Debating the importance of Software-as-a-Service long ago became a great way to flag yourself as a luddite.
The enterprise software market has become the SaaS market, and historic enterprise titans like Oracle, SAP and Microsoft have been working feverishly for years to reposition themselves as cloud companies. But revolution means change, and it’s the new entrants that have defined SaaS.
Since the IPO of Salesforce, the first true enterprise SaaS titan, in 2004, SaaS companies across the U.S. have created over $200Bn of public market value, generating a wave of returns for VC-backers that has helped to fuel the recent frothiness in private markets.
We are only just getting started, however. While consumers were much quicker to embrace the cloud, social, and mobile –- Facebook and Twitter alone have a combined market cap that is more than half of the aggregate market cap of every single public SaaS company! –- enterprises have been slower to move (but they are catching up).
Finally, you can’t find a credible CIO in corporate America anymore who isn’t cloud first in her orientation. Forrester estimates put this continuing transition as likely to generate over $150B of annual new SaaS expenditure by 2020, and our analysis suggests that will swell $300B annually by 2025. That could equate to over $1 trillion of market value.
The SaaS winners to date have been largely concentrated in Silicon Valley, with a secondary stronghold in Boston.
As the market continues to mature, and as we watch a blossoming of SaaS activity in New York City, we believe that NYC is poised to become a genuine leader in the formation of companies leading the next wave of enterprise transformation. Ultimately, we believe that NYC could even challenge our friends in the Bay Area for SaaS leadership, and a deep dive into the data on recent activity appears to bear that out.
NYC SaaS Activity Rapidly Accelerating
To take the temperature of the SaaS ecosystem in New York, we first looked at investing activity. Measured by number of funding rounds or dollars invested, the trend is clear – investments in NYC SaaS are increasing at a rapid pace.
How does the Big Apple stack up against the Bay? To find out, we looked at financings across the entire tech ecosystem in both the Bay Area and NYC to calculate the portion of overall startup activity in each area that was made up by enterprise SaaS companies. Our results show that, back in 2009, SaaS startups made up around 20% of overall investment activity in both NYC and the Bay Area.
However, if we fast forward to 2014, we’ve seen SaaS startups steadily growing share of the NYC investment activity, while staying steady in the Bay Area. Not only is SaaS activity growing in NYC, but it is dramatically stealing share from traditional strengths in AdTech, consumer, and FinTech.
NYC Closing the Gap
Are more SaaS companies being funded in NYC vs. the Bay Area? The short answer is no…or, perhaps more accurately, not yet.
Looking back to 2009, the number of investment rounds in NYC SaaS companies made up just 25% of the number of investment rounds in Bay Area SaaS companies. By 2014, that figure had grown to 50%. Total investment dollars tell a similar story, with NYC SaaS companies raising just 15% of the dollars that Bay Area SaaS companies raised in 2009, but increasing to 33% by 2014.
Whichever way you slice it, NYC SaaS startups are closing the gap to their west coast brethren. Will NYC catch up to the Bay? That seems perhaps a stretch – while the gap may be closing, the Valley is still running awfully fast, and is hardly showing signs of weakness. But regardless of who’s out in front in another 10 years, it’s increasingly hard to argue against NYC’s increasingly relevant role in the market.
Ones to Watch
The NYC SaaS ecosystem has seen some notable successes already. Medidata Solutions, a SaaS platform used by the pharmaceutical industry, was arguably the first great vertical SaaS IPO success story. Medidata was spawned out of a research lab at Columbia, went public in the depths of the recession, and currently trades at close to a $3 billion valuation.
We’ve also seen successful exits such as the acquisition of Buddy Media by Salesforce, and the acquisitions of TXVia and Divide by Google, to name a few (disclosure: both TxVia and Divide were Primary Venture Partners portfolio companies).
But it’s looking at the pipeline that gets us excited for NYC’s future potential as an enterprise SaaS powerhouse. Companies like Datadog and Digital Ocean are making stunning headway in the IT infrastructure space, delivering on the promise of big data analytics and cloud hosting, respectively, for IT professionals. MongoDB is redefining the database landscape with its open source model.
In the world of social media, many enterprises look to Sprinklr, a recent addition to the private Unicorn Club, for the software tools to manage their social media presence. And if you want to make sense of all that social media data, look no further than NYC’s own Dataminr to transform those public datasets into actionable signals. Across the spectrum, many NYC-based firms are poised to become breakout stars.
Why Will NYC Lead the Next Generation of SaaS?
