The Principal Focus
This has been the #1 topic in the meetings I’ve had with software CEOs and board members over the last 3 years.
And it is understandable.
Take Esker, a French vendor of Document Automation software I recently posted about on LinkedIn (read here
in French). Having successfully transformed from a traditional software vendor to a SaaS model, since 2012 its total revenues have surged +300% - 10 times more than one competitor. Better still, Esker’s market cap was multiplied by 7 in that period whilst its competitor’s only increased by 1.7.
High Stakes for Established Vendors
However, making such a move is high stakes and fraught with risks for established vendors with a large installed base and millions coming in every year in maintenance revenue. Esker embarked on that journey very early, so their transition was gradual.
So, how do you make sure that you are not jeopardizing the fruits of a lifetime’s labour by disrupting your own business model and possibly upsetting your customer base?
For shareholders, I have experienced 4 possible options:
- SELF-FUND a move to a PaaS (such as Azure) and gradually incentivise your customers choice to move away from OnPrem to SaaS/Hosted.
- KEEP your traditional model for existing product lines and invest into a new SaaS offering, rebuilding it from scratch in a separate Business Unit in which you take the best of your teams + new hires and run in Start-up mode.
- ACQUIRE a SaaS Business and build your new SaaS offering by leveraging synergies, both commercial and technical
- SELL in whole or in part your mature business to fund an independent, “pure player” start up in the same business area, using your expertise to go quickly and avoid mistakes.
Options 1 and 2 mean lowering profits during the 2-to-5 years it takes to build the service, impacting your returns on current equity and your immediate valuation metrics during that period.
2-to-5 years can seem a very long time for shareholders.
Options 1 and 2 are a real challenge to execute well because critical success factors differ substantially to run 2 different businesses in one. Maintaining momentum in the legacy business and behaving like a startup for the SaaS business, requires some kind of “Dr Jekyll and Mr Hyde” behaviours, with many opportunities to create tensions within teams. Changing market dynamics during the transition period also bring uncertainty and therefore, additional risks.
However, once the new offering is unveiled and starts to show results, it can cast a new light on the whole business. A former laggard can be re-positioned as a “born-again” company, leveraging a good installed base.
Option 3 requires cash, dilution or debt. Yet, if executed properly it allows the company to grow during the process, whilst gaining time. Valuation metrics should be positively impacted immediately, depending on the fit of the acquisition and the spin that can be created around the synergies. However, in the real world, quite a bit of energy can be put into combining different teams with vastly different cultures and technical expertise - A challenge for most entrepreneurs, who usually have strong personal relationships with a large proportion of their team.
I never hear Option 4 discussed openly, but I think it should be. It’s not a bad way to mitigate financial risks. It is a bold move and challenging in human terms. Beginning again as a start up after having run a larger business is not easy for everyone. Sitting on the Board and recruiting a CEO to run the show is often a preferred strategy when choosing this option.
What do you think?
Do you have an experience to share about morphing from OnPrem to Cloud/SaaS? - Or simply an opinion? Please feel free to share your opinions and experiences with us