Cloud Stocks: SaaS Companies Need A PaaS Strategy

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Includes: CRM, HUBS, INTU, TEAM, WDAY
by: Sramana Mitra
Summary

It's well known in the technology industry that companies, once they grow to a certain size, tend to expand further through acquisitions.

For SaaS companies, it's a lot easier to integrate adjacent products if they're built on compatible technology stacks.

Investors and stock analysts should pay close attention to the PaaS strategies of their cloud portfolios.

I have been analyzing SaaS companies for over a decade. More recently, I have been looking into their acquisition strategies, as many have now reached critical mass and need to expand beyond the one product that made them successful to begin with.

Some clear trends are evident in the industry:

First, SaaS companies are acquiring capital-efficient startups much more readily than heavily funded ones. Bootstrapped startups are particularly popular as acquisition targets. We've covered several prolific acquirers of small startups:

Second, some SaaS companies have launched definitive Platform As A Service (PaaS) strategies.

In this piece, I would like to discuss why SaaS Companies need a PaaS strategy.

It's well known in the technology industry that companies, once they grow to a certain size, tend to expand further through acquisitions. For SaaS companies, it's a lot easier to integrate adjacent products if they're built on compatible technology stacks. For a company that intends to grow through acquisitions, launching a PaaS is the best way to ensure that adjacent products built on compatible stacks are growing in their eco-systems, but doing so without taxing their P&Ls. When the time comes, acquiring and integrating such companies tend to be relatively easier and seamless.

Salesforce.com (NYSE:CRM) has thus far done the most successful PaaS strategy of the entire industry. Let me give you an example. Apttus was a contract management application that was built entirely on Force.com back in 2006 and bootstrapped to more than $5M in revenue before the company raised any money. It went on to do over $160M in revenue and raised over $400M in funding before being acquired by private equity firm Thoma Bravo for over a billion.

Apttus' biggest competitor SteelBrick was also built on Force.com. In 2015, Salesforce acquired SteelBrick for an estimated $360 million. Prior to the acquisition, SteelBrick had raised $78 million.

My prediction is that Salesforce.com will acquire more players from their PaaS ecosystem in the upcoming years. Their ecosystem is brimming with possibilities.

Meanwhile, Workday (NASDAQ:WDAY), Hubspot (NYSE:HUBS), Shopify (NYSE:SHOP), Intuit (NASDAQ:INTU), Atlassian (NASDAQ:TEAM), Zendesk (NYSE:ZEN), Xero and many others have launched PaaS strategies.

Those that haven't should do so soon.

On the sell side, if you are a SaaS entrepreneur looking for an exit, try to align with a PaaS ecosystem.

Investors and stock analysts should pay close attention to the PaaS strategies of their cloud portfolios.

And keep reading my Cloud Stocks coverage for more on PaaS.