We need some Venture Appitalists!
There’s a disconnect between the business models for custom software development of the past and the new age of SaaS and PaaS. It goes a little something like this:
The "exectuive" thinks that this whole PaaS thing sounds like the bees knees. He can finally get that project he's been wanting done without waiting for next year's capital budget and the inevitable delays of buying new servers and all that. Get the SI to build it and pay per user per month.
The SI conducts his business as usual - charging for work done. The customer can get utility pricing from the vendor for ongoing use of the app on the platform, but development is a separate expense.
Hillarity ensues as the executive realises that software as a service is software use as a service. Bespoke development doesn't have a new model to go with the new platforms and billing models of SaaS and PaaS.
Yes, we can have a debate over whether or not there should be any bespoke application development in the future, but for now corporate customers expect Whopper software (have it your way). And thanks to outstanding PaaS marketing (ahem), they also want it “in the cloud.” So how do they/we/you deal with the colliding business models of traditional bespoke development and the utility model of SaaS?
Imagine a project that’s going to bid in at $50K for custom development work but it will run corporate-wide with 1000 users. That could be spread out for $4200/month covering the development cost over a year. That’s only $4.20 per user per month. But who’s putting the $50K up front? The venture appitalist, of course!
A venture appitalist funds the upfront development costs of bespoke applications that will be delivered in a SaaS model in exchange for a commitment by the customer to use the service for a minimum period. Why would anyone want to be a venture appitalist? Well profit, naturally! Profit comes from negotiating both the monthly utility cost to cover the development costs and duration of commitment. In the above case, for example, the VA (see, I’m already making a meme) could pin $5 per user per month premium onto the regular per-user cost, and require the end customer to commit to a 24 month contract. The first year would yield about $10K (.80 per month above the straight repayment costs) and the second year yields $60K. 140% return. OK, not bad. But even more attractive is taking that originally bespoke solution and selling it to other companies. Chances are if one metal fabrication company in Duluth needs a custom inventory system, some metal fabrication company in Dunkirk does too! As long as there’s company+1, it’s no longer bespoke, it’s just SaaS.
So who pays?
1. Independent investors who front the initial expense of development in exchange for a share of the ongoing revenue from the utility of the application (pure “venture appitalists”). This could be a whole new type of venture – not investing in a company, but investing in an app.
2. PaaS providers who create a device that lets organisations attach some initial development expense to their platform subscriptions (e.g. the PaaS vendors themselves are the venture appitalists)
3. System Integrators who create their own system to amortise the expense of the development into the utility pricing model. This is probably the easiest (but least interesting): and it simply means that the SI’s give up their “net 30” mindset.
4. The end customers who just need to adjust their expectations to allow a certain up-front investment if they want a custom solution, and then the utility model benefits kick-in once the application is live and running (e.g. no ongoing administrative costs, or IT infrastructure and maintenance costs).
Only options 1 and 2 are really “venture appitalism.” For a PaaS vendor, it could be an interesting side business and would obviously help drive traffic on their platform. For a traditional VC, it could be an interesting new business.