The SaaS landscape is rapidly changing as IT megatrends continue to redefine the keys to success for enterprise startups. Web and mobile natives today make up an increasing percentage of the workforce, which has led to an explosion of enterprise-focused applications catering to their increasing demands for always-on, mobile technology and data access. In this environment, simply offering a cloud-based software solution or mobile app is not enough to ensure success. The most useful tools are those that are tailored to the specific needs of the enterprise user, which means incorporating industry-specific expertise to develop a solution that truly addresses the unique needs of a given user population.
The early days of SaaS were dominated by horizontal applications – companies like Salesforce, SuccessFactors, ServiceNow and Workday all built SaaS monsters by addressing customers across any vertical market. Early on you had to be horizontal – there just weren’t enough customers in a given vertical who were comfortable with the SaaS model to build large, vertically-oriented businesses. But as SaaS acceptance has exploded, we’ve seen an explosion of vertical SaaS opportunities.
It is these vertical opportunities that we think will be particularly successful in New York. In today’s SaaS market, success is less than ever a function of surmounting the early tech challenges of building SaaS platforms – challenges best tackled by the engineering prowess of Silicon Valley. Today we believe success is driven much more by understanding of and access to customers – dynamics that drive the creation of product-market fit and early access to customers.
So where can a fledgling SaaS company optimally position itself to access the domain expertise to develop the right product and access the customer base to sell that product? I’ll give you one guess…
NYC: The Domain Expertise Capital of the World
Simply put, the breadth of domain expertise in NYC is unparalleled and a critical asset for enterprise SaaS startups. Medidata’s founding and ultimate success was in no small part based on its position squarely in the middle of the Philly-to-Boston pharmaceutical/biotech corridor. NYC startups targeting the real estate sector have the largest market in the world at their doorstep. In the worlds of finance and insurance, many of the largest companies in these sectors reside within Manhattan’s 23 square miles.
Squeezed into that same space are some of the biggest names in advertising, publishing, consumer brands and professional services. With one in five of the S&P 500 headquartered within 75 miles of NYC, SaaS companies have many of their biggest potential customers right on their doorstep, seemingly no matter which industry they target. Which sectors are we watching most closely for vertical opportunities? Pay attention to real estate, healthcare/pharma, consumer/CPG and professional services, amongst others.
But what about the opportunities to target the small and medium-sized business landscape? Does NYC make sense for these markets? If you think having 5x the number of SMBs as either San Francisco or Boston suggests opportunity, then the answer is yes.
With over half a million of those businesses in the city, by far the nation’s largest base of SMB customers are on our doorstep too. Such density of customers drives innovation, facilitates business model experimentation, and makes early customer acquisition especially efficient. These dynamics have aided the creation of SMB SaaS successes like Booker, Namely, SinglePlatform, Squarespace, and Yodle.
A Concrete Jungle Full of Talent
Strong talent is a key consideration for any startup. NYC stacks up well due to high numbers of well-trained graduates joining tech startups after stints at the east coast campuses of firms like Facebook and Google, or some of the biggest consulting, banking and law firms. Many graduates are drawn to the Big Apple from across the country, seeking the dynamic and diverse lifestyle of the cultural center that is NYC. The same sociological dynamics that have led to the repatriation of San Francisco and Boston from the Valley and Route 128 are leading talent from all over the world to come build technology businesses in the “World’s Greatest City.” Enabled by this inflow of talent, NYC tech jobs have grown at 4 times the rate of total job growth in the city since 2009.
The city has built a strong base of native capital providers to nurture this growing SaaS ecosystem. SaaS startups now have at least 20 committed seed investors to pitch in their home market. With a growing base of talent, a full complement of capital providers, and core market dynamics that play directly to the trend towards verticalization of the SaaS landscape, we expect NYC’s position to only strengthen in the coming years.
Perhaps our only outstanding question at this point is will our growing SaaS ecosystem be able to build standalone anchor tenants in the NYC community, taking their place among the other industry leading firms that are headquartered here?
Ultimately, to challenge the Bay Area for market leadership, we need a wave of Medidatas to build additional pillars supporting the NYC platform. As Medidata co-founder and President Glen de Vries said to me, “The East Coast technology scene, which New York has become the epicenter of, is based on people who came from within existing industries, and decided to use technology to reinvent them. It’s a stark contrast to the model of technologists looking for businesses to reinvent. That’s why NYC is the perfect platform for vertical SaaS. We’re certain Medidata won’t be the only public vertical SaaS company here, and we expect the whole ecosystem to thrive.”
See our full NYC SaaS presentation on Slideshare.