Venture capitalists looking ahead to 2007 are optimistic about the financial potential of software as a service (SaaS), even though industry data shows that total investments in software companies are declining.
SaaS, which allows companies to access applications hosted remotely via the internet, typically while paying monthly fees, offers a more predictable revenue stream and lower research and development expenses to software vendors than packaged software products, says Jeff Horing, co-founder and managing director of New York-based Insight Venture Partners.
"Overall, if you can build a successful company it's a much better business model than licence sales," Horing said.
Total venture capital dollars invested in software declined 19% between the second and third quarters of 2006, and the number of software deals reached its lowest point in a decade, according to the Q3 2006 MoneyTree Report, compiled by PricewaterhouseCoopers and the National Venture Capital Association.
Horing said he and other investors at his firm are sceptical about growth for companies looking to make their mark by selling enterprise software applications, as opposed to those that market the SaaS model.
"From our view, convincing lots of Fortune 500 companies to buy a complex piece of application software is very difficult," he said.
Horing would rather invest in established companies that are looking to enhance profitability through buyouts, rather than growth, he said. To that end, Insight Venture financed a recent deal that allowed Primavera Systems to bolster its line up of project management software by purchasing two smaller companies.