SandHill.com | Finance | New VC Rules for On-Demand Software

New VC Rules for On-Demand Software: "
Expansion round specialists, Insight Venture Partners, provide their list of must-haves for investing in on-demand software companies.
Deven Parekh and Peter Sobiloff, Insight Venture Partners
Sep 23, 05
On-demand is the big game in software today.

We're bullish about the prospects for recurring-revenue software solutions. Whether you call them application service providers (ASPs,) on-demand vendors, or even a subset of software-as-a-service (SaaS) companies, the opportunity is the same: a growing company with streamlined operations that provides a hosted, pay-as-you-go software solution which earns them a steady revenue stream, as well as a satisfied enterprise client base.

But not every software vendor can play successfully in this emerging field. We use a new set of criteria we use to analyze on-demand software vendors as VC investment opportunities.

The Potential for On-Demand
There is a new and emerging market for best-of-breed ASPs. The underlying business model shift away from perpetual licenses to recurring revenue will enable smaller vendors to compete and grow in today's world of software megavendors.

The recurring-revenue model has several advantages for customers. Turn-key implementation. Low maintenance efforts. Continued vendor attention. These advantages will spawn a host of vendors that offer today's enterprise applications via an ASP or recurring-revenue business model.

After these recurring-revenue vendors grow, you'll begin to see ASP rollups: on-demand vendors who team up to offer best-of-breed, on-demand suites of enterprise solutions.

You'll also see some vendors - Salesforce.com for example - emerge with a much bigger footprint in the "