then we could save some pennies on the accreditation fees. Equally, I'm sure most business managers wished they didn't have the auditors in disrupting their daily business routine :-)