A recent article in the Wall Street Journal outlines how some VC firms are slowly beginning to understand the business model of On Demand Software as a Service Companies.
Most VC’s have traditionally concentrated on investing in companies after the seed stage of funding. VC’s normally look for a seat on the board, preferred stock and control of a firms operations in exchange for a multimillion dollar later round investment.
The catch with todays Enterprise 2.0 – Web 2.0 – SaaS companies is that with a dedicated team and a great idea, $500,000 is in most cases plenty to get a beta product introduced via the internet. With OpenSource development tools low cost storage options like Amazon S3 and SaaS delivery models it is much easier in 2008 to develop a software solution than it was 5 years ago.
Also having heard stories of how Facebook and other Web 2.0 – Enterprise 2.0 companies were able to get a successful beta product developed without the overbearing presence of a traditional VC firm, many of the current crop of SaaS companies are for the first time NOT considering spending a substantial amount of time and effort seeking VC funding.
Investments in the $100,000 to $500,000 range were until recently the sole province of Angel Investors. But many VC’s; fearing that they will be shut out completely from some of the up and coming Enterprise 2.0 and Web 2.0 companies, have changed tack and now consider the smaller investments worth their time.
These developments bode well for most SaaS entrepreneurs as they will conceiveably have access to additional sources of funding that were until recently not available to their firms.