The Daily Telegraph has an intriguing story about how Michael Jackson, former director of Sage Group may be looking to invest in the saas market. Entitled, Sage faces challenge from its ex-boss, the author says:
Mr Jackson, 58, told The Daily Telegraph that he is preparing to take a 25pc-30pc stake in a £10m Aim-listed software company which he will use as a vehicle to buy other businesses, including a small accounting software company.
Mr Jackson, who refused to be drawn on the identity of his targets, plans to spend about £1m of his own money to take the 25pc-30pc stake and a further £2m from his venture capital fund Elderstreet Investments, which has £80m under management.
That immediately raises questions about the identity of the target and while I could speculate, history tells me I’m almost certain to be wrong. The more important question is why Jackson is choosing to invest now and what might be his motivation.
Last year, his main investment fund sold its holding in Computer Software Group to IRIS at a handsome profit. IRIS was itself handed on in a private sale estimated at $250 million. It is reasonable to assume then that Jackson is looking to re-invest but in which direction will he go?
I spoke with Richard Holway, an investor in one of Jackson’s investment vehicles about the current state of the UK saas market. He agreed with me that it isn’t mature by any stretch of the imagination. “The seeds have only just been planted, they’ve not had time to flower,” he said.
By implication therefore, Jackson cannot be making a credible rollup play. However, he did tip his hand somewhat in the Telegraph article by declaring that:
It’s like DoS versus Microsoft Windows. For quite a long time DoS held out and suddenly it died and Windows took off. I do think it’s now coming.
That’s entirely wrong. The business models that supported accounting applications running DOS and Windows did not change from product plus maintenance. They merely shifted platforms.
The saas model is very different, requiring annuity based thinking and the potential for long periods of investment before realizing significant profit. Even if Jackson is thinking saas-ish then I wonder whether he realizes that the real opportunity is not necessarily in direct replacement but in disruptive models. That’s one reason why I believe companies like Xero, CODA and FreeAgent are well positioned. In their own unique ways, they are breathing fresh life into tired models and avoiding the so-saas trap which Phil Wainewright so elegantly describes.
But is Jackson’s alleged entry a genuine threat to Sage? Jackson doesn’t think so though the article’s author notes:
News of his plans come amid fresh questions over Sage’s long-term future. The company’s software has been seen as crucial to the running of its 5.5m business customers, 80pc of which have fewer than 25 staff.
However, the company has been criticised by some analysts for being slow to embrace “software as a service” (SaaS) – software that is hosted on remote servers and paid for on use, like a utility – for fear of cannibalising sales of its shrink-wrapped software.
Sage has been tilting at saas for more years than many of us can remember but has singulasrly failed to make any real headway. As Holway and I agree, it is incredibly difficult for a company like Sage to turn to investors and effectively say: ‘Oh by the way, we plan on taking zero upfront money from customers but are back end loading with services.’ It would be possible if Sage turned its attention to the bloated sales and marketing costs the company incurs.
Sage is sort of moving in that direction with its emphasis on maintenance revenues but even then its current strategy is flawed. Sooner or later, customers run out of reasons to continue using something that was designed for another time and which is not helping them run their businesses effciently. That’s where the saas innovators can score very heavily.
If I was on the receiving end of an offer from Jackson would I be willing to sell out right now? That depends on a multitude of factors but the answer is likely to be no. If anything, I would thank him for adding validity to the saas story and suggest he think about making angel or early stage investments. Why?
Building out a saas business to scale for the very small and small to medium sized business is not easy. Viral marketing can take you some distance in the right markets but not in all segments and not without a good amount of hard work. Even then, operating economically at scale is not as simple as it appears. FreshBooks with its 300,000+ new users since 2004 doesn’t exhibit too many technical problems and is said to be doing very well with zero external investment. But it is only one of many vendors vying for attention in this emerging market. In the meantime, an investing entrant like Jackson, with his years of experience in the accounting market, will most certainly be welcome. If nothing else, it is excellent PR for the saas contingent.
Endnote: I endeavoured to contact Jackson but was unable to get a response. If he does come in contact I will report his thoughts.
Disclosure: I have a tiny stake in FreeAgent. FreeAgent, Xero and CODA sponsor this site
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