Why is SaaS (Software-as-a-service) so popular and why does it raise so much money

Why is SaaS (Software-as-a-service) so popular and why does it raise so much money

SaaS is short for software as a service where you pay a subscription fee, sometimes that’s monthly or yearly to get access to something. Some popular SaaS products are Microsoft Office 365 (Canada, US affiliate links), G suite which is known as Google apps, and Zendesk. It has been known that companies that switch to SaaS can save around 15% according to the analyst firm computer ecomomics (you can read the details about this over at computerworld.com.

The reason why SaaS is becoming more popular is many reasons, it’s easier for the IT department, reduces costs, updates are built in, and makes telecommuting easier. These are just some of the popular reasons why SaaS is becoming more popular. Thenextweb covers very well why more businesses are using SaaS.

Now that you know what SaaS is and why it’s so popular it’s time to talk about why do SaaS companies raise so much money. If you take a look at Techmeme you will usually see at least one mention of the word raise. At the time of writing there were 10+ mentions of the word raise so you can see that many people and companies raise money. The answer to why they raise so much money is a number of reasons, SaaS is hot right now and people love it so investors invest in companies that do that, Cisco’s global cloud index (2016 – 2021) predicts that by 2021 75% of the total cloud workloads will be SaaS, in September 2018 Gartner had predicted that SaaS revenue will reach $85 billion in 2019 and even Crunchbase reported that in Q2 2019 SaaS had a 11 times revenue multiple.

There are many companies that raise money but don’t actually pay it back, or even make a profit. In reality anywhere from 10% to 20% of all investments an investors makes will actually return any sort of profit. In fact some companies don’t even plan to make a profit when they raise money, Medium is a well-known company (and website) but since 2014 they had trouble making themselves profitable and even when the company had raised $132 million they need to raise even more money. Thanks to Nieman Labs for the history and the links. WeWork is also another company that is well known and has raised tons of money (At time of writing, Crunchbase reports $ 20.8 billion, but Craft reports $19.2 billion) but unable to turn a profit.

I know what you may be thinking, if making an investors money back is so low why do investors actually invest. The reasons are up to the individual investor but reasons include they like what the company is doing, or they like the people behind the business, or various other reasons such as they want to coach the business. Businesses also need investors as they may not be able to get a loan from their bank or from friends and family.

Now that it is known what SaaS is and why it’s so popular it’s time to know why it keeps gettting news coverage, it keeps getting coverage because companies want to promote themsleves saying they raised x amount. Some people say it’s a good idea to do some sort of public relations when you have raised the money and some say it’s a horrible idea. The companies that think it’s a good idea to announce when they have raised money are the companies that are in the news, sometimes companies will raise money but quietly announce it on their website by adding an investors page, and sometimes a company will stay silent because they feel it is the right thing to do.

What happens when the news coverage isn’t enough and a business fails, most businesses try to do what they can to survive by either raising more money or changing what they do but if that isn’t enough then they will shut down. Sometimes there is press about these but most of the time the companies just want to shut down quietly and get on with the rest of their life. TechCrunch so well covers why Omni (which raised $35 million) shut down and it was mostly due to “venture capital-subsidized business offering a convenient service at an unsustainable price”. Now what about the investors, do they get their money back? Most likely not, if the company declares bankruptcy then the investors may get some of their money back but if the company just shuts down then the investors get $0 back which makes investing in a company very high risk.

Because investing in companies can be such high risk there are many investors who at some point choose to stop investing, this may be due to the low amount of money they have left, they no longer want to risk their money, or they don’t have anymore time. Tucker Max who is a former angel investors explained on Observer why he stopped angel investing.

To wrap up, software as a service is a subscription that you pay in order to continuous access a software, and it’s so popular because it is hot right now and investors want to invest in hot companies hoping to make their money back.

Gregory

Gregory is the owner of Gregory J Development and he loves helping people with their websites. In his spare time, Gregory listens to music, writes (not just for the blog here), and is trying to read more often.