SmoothSpan Blog

For a long time VC’s and other investors bemoaned SaaS.  I head more than one say that nobody would ever be able to raise as much money as Salesforce did to IPO–$70M–so you just had to figure out how to do it much more cheaply than Salesforce had.

This morning I read that Marketo has raised a whopping $50M round, bringing their total to $107M.  Zuora is not far behind, raising $36M for a total of $80M.

I guess the conventional wisdom was wrong, and it hasn’t been that long ago that I was hearing that companies would have to be able to get there for a lot less than $70M.

This trend is interesting.  Marketo and Zuora are great companies, but they’re niche players compared to Salesforce, and SFDC was much earlier to the SaaS party.  They also have a lot more competition than it seems like SFDC did at the time.

I’m not sure what the justification is for these valuations and sums raised.  I do know there is a dearth of significant new SaaS companies in the pipeline.  You can build consumer Internet companies all day long on the Ramen budget Sand Hill has decreed is what works, but not Enterprise Software companies.  I don’t think Salesforce, Marketo, or Zuora could’ve been created out of a Y Combinator-like scenario.  In other words, if today’s rules had been in effect, they never would’ve been founded.  Interesting to wonder what companies are not being founded today because of those rules.  I did notice that there is a small but growing backlash against the whole capital-efficient-minimum-viable-product thesis.  Even Scoble had a rant on about it and he likes every shiny new thing.  Even shiny has a much higher minimum viable bar these days.

The VC market, like any other investment market, is a strange combination of herd behavior and contrarianism.  Being a contrarian is risky.  You have to pick the right time and the right investment thesis to do it.  Much safer to follow the herd right up until valuations are so high and competition so fierce that nobody is making money.  That’s when you need to start placing some contrarian bets.

I’ll be interested to see if the VC world gets back to funding more early stage Enterprise Software that may need significant capital even to build a product.  This may also simply be a judgement call to bet on the latest possible companies that will be ready to IPO soonest.  The former is a contrarian play, the latter a herd play.  Like I said, you need both, and you need to time the application of each appropriately.