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January 24, 2011

The Uphill Battle for SaaS Companies on Wall Street

Nicole Hemsoth

London’s Financial Times noted that after ten years in the making, cloud computing is becoming more of a reality for Wall Street, particularly on the Software as a Service (SaaS) front.

Still, while signs of life for cloud to emerge as a dominant trend are becoming more visible, this is a sector that some argue is resistant to large-scale shifts in how it how thinks about IT models.

This is even further complicated by the fact that it’s difficult for startups in the space to emerge as leaders when SaaS revenue models are hard to prove—at least in the short term view that many investors take.

Despite the proof end of the spectrum, Richard Waters of the Financial Times says that “Salesforce only just scrapes out a profit, but its operating cash flow jumped nearly two-thirds in the first nine months of 2010.” As Waters argues, investment sources behind companies that provide software via the internet to financial services firms are facing a challenge as they attempt to prove their revenue model as viable for continued investment.

Waters stated in his article, “Wall Street Sees the Light on Cloud Computing” that it’s no surprise it has taken so long for the movement toward cloud as an IT framework. Waters explains that this is “how it goes with big transitions in the underlying architecture of IT; there are many false dawns in what can appear to be inevitable long-term shifts—in this case, a new approach to information storage and processing, carried out remotely in large datacenters and delivered remotely via the Internet.”

Although the article does not look at the high-performance computing end of the market (the computation behind some of the most powerful decision-making processes at many financial firms) it does see applications such as those presented by Salesforce as a canary in the coalmine for clouds—strong in terms of user adoption and interest, but with a business model that takes a genuine sales force to pitch and support—especially for smaller SaaS startups aiming at the financial services market.

Waters says that since many SaaS companies catering to financial services markets are subscription-based, SaaS companies can look like they are not making a profit, even after several years, which makes it difficult for startup SaaS providers to break into the market, makes it harder to predict trends based on annual sales figures for large SaaS companies like Salesforce, and in general, it makes it difficult to look at the cloud trend for financial services as a whole.

Full story at Financial Times (Registration Required)