Activant's Greene Street Observer No.17

Founders, Partners, and Friends,

SaaS replaced license and maintenance, so will AI replace SaaS. There is over $2T of software spend globally that is up for grabs - the next great replacement cycle is under way. Let’s look to the past to see how this might play out.

AI spelled the beginning of the end for pure SaaS – the new models will be AI embedded software. And the difference between the old software and AI embedded SaaS is that the ROI will be very clear. We will expand on this in the future, but of the capital spent on software there was a bump of productivity gains form the mid 90s until about 2010 when productivity slowed. The ROI on the incremental SaaS product isn’t what it used to be, but the ROI on the AI embedded SaaS, will be very clear, adding additional revenue or cutting clear cost. This is a step function for the enterprise, and eventually the consumer.

Prior to the SaaS boom, on-premise license and maintenance dominated the software industry for 30 years or more. Companies charged an upfront license fee for the software and then typically 20% of the license each year for an ongoing maintenance charge. The benefit of this model is that enterprises had more control over the software, and the software companies were profitable because of the upfront license fees.

As networking technology developed, threats emerged to the on-premise license and maintenance model. Application Service Providers (in the early 90s) were the modern predecessor to SaaS. These applications were generally single tenant and the first time since the 1960s that customers were co-mingled in data centers - they called it multitasking back then. SaaS came from a well worn path. I always get a chuckle when people think they invented something new that has deep roots in the past.

ASPs were short lived however. The challenge for Application Service Providers was infrastructure cost was extremely high, and most of the ASP companies went out of business. Citrix was one of the few survivors of this era, and it was founded in 1989, Concur was another. That date is right - 1989. The kernel of what became SaaS started in the early 1990s! This gives you a sense for how long a scale these cycles play out and also how important timing is both as founders and as investors.

After the dot com bust, Cisco servers became much cheaper (see our GSO #4) and the marketing people in Silicon Valley realized we needed a new name for software run in the cloud, and they came up with Software as a Service or SaaS.

The term SaaS first started appearing in 2001, and I have yet to do research to see who coined it, but it has been around for a long time. Most people point to the beginning of SaaS in 2010/12 but that is because their point of reference is wrong.

That said, we saw a big run-up in the middle of the cycle and hundreds of SaaS unicorns created during the 2009 to 2013 period. These aren’t just pure SaaS companies but also includes other companies that benefited from data and networking infrastructure (which allowed for mobile), such as Uber, AirBnB and Stripe. This begs the question, are winners evenly distributed across the cycles or are there better times to enter? We have analyzed most of the cycles and there is a local maximum early in the cycle and the overall max tends to be in the middle of the cycle.

As an investor we think about timing the cycles which is hard, but as a founder or management team, the key is start on the new cycle AS EARLY AS POSSIBLE. Every journey begins with a step. To use a real world example, retailers that waited until 2007 to launch their website struggled in comparison to those that launched in the 90s, even if those sites were terrible back then.

For those running companies, if you don’t have an AI strategy, whether you are an industrial business or produce consumer goods, start today. We are still relatively early in the cycle and long term winners have yet to be crowned. Driving an AI strategy and marketing are two different things but we see them conflated. Some of the best technology companies incorporate AI across all parts of their business but it isn’t mentioned in the product marketing. Why should a customer care as long as they have a better cheaper solution that drives real ROI? AI should be the new magic in tech and simply embedded.

Let’s go! 🚀

Steve Sarracino

Founder & Partner

Only 37 days left until Founders, General Partners, and Limited Partners gather in Munich for Activant’s first-ever Genesis Summit! We are so excited to unite members of our European and US tech ecosystems on September 26th for a curated day of discussions, speaker panels and networking.

LPs, engage directly with a handpicked collection of General Partners from early stage to buyout, offering a front-row seat to emerging market trends and the opportunity to diversify your investment portfolio.

GPs, showcase your strategies and strengths to potential investors and connect with a global network of peers and founders.

Founders, network and increase your visibility with new partnerships and collaborative opportunities.

Apply to register today to join this curated group of experienced individuals!

• Our Berlin team co-hosted an Industrial Software Dinner in Borchardt with General Catalyst. Thank you to Maximilian Mayer and Paula Wehmeyer for organizing an insightful evening for founders and investors!

• In SoHo, we enjoyed our third edition of Poker Night with investors, founders, and engineers. Contact John and Marc to join us for the next one!

• Celonis, the global leader in execution management, partners with BMW Group to make process mining available to all BMW employees [Intelligent CIO]

• Cardless, a credit card infrastructure platform, partners with Avianca to launch exclusive credit cards on the American Express network [LinkedIn]

• NewStore, the leading omni-channel commerce platform for retailers and brands, appoints Mike DeSimone as new CEO [NewStore]

Activant is a research-focused global investment firm that partners with high-growth companies, transforming the way the world makes, moves, and sells.

Founded in 2015, Activant has invested in category-defining companies like Deliverr (acq. by Shopify), Hybris (acq. by SAP), Celonis, Sardine, and many more.

The firm has $1.5B assets under management and is headquartered in Greenwich, Connecticut, with offices in New York City, Berlin, and Cape Town.

The Greene Street Observer is published monthly from Activant’s office on Greene Street in New York City.