Saas and the Cloud Ten Years In

1Confidential

Rory O’Driscoll, Managing DirectorScale Venture Partners

Software as a Service & Cloud Computing:The Reality & The Opportunity

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SaaS: An Understood Concept

Average Worldwide Search & News Traffic

Source: Google Trends.

SaaS

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Cloud Computing: Newer and Murky

Average Worldwide Search & News Traffic

Source: Google Trends.

SaaS Cloud Computing

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Lady Gaga

Average Worldwide Search & News Traffic

SaaS Cloud Computing Lady Gaga

Source: Google Trends.

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Start with the Person Who Has the Money

$50B $70B

“Bill the Business Buyer”

“Ivan the IT Guy”

$20B

“Connie Consumer”

Annual Software Spend

Consumer Business

Source: IDC.

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Application

Infrastructure

Consumer Apps & Infrastructure:Running on a PC

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Business Apps & Infrastructure in the 1990s:Running in a Data Center

“Bill” Business Buyer “Ivan” IT Guy

Application

Infrastructure

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Business Apps & Infrastructure Today:Running in the Cloud

“Bill” Business Buyer “Ivan” IT Guy

SaaS Cloud

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Mainframes

Minis

PC

Client/Server

Basic Internet

I.T. Has Re-Invented Itself Before

1960s

1980s

1990s

1970s

2000s

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Application Software Architecture Model:Before & After SaaS

Bill buys it.Ivan makes it run.

Company A

SW

HW

DatacenterVendor

Company A

Company B

Bill buys it.Ivan never knows.

HW

SW

Client Server SaaS

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Application Software Business Model:Before & After SaaS

Sales / marketing 50% of all expenses

Small number of big deals Deals close last day of quarter Arduous implementation

Sales / marketing 50% of all expenses

Large number of small deals Business model high quality SW Steady, predictable business

Bill

$ $1,000,000

Sales Guy

SOFTWARE

!

Bill

?PURCHAS

E

“Try Before You Buy”Plan A: $100 / mo.

Plan B: $199 / mo.

http://

Client Server SaaS

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SaaS: The Wisdom of a Decade

A model. Not a market.

Leverage the architecture.

GAAP: Unflattering to annuity business.

Compounders not rocket ships.

Play to win.

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<$1B $1-5B $5B+

$40bn In Value Generated by SaaS Winners

2010 Market Cap

LogMeinRightNow

TechnologiesConstantContact

DealerTrackHoldings Vocus Kenexa

DemandTecSPS

Commerce Convio

Postini Frontbridge ScanSafe

Zantaz Paycycle ExactTarget

Responsys Eloqua Indeca

Zendesk

Taleo Corp. Athenahealth

NetSuiteOmniture

RealPage SuccessFactors

ConcurTechnologies

Salesforce.com$17.5B

Source: Public financials, Capital IQ, industry research.

WebEx

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SaaS: Where from Here?

Land of a thousand niches.

Surprised by upside.

Consumer sets the tone.

Technology drives the potential.

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Architecture Evolving To Cloud Based I.T.

Ivan buys software + hardware.Ivan makes it work.

Ivan buys a service.Vendor makes it work.

Company A

SW

HW

SW HW

DatacenterCompany A

Cloud Services Vendor

Company B

HW

SW SW SW

Vendor Vendors

HW SW SW

IT Before the Cloud IT in the Cloud

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Virtualization Enables the Cloud

Traditional Architecture

Virtual Architecture1 Company / Server

Many Companies / Server

Virtualization allows multiple companies to share infrastructure

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Where Is the Cloud World Now?

?“ Where is cloud

most valuable?”

“ Will companiesreally adopt it?

”

“ What level of cloudservice do people want?

─ PAS, SaaS, IAS

”“ What does this mean

to equipment vendors? Some panic?

”

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11mm PDFs Created in One Day

4 TB Data 100 Nodes 11 Million PDFs

100 instancesx 24 hoursx $0.10 / Hr= $240

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5000 Servers Commissioned in 3 Days

Numberof EC2

InstancesLaunch of Facebook modification

Steady state of ~40 instances

Amazon EC2 easily scaledto handle additional traffic

Peak of 5000 instances

Animoto Scales to Meet Demand for Photo Presentations

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Will People Really Adopt It?

