VCs on SaaS

I've been asked several times recently why I'm focusing so heavily on Software as a Service.  The answer is very simple: the future of the model is inescapable.  I work in the team at Microsoft that is responsible for managing our relationships with Venture Capital firms and helping their startups succeed with us as business partners.  In the last 6 months I have heard in person - whether around a table or attending an event - from partners at Accel, Hummer Winblad, NEA, Norwest Ventures, and many others: "We are only considering software deals that include a strong SaaS component." 

John Hummer actually said it more directly, at the SDForum event on SaaS back in March 2005: "If you are going to pitch me a software deal, it had better be Software as a Service."  Emergence Capital is a $125 million fund established solely to finance SaaS plays.  BAVP made their interest clear way back in 2003.

Add to this the fact that many partners I've spoken with have said that the software side of their portfolios currently include between 1/3 and 1/2 SaaS plays, and the reason to focus on this is obvious: the trend is only accelerating.  IDC forecasts the delivery segment (not "market") to reach $10.7B by 2009. 

It can be argued that this is a new bubble, but unlike Web 2.0 (which sure smells like a bubble right now but perhaps it's an echo boom) it is a software value shift that is fundamental and easy to grasp, whether or not you're a member of the digerati.