Salesforce.com’s new PaaS Fund: Is it Enough to Jump Start the PaaS Concept?

Salesforce.com and its venture capital pals are trying to up the ante in the platform game by putting together a seed fund for start-ups that want to target SFDC’s re-christened AppExchange platform, now known by the somewhat outré term: platform-as-a-service, or PaaS.

According to published reports, the VCs are going to pony up $500,000 per company, for a total of $25 million over three years, to help these companies get their PaaS sales and marketing efforts under way.

It’s an interesting deal, for several reasons. One is that the size of the bet these investors are making is relatively small. Relative certainly to SAP’s NetWeaver fund, which has a $125 million war chest and is part of a larger SAP effort to help finance companies targeting its platform play, NetWeaver. It’s also rather small considering how otherwise bullish SFDC seems to be regarding PaaS: I would imagine such a good idea would draw a serious pooling of money, rather than a modest sum that stands out for being, well, more modest than the claims that have been made for the future of PaaS.

Indeed, the fund’s relative size brings to mind Winston Churchill’s famous comment about rival Clement Atlee: ”A modest man, who has much to be modest about.”

Which brings up another other question about the value of this investment opportunity: The majority of Apex – I mean PaaS – partners I have talked to over the years have basically categorized their Apex/PaaS efforts under “marketing” – as opposed to sales or even lead generation efforts. The reason: not enough sales relative to the investment they are making in the platform.

The lack of significant revenues for many if not most Apex/PaaS vendors doesn’t mean they shouldn’t be investing more in the concept – riding SFDC’s coattails isn’t necessarily a bad idea. Even if the result isn’t a direct payback on the investment in Apex/Paas, partners are hoping that they’ll make some real sales from the rest of their product line. So they line up, pay their development and certification costs, buy some booth space at the conferences, and, cross their fingers.

Which begs the final question: what is the expected return on a $500,000 sales and marketing investment in PaaS for the VCs concerned? Or, more succinctly, how much equity does a PaaS vendor need to give up to get a piece of this fund? And even more succinctly: is it worth it for a start-up to take this money to invest in a platform that promises much but, to date, delivers relatively little? Bear in mind that there are other costs to this capital: the investment in development of the PaaS product (which this fund doesn’t cover), the certification costs that SFDC charges ($10,000 per product, last time I checked in), and the booth space and opportunity cost of being part of the PaaS game. Add those up and $500,000 for sales and marketing starts to look small in comparison.

I’m not advocating companies not invest in co-marketing with PaaS: the coattail effect of SFDC is not to be denied. But the cost of the capital in this new fund – VC investments in early stage companies eat up a lot of founder and employee equity – may not be worth it for smaller companies hoping to make a big splash in what is now a relatively small pond. For my money I’d wait for the PaaS market to grow and demonstrate some real revenues for a large number of (larger and better funded) partners before I’d sign up for a $500,000 investment. It may be tempting, but there are better things to do for a start-up than try to help SFDC grow a market that is, for now, advantageous only to SFDC. Especially by using VC money to do so.