10.09.19

Investing in technology businesses (part two)

On cloud nine

Tom Matthews

At Pemba, one of our early areas of focus with technology investing is understanding the business’ operating model and where it is on its cloud journey.  We look for businesses that are either already offering a cloud solution or those that are well progressed on their journey to the cloud.

What is the cloud?

The cloud can be thought of as the internet.  If you’re using cloud based software, you can use the internet to access that system whenever and wherever you are.  You just need an internet connection and the ability to log into the system via a web browser.  You can be on a desktop computer, phone, PC or tablet.  You can be at the office, home or even at the airport.  It doesn’t matter, as long as you’re connected to the internet.

What is SaaS?

SaaS stands for software as a service and is a method of software delivery and licensing in which software is accessed online via a subscription, rather than bought and installed on individual servers or computers.  The software application runs on the SaaS provider’s servers.  The third party provider then is responsible for the security, performance and maintenance of the application on their servers.

Cloud vs SaaS

Cloud computing and SaaS are two different, but closely related terms:

  • With cloud computing, a user is able to customize and manage an application on a server that is hosted remotely by a third-party like Amazon Web Services.  The user is given access to their data on those servers via the internet
  • With SaaS, the user no longer has to maintain either the physical servers or the cloud based software application.  Instead, you pay a subscription to access an already developed software application via a web browser.  You don’t have the responsibility of maintaining the software.
Australia needs to get its head in the clouds!

The rapid advancements in computing power, bandwidth and cloud infrastructure over the past two decades has enabled a new wave of SaaS companies to provide powerful software solutions directly via the internet.  However, SaaS adoption in Australia is still relatively behind countries such as the US the UK.

Security concerns regarding the storage of sensitive or confidential information on third party systems, as well as slower internet speeds in Australia have impacted SaaS adoption.  However, improvements in cloud security and infrastructure have reduced these issues and SaaS adoption in Australia is increasing.

What are the advantages of SaaS?

There are many benefits to SaaS.  You don’t have to host, maintain, upgrade, or worry about data security of the servers for your software applications.  You have access to your data in real-time, whenever you need it.

Older legacy systems (known as ‘on-premise’ solutions) typically are housed and operated on the servers of the client.  The in-house servers, data storage and dedicated IT personnel responsible for maintaining hardware and infrastructure can be costly, particularly for SMEs.  Cloud solutions can dramatically reduce these costs because you just pay to rent space on the hosted servers.  With SaaS, you usually pay by subscription to have access to the software and your data, which allows you to scale resources as you need.

Another key advantage of SaaS solutions is they allow for immediate product updates, new releases and upgrades, whereas legacy systems only receive periodic version releases of on-premise software.

How do the different revenue models work?

Legacy solutions and SaaS providers also have different revenue models.  Legacy products are typically charged via a large one-off implementation fee with ongoing annual maintenance and / or license fees.

Typically, SaaS applications are licensed on a subscription basis.  You pay a monthly fee based on level of service and number of users needed.  Accordingly, SaaS businesses usually have a higher proportion of recurring revenue than companies offering on-premise solutions.

Why cloud is important – future proofing the investment

While clients might not necessarily be demanding a cloud based solution today, a time will likely come in the future when they will seek to switch from an on-premise solution to a more modern cloud platform.  Having to redevelop a software solution so it is pure cloud can be a very costly and time consuming process.

Accordingly, at Pemba we look for tech businesses that have already made either all or the majority of this investment in order to “future-proof” their business.

What next?

If you are an owner of a technology business and wondering if your company is suitable for growth capital, or just want to find out more about tech investing, then please contact and I’ll be happy to share my thoughts.

Photo by eberhard grossgasteiger on Unsplash

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