For any business software start-up to raise a $75 million funding round would be good news in any economic environment. But in today's challenging times — when people are even questioning the sustainability of the VC model itself — Workday's latest funding round (Techmeme coverage) is especially remarkable. It's certainly a boost to morale and credibility for anyone working in the SaaS sector, for which enterprise business systems vendor Workday is something of a poster child.The new round, which has been dubbed a 'Series E', doubles Workday's total funding to date to $150 million. It all leaves me wondering how exactly Workday will use the cash, and what the size of the investment tells us about the provider's ambitions (of course founder Dave Duffield has always said the aim is to rival SAP and Oracle's ERP hegemony, but market bluster is cheap — this is real money talking now).
The nature of the SaaS business, in which providers take on the upfront burden of building and operating the technology infrastructure, means that high-growth SaaS companies need big reserves of cash to fund their expansion. Josh James, CEO of Omniture, explained in a presentation to the SIIA OnDemand conference in San Jose last November how SaaS companies bleed cash with every new customer they acquire: "Every time we add an incremental customer, it costs us more money that quarter ... When you multiply that by [n] customers in a quarter, that's a lot of expense for no money."
Workday's management are well aware of this conundrum, as co-founder Aneel Bhusri explained in an interview with peHUB yesterday:
"In the software-as-a-service business, the faster you grow, the more cash you consume. But this is likely to be our last round of funding. The only reason it wouldn't be is if we wanted to grow faster."
The nomenclature alone tells you that this round is designed to be the last round — who's going to want to be a 'Series F' investor? What's interesting though is that the sums raised so far are already way above those raised by other standard-bearers for the SaaS industry, such as Successfactors, NetSuite and Salesforce.com. In a blog posting last December, Bruce Cleveland published a table compiled by Wachovia Securities in May 2008 listing the amount of capital paid in prior to an IPO for 18 public SaaS companies. Of the 18, only Blackboard (barely) topped $100 million. The figures for the three mentioned above are: NetSuite $85 million, Salesforce.com $66 million, Successfactors $55 million.
So this round is designed to be the last before an IPO, as Bhusri told peHUB (in answer to a question about whether the company would ever sell itself to Oracle, which bought PeopleSoft, Duffield and Bhusri's previous venture):
"We're not building Workday to sell it, though. If everything works out well and we hit our milestones and there's an IPO market some day down the road, we'll hopefully take the company public ... If the IPO markets come back and we continue to perform, I think there would an opportunity two to three years from now. If market gets better faster, it could be sooner."
I'm still wondering what that means in terms of the revenue numbers we can expect Workday to be disclosing when it ultimately files its S-1 documents. The company of course is saying nothing about revenues now, except to say that, subject to growth, it is looking to reach breakeven within a year and a half, which takes us to sometime in the second half of 2010. Given the change in the economic climate, we shouldn't expect to see Workday coming to market showing the degree of sales and marketing spend that NetSuite or SuccessFactors were burning at the time of their IPOs, which may throttle back the numbers Workday will feel able to report. But given the amount of funding we're seeing going into the company, based on comparisons to other SaaS companies that have previously gone public, we're probably looking at a revenue figure within close range of $100 million a year by the date of the IPO and a year-on-year growth rate of somewhere around 60%.
Remember, this is just my speculation and not a benchmark Workday should be held up to. If Workday's founders are smart (and of course they are) then they'll have made sure they're putting enough in the bank to tide them over an economic nuclear winter in the event this spring's green shoots of recovery have withered by the autumn, deferring any likelihood of an IPO for another year or two. Either way, today's funding news speaks volumes about the company's prospects.
PS: I posted a podcast interview to my ebizQ blog earlier today with Workday's CTO Stan Swete, discussing the new contextual reporting feature in its latest release: Real-Time Reporting that Users Can Act On.