June 22, 2009
LucidEra’s Demise Doesn’t Diminish SaaS and Cloud Computing Promise
LucidEra’s decision to close its doors this past Friday will spark a new round of debate regarding the viability of the Software-as-a-Service (SaaS) and cloud computing business models.
Some established vendors will use this event as further proof that the SaaS and cloud computing models are not sustainable. Conservative IT and business decision-makers within ‘user’ organizations will use it to justify their decisions to stay away from these ‘on-demand’ solutions.
Ironically, the Wall Street Journal published an article today highlighting the growing efforts of many of the largest software and systems vendors to get onboard the on-demand services bandwagon. The article points out that these vendors have been reluctant to adopt SaaS and cloud computing strategies and offer on-demand alternatives because they undercut the value and profit margins of their legacy products. But, their customers are moving in this direction and they must respond or continue to lose business to companies like Salesforce.com and SuccessFactors.
I’m saddened to see LucidEra fail because I’ve liked the company’s principals and value propositions since their inception. The company’s founder, Ken Rudin, has been an important evangelist for SaaS. And, the company had developed some interesting ways to demonstrate the value of its offerings beyond simple ‘try and buy’ promotions.
But, I’ve been predicting for months that today’s tough economic climate is going to claim many SaaS and cloud computing companies who don’t have sufficient resources, compelling value propositions or clear differentiating qualities to sustain themselves.
The proliferation of players, combined with incentives within companies of all sizes to delay purchase decisions, has extended the salescycles for almost every SaaS company.
This is hurting many of the SaaS 1.0 vendors in particular who had to make significant investments in their SaaS architectures and delivery capabilities before less expensive platforms and computing resources became available from companies like Salesforce.com and Amazon, for example.
Venture firms, who are facing severe pressures from their limited partners, have put much higher hurdles in place when considering new rounds of funding for their current portfolio companies, as well as prospective start-ups.
LucidEra found itself in this bind and wasn’t able to find a buyer to rescue it from an untimely death. Larger SaaS companies, as well as many legacy vendors, are also facing financial constraints which are precluding them from making acquisitions. Other prospective buyers are willing to cherry-pick the assets or personnel rather than purchase the entire enterprise.
Just as the demise of individual car companies or banks doesn’t spell the end of the automotive or financial services industries, the failure of LucidEra doesn’t represent the end of the SaaS era. It also doesn’t mean that SaaS-based business intelligence and analytics can’t succeed. Customer interest and adoption of SaaS-based BI/analytic solutions is growing. But, there isn’t enough demand to support the myriad of SaaS vendors competing in the market.
The demise of start-ups, like LucidEra, is a natural part of the evolution of any new marketplace. It should not be viewed as the beginning of the end of the SaaS or cloud computing industry.
But, it will make it more difficult for other small SaaS companies to convince IT/business decision-makers that they can survive in an increasingly tough economic and competitive environment.
The key will be for SaaS and cloud computing companies to clearly demonstrate the measurable business benefits they can generate to offset these concerns.
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Good article. LucidEra offers a couple of important lessons that this economy is teaching software firms:
- There may not be any more venture money out there for some firms. LucidEra had been looking for awhile and no one wanted to take the lead. Last quarter almost 25% of all VC exits were asset sales.
- Just because you are running a SaaS company doesn’t mean you will survive the recession, as you mentioned in an earlier article. You need to be a well run SaaS company and invest your resources wisely and keep an eye on your business metrics.
- In a crowded space, you have to be price competitive. I spoke to someone today who said although LucidEra’s products were good, they were very expensive relative to Salesforce.com’s basic licenses. You may need to offer a free solution for a period of time, so have your cost structure as lean as possible. Move to the Cloud now.
The silver lining is that many SaaS firms are still doing well during this recession and Intuit and SAP’s announced shifts to SaaS in the last 30 days means the market is moving our way.
Kevin Dobbs — June 22, 2009 @ 7:31 pm
SaaS start-up closing shop is the lesser of two evils.
There’s a bigger question here, do I go with a start-up product or not? Not all start-ups are going to make it. That’s a fact. If one is buying a into start-up product with a perpetual license model, that goes belly up, then one probably needs to write off the whole capital expense/investment (vs. a SaaS product with a subscription pricing model – one only pays for what one used it for). Also, most likely, more time was spent into integrating a non-SaaS product into the customer’s environment, which again, amplifies the losses.
Tsahy Shapsa — June 23, 2009 @ 10:29 am
While I’m not convinced that LucidEra’s downfall is harbinger of a total SaaS meltdown, it is difficult to believe that the SaaS category had nothing to do with it. First, SaaS companies seem to be more capital consumptive than their on-premises bretheren — e.g., remember the massive losses that NetSuite sustained for years in building their business. Second, I’ve always wondered how SaaSable BI is as a software category.
While I believe that ERP/CRM type apps SaaS-up very nicely and easily, I’m less convinced about SaaSy BI. See my thoughts here for more: http://bit.ly/NCChK
Dave Kellogg — June 24, 2009 @ 7:50 pm
Jeff, this indeed reinforces the discussion we had about Hybrid Delivery. I maintain that most pure SaaS offerings by small startup’s cannot really survive the SaaS economics, given the revenue trickle and absence of economies of scale. I see a widening gap between SaaS demand and supply (http://tinyurl.com/pcome7) that, with present technologies, can only be narrowed by using Cloud Enabled Application Platforms which support hybrid delivery models.
Avigdor Luttinger — June 25, 2009 @ 3:16 pm
What people fail to understand about these businesses is that they are “back-end loaded”. You have to build the platform to scale, then go out and acquire customers. Because of this, it takes both time and capital to break through to cash flow profitability. Anyone who thinks these businesses will take capital like software copmanies is fooling themselves; they can be much more capital intensive than building a software company. And as a result, in tough economic times, these businesses can fail if they become capital constrained. One would have to look further under the hood at lifetime value of a customer economics to know if LucidEra failed because it lacked traction or because of a lack of capital and/or lack of business fundamentals. It is entirely possible that the cause is the latter.
Derek Pilling — June 25, 2009 @ 5:50 pm
Jeff, You’re right that one lesson we should not draw from the experience of LucidEra is that there’s some fundamental flaw in the SaaS model.
SaaS firms should also be careful with any lessons they take away about spending. Of course, they need to be especially prudent with expenses, given the longer payback period. But if they’ve put in place programs and processes that can generate lifetime customer revenues that exceed the costs to acquire and support those customers, they shouldn’t under-fund those programs.
If you’ve built a Ferrari, why leave it parked in the garage because you’re too cheap to fill it with gas? There is in fact risk associated with SaaS firms spending too little. (http://saasmarketingstrategy.blogspot.com/2009/05/risks-of-spending-too-little-on-saas.html)
Peter Cohen — June 27, 2009 @ 8:02 am
[...] the greatest promise of a solid exit. The most notorious casualty of this strategy in 2009 was LucidEra, who pioneered the SaaS business intelligence (BI) market, but was not able to generate enough [...]
THINK IT Services » Blog Archive » A SaaS/Cloud Computing Scorecard for 2009 — January 3, 2010 @ 4:01 pm