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Hello "On Demand" hype machine

The flavor of the month is "on demand" -- and the funding activity lately is at alarming levels. Web 2.0, you are being eclipsed!

The latest is San Mateo's SuccessFactors, which raised $45 million, a whopper of a round, and which made us decide to write this post. The software helps companies manage their human resource issues, such as compensation and career development. Granite Global Ventures led the $25 million equity component, while Lighthouse Capital contributed $20 million in debt. It is a five-year-old company.

Our email server is smoking with announcements from other Silicon Valley "on demand" start-ups. What you're seeing are Web-based companies getting bought by the big guys (Oracle, SAP), and M&A action elsewhere (Nistevo was bought this month) which is leading to more funding, and also scaring the daylights out of other "on demand" start-ups that are in stealth mode, forcing them out of the bushes to announce they too are around.

"On demand" refers usually to Web-based software programs that you can use as you want, wherever you want, and pay as you go. It is all the rage, because it lets you avoid paying hundreds or thousands of dollars up front for large software subscriptions. A related term is "Software as a Service," known as SaaS. Here is the latest:

-- Also new is Burlingame's Marketbright, for managing online marketing campaigns. It will launch in early June, the company tells us.

--We mentioned LucidEra yesterday, as well as Intacct.

--Entrepreneur Halsey Minor has backed Kareo, for healthcare billing.

--Santa Clara's OpSource takes the opportunity to tell VentureWire that it too is searching for cash. The company helps other companies develop their own on demand services. It wants to raise $15 to $20 million in debt and equity financing "near term."

--Instantis, of Santa Clara, sells software to track and improve employee performance, and has raised $8.8 million from U.S. Venture Partners, along with exisiting investors JK&B Capital and Shea Ventures.

--oDesk, of Sunnyvale, provides a way for companies to tap tech talent when they want. oDesk has relationships with techies who like to stay at home and work their own hours. It contracts with them to do work for you when you need it. It wants to undercut big outsourcing/offshoring companies like Infosys and Wipro, which serve mainly large firms. The company tells us it has $6 million in backing from Sigma Partners and Globespan. Google ads are the only way it acquires users. Here is a Business Week article about the company. It too has been stealth since 2004, and is only now coming out into the open.

--There are other types of on-demand services too, such as computing. Bill Coleman, co--founder and former chief executive of BEA Systems, launched Cassatt several years ago to do that, and just raised $15 million more in venture capital.

There are many, many more examples. Mark it down: May is when "on-demand" hit hype mode.

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On-demand (or Software-as-a-Service) represents a major shift in how companies consume information technology. In the early days of the Industrial Revolution, it was not uncommon for factories to have coal-fired generators in the back lot that would produce the electricity for the factory. Around the turn of the century factories quickly discovered that it made a lot more sense to buy electricity from companies that specialized in managing power plants. Information technology is now undergoing a similar transformation.

I think On-Demand is less a 'flavor of the month' and more about a significant re-alignment in the software industry. Time will tell if the traditional packaged software companies can adapt. I've written about this topic at www.charterstreet.com.

Paul McNamara on May 23, 2006 11:02 AM
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Want yet another one (it may be a surprise)? Here you are, an 'On-demand PayPal(r)' service: http://On-lineCard.com. Welcome to the future!

Alex on May 23, 2006 11:02 AM
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Paul, sure, there is a lot of promise in some of these companies, but too buzzy right now.

Matt Marshall on May 23, 2006 12:40 PM
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Too "buzzy". Come on Matt. If you looked under the hood you would realize SuccessFactors has significant "real" revenues, and is profitably, unlike every web 2.0 company you write about!

jason.corsello@comcast.net on May 24, 2006 4:23 AM
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No doubt, Jason, there are some hot companies, and perhaps SuccessFactors is one of them. It's just that Silicon Vally is following its usual cycle. This is the buzz/hype era for on demand.

Matt Marshall on May 24, 2006 5:35 AM
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As General manager of the sales division of an 'on demand' (actually the preferred term is SaaS)software provider that has been in business for seven years I can assure you that this is not a 'buzzy' subject. We have thousands of businesses using our services, paying per user per month. We're seeing a huge uptick in acceptance and understanding of the model. Microsoft's Live initiative is their belated attempt to enter the field. Google is unveiling on demand apps almost weekly.
The start-ups you mention will take time to scale. Delivering software as a service is complex and requires a committment to very high levels of reliability, which, in turn, require a lot of infrastructure design and software designed to be delivered via the web (not a repurposed desktop app). Salesforce.com's recent series of outages have real business consequences- imagine you have a thousand salespeople who can't access their SFA info for hours. It adds up really fast.
IMHO, this is where its all going. You'll log into all your software in the future and you'll never pay for upgrades.

MartinE on May 24, 2006 11:01 AM
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Sorry if i was being a little critical. I actually think the buzz/hype around on-demand is over and we have moved to a real, proven service delivery model. SuccessFactors is in a market totally $1.7B of which more than 60% of the new deployments will be deployed "on-demand". The buzz is over..."on-demand" is real!

Jason Corsello on May 24, 2006 4:18 PM
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SoS is powerful in two flavors - (1) replacement for existing client-server software solutions (Salesforce, SuccessFactors) and (2) enabling new applications that wouldn't be possible without being SoS (Basecamp, SixApart, most wikis, etc.). SoS in the first category is exciting because it can come up from the bottom - but in the end it pretty much becomes the same thiing as the client-server solution (Salesforce being the prime example - in the end it becomes a heavily IT managed, centralized CRM solution at larger companies). NextGen SoS that leverage collaboration & communication in novels ways may be more interesting, because they don't just repackage old software genres onto the web. But the key common factor is a decision-maker being able to deploy with little or no IT resources - as SoS has become acceptable across top enterprises, this is creating a real revolution.

Jason Lemkin on June 11, 2006 11:53 AM
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