Can the financial crisis help SaaS companies in the long term?

No doubt that the financial crisis will hurt everyone. With a frozen financial system the entire idea of US capitalism (borrow cash, put it to work, grow to be profitable, invest again…) is on hold. Eric Schonfeld concluded today that VCs and Startups will not be immune to the crisis and I can not agree with him more. The one thing to remember though, is that a financial Crisis, a war or other disasters impact some people/industries/countries more than others, so while no winners will emerge, some may lose less.

One of the sectors that may lose less is the little (but fast growing) SaaS (Software as a Service) industry. Here is why:

1. The SaaS model is perfect for an unstable economy- the business sector may spend less but no one will ever stop spending. Why? Since one can’t earn without spending. I do predict that enterprises will put major investments on hold (not a great time to budget 10M for an Oracle implementation) but it may be a great time to subscribe to a SaaS service that makes you more efficient/profitable for a much smaller amount and measure the results. It is a much less risky approach that may work for SaaS companies that add real value, especially around sales or cost management. 
   
2. Most SaaS companies are small and nimble. CEOs with open eyes will be able to reduce costs and surf for much longer with the same amount of cash they have today.
3. SaaS create ultimate flexibility- you have 30 people in sales? license 30 seats of salesforce. You have added 10 more? license 40. You shrink to 20? reduce the number of seats accordingly. When costs are per employee and can be modified every month/year, you can adjust spending to the current state of the market so much better. Try to do that with an on premise software.
4. SaaS model can overcome budget freeze: what many large companies will do is call a budget freeze. No more spending on any large projects. It is the the ultimate weapon for the CEO that buys time until budgets can be redesigned to face the new reality. It does not say, however, that VPs and department heads can not spend- they are just limited in amounts. It may well be that small SaaS projects can slip through the cracks, even in days of budget freeze. 
5. VCs will not cut off the cord- VCs will keep investing because this is what they do. They will be more conservatives, they will let mediocre companies die, but they will keep investing in good markets and companies. I can expect less investments in companies with no tangible revenue model but companies with recurring revenue may be a good safe bet these days. 

Lastly, Phil Wainewright from ZDNet summarized his view point on the topic:

In summary, my guess is that you’re going to hear and see conflicting signals. Some of the best-known names in the SaaS business are going to show some short-term hurt as large enterprises cut back on subscriber headcounts, especially in financial services. But if the hurt spreads into the wider economy, SaaS could become a refuge that benefits from others’ misfortunes, finding opportunities from canceled big-ticket projects and other cost constraints. Unfortunately, not all SaaS players will have enough funding to carry them through, but those with a strong enough capital base or cashflow model will be well-placed to profit.

So in these not so easy days, it is important to stay cool, realistically evaluate what you have and what to do based on that. Even in the best of years some companies win and some lose; chances of losing are just higher these days, but are far from being 100%. 

Update 10/1/2008: couple of more points to signify the above: In the last 6 months, couple of promising public SaaS companies preformed much better than NASDAQ. Success Factors (SFSF) and Taleo (TLEO) are 18% and 14% higher than NASDAQ performance at the same time. Moreover, EchoSign reported a great Q3 despite the economy. Game’s on, but there are sure hopes for good SaaS companies.