How to Invest in Software-as-a-Service (SaaS)

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Back in 2000, if you were filing your taxes with Intuit’s TurboTax, you would buy its software on a compact disc, download the software onto your computer, and input your data into the program. With changes to the tax code every year, you had to cycle through the process annually.

The advent of cloud computing has changed all of that. These days, you can use TurboTax software without downloading anything, updates to the company’s systems are made in real time, and all of your data is stored for you on Intuit’s servers.

This is an example of software-as-a-service — or SaaS. The model has transformed the relationship between a customer and a company’s software: where once owning the software on site was key, it is now the ability to access the software that truly matters. As more companies, both new entrants and existing software providers, gravitate toward the SaaS model, it’s also becoming an increasingly popular area of focus for investors.

Below, we’ll dive into SaaS and discuss why it’s so advantageous — to companies, to their customers, and to their investors. We’ll also tackle the unique metrics that will help you measure the strength of an SaaS company’s business and discuss the risks any potential investors ought to be aware of.

What is software-as-a-service or SaaS?

Perhaps the best way to start is to define software. Put simply, it is any program that can be run on a computer. That online calculator, the Word document you’re working on, and the weather app you check daily are all examples of software. In order for those to work, someone had to create the computer code to make them function.

If that still seems fuzzy, think of it this way: software is usually juxtaposed against hardware. Hardware is the physical computer or smartphone that you own. You can hold hardware in your hands. Software includes all the programs or apps that you use on a device — no physical product to speak of.

Software-as-a-Service (SaaS) companies have taken advantage of cloud computing in order to provide access to software and stored data from any device with an Internet connection. Cloud computing, which makes SaaS possible, is the practice of using offsite servers to house and handle large computing tasks and making all of the relevant information available on demand via the internet.  – Read more

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