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Cloud Services Vendor

HW

SW SW SW

Why Equipment Vendors Should Be Nervous

Company A Company B

Vendor

HW

Vendors

SW SW

HW

SW

Vendor

HW

Vendor

SW

Company A

Datacenter

I.T. Before the Cloud

I.T. in the Cloud

Customer concentration

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Winners: SaaS and Cloud

<$1B $1-5B $5B+

SaaS

Cloud

LogMeinRightNow

TechnologiesConstantContact

DealerTrackHoldings

Vocus Kenexa DemandTecSPS

Commerce

Convio, Inc.Postin

i Frontbridge ScanSafe

Zantaz Paycycle ExactTarget Responsys

Eloqua IndecaZendes

k

Taleo Athenhealth NetSuite Omniture

RealPage SuccessFactorsConcur

Technologies

Salesforce.com$20B

VMWare, Inc.$40B

Heroku Rightscale Go Grid Cloudera

CloudkickEucalyptus

System Nimsoft Engine Yard

Data Domain

Isilon

3PARRackspace Holdings

$40bncreated

$50bncreated

WebEx

Source: Public financials, Capital IQ, industry research.

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Clouds on the Horizon

Clouds are a large pool of easily usable and accessible virtualized resources (such as hardware, development platforms and/or services). These resources can be dynamically reconfigured to adjust to a variable load (scale), allowing also for an optimum resource utilization. This pool of resources is typically exploited by a pay-per-use model in which guarantees are offered by the Infrastructure provider by means of customized SLAs.

— Vaquero, Rodero-Merino, Caceres, Linder

“ ”

… outsourced, pay-as-you-go, SaaS, on-demand, somewhere in the Internet, etc.

… using the internet to allow people to access technology enabled services.Those services must be massively scalable.

“ ”

“ ”

We've redefined cloud computing to include everything that we already do. Maybe I'm an idiot, but I have no idea what anyone is talking about. What is it? It's complete gibberish. It's insane. When is this idiocy going to stop?

— Larry Ellison

“ ”

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Near Free Computing

March 2009 January 2010 September 2010

10 Amazon Web Services Price Cuts in 18 Months

Lower ReserveInstance PriceAug. 19, 2009

EC2 PriceReduced

Oct. 26, 2010

Lower S3 and EU Windows

Dec. 2, 2009

CombinedBandwidth

Mar. 25, 2010

CloudFront Price Reduction

June 7, 2010

Free Tier and Increased SQS

LimitsJune 30, 2010

High MemoryPrice ReducedSept. 1, 2010

Reserve Instances

Mar. 12, 2009

Data TransferFeb. 1, 2010

Spot InstancesDec. 13, 2009

Source: AWS announced price cuts.

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Cheap Energy (1900s)Cheap Computing (2000s)

Free consumer services.

Start ups abound; IT not a barrier.

Connecting services in the cloud.

Your stuff is in the cloud.

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The Pain of GAAP + a Sales Rep

$s in Thousands Year 1 Year 2 Year 3 Year 4 Year 5

New Bookings $200 $700 $1,200 $1,400 $1,500

Renewal Bookings

- $150 $700 $1,800 $3,000

Total Bookings $200 $850 $1,900 $3,200 $4,500

Revenue $50 $500 $1,400 $2,600 $4,000

Operating Income ($200) $(150) $ - $300 $700

One New Rep = $200K Loss in Year One;$700K Profit by Year Five

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The Pain of GAAP Per Sales Rep

Year 1 Year 2 Year 3 Year 4 Year 5$50

$500

$1,400

$2,600

$4,000

-$200 -$150

$0$300

$700

Revenue

Operating Income

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Compounders Not Rocket Ships

Time Period Year 1 Year 2 Year 3 Year 4 Year 5

5-Year CAGR

Omniture 2003-08 138% 108% 86% 79% 107% 103%

SuccessFactors 2005-10 150% 95% 77% 37% 35% 74%

ExactTarget 2005-10 58% 54% 51% 32% 41% 47%

Responsys 2005-10 35% 62% 33% 33% 41% 40%

SalesForce 2005-10 60% 51% 44% 21% 27% 40%

Netsuite 2005-10 85% 62% 40% 9% 16% 40%

WebEx 2001-06 72% 35% 32% 24% 23% 36%

Concur 2005-10 35% 33% 67% 15% 18% 32%

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Invest to Win

Profit

Time

Loss

Company X

ExactTarget

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Winning in SaaS

Web Analytics#1 Omniture - $1.8B

#2 Webside - $.3B

Web Conferencing#1 WebEx - $3.6B

#2 Placeware - $.2B

CRM#1 Salesforce - $17.5B

#2 X - $.1B

Distribution + Technology

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As hot as it is, remember…

It’s still no Lady Gaga.

32Confidential

Rory O’Driscoll, Managing DirectorScale Venture Partners

Software as a Service & Cloud Computing:The Reality & The Opportunity