Over the last few years, cloud computing has
completely transformed the enterprise software market. The traditional
business model for software deployment is rapidly losing ground to
Software-as-a-Service (SaaS), which emerges as the new norm. As the
enterprise SaaS market continues to mature, industry giants strive to
reinvent themselves as cloud companies while high-growth start-ups take
the lead and set the pace for innovation. The present article will
discuss how SaaS companies throughout the country can take advantage of
R&D tax credits to support their innovative efforts and increase
their chances of success in an increasingly competitive environment.
The Research & Development Tax Credit
Enacted in 1981, the federal
Research and Development (R&D) Tax Credit allows a credit of up to
13 percent of eligible spending for new and improved products and
processes. Qualified research must meet the following four criteria:
New or improved products, processes, or software
Technological in nature
Elimination of uncertainty
Process of experimentation
Eligible costs include employee
wages, cost of supplies, cost of testing, contract research expenses,
and costs associated with developing a patent. On December 18, 2015
President Obama signed the bill making the R&D Tax
Credit permanent. Beginning in 2016, the R&D credit can be
used to offset Alternative Minimum Tax and startup businesses can
utilize the credit against $250,000 per year in payroll taxes.
Start-Up R&D Tax Credit
The new federal tax law is
extremely beneficial for start-ups. For the first time ever, a
qualifying start-up can use the credit against $250,000 per year in
payroll taxes beginning January 1, 2016. Essentially, with the
new start-up provision, companies can claim the credit even if they do
not pay income tax and regardless of their profitability.
Tax Credit
Example
A company owes $300,000 in
payroll taxes and they qualify for $100,000 in R&D Tax Credits. The
R&D credit can now be applied to payroll taxes. Therefore, the
amount of the payroll tax that has to be paid is reduced to $200,000.
The most amount of money that can be deducted annually from the payroll
R&D Tax Credit is $250,000. Therefore, if the company qualifies for
$300,000 in R&D credits, the company would now only owe $50,000 in
payroll taxes.
Illustration
of
Tax Credit Opportunities
Crunchbase lists over 7,500
SaaS companies globally while AngelList has over 11,800 start-ups in
the SaaS category. A great portion of these companies are located in
the U.S. and can benefit from R&D tax credits. Figure 1 below
illustrates the start-up tax savings available to U.S. SaaS start-ups
at various company counts and technical employee levels (up to 7,500
SaaS start-ups).
Figure 1:
Understanding SaaS
Cloud computing can be
defined as "the practice of using a
network of remote servers hosted on the Internet to store, manage, and
process data, rather than a local server or a personal computer".
Cloud
computing technology enables the consumption of computing
resources as a utility over the Internet, in a new model that allows
for on-demand, self-service provisioning, rapid elasticity, and broad
network access in a measured, pay-per-use system.
Among different cloud-based
service categories, SaaS stands out for its growing pervasiveness. SaaS
can be defined as a software distribution model in which a third-party
provider owns, manages, and delivers applications remotely to customers
over the Internet. Also known as web-based, hosted, or on-demand
software, SaaS applications run on the provider’s servers and are
easily accessed via the Internet. Though conceived as multitenant
systems, in which multiple users share the same infrastructure and code
base, SaaS applications are easily customized to meet specific user
needs. The SaaS model eliminates installation and maintenance concerns,
freeing users from complex hardware and software management tasks.
The emergence of SaaS is
revolutionizing the software industry. According to the International
Data Corporation, over the next five years, “cloud software will significantly outpace
traditional software product delivery, growing nearly three times
faster than the software market as a whole and becoming the significant
growth driver to all functional software markets.” By 2020,
service-enabled software will represent nearly 50 percent of all new
business software purchased and cloud software will account for over 25
percent of all software sold.
In fact, numerous experts
have pointed out that cloud is rapidly becoming the default option for
software deployment. According to research and advisory firm Gartner,
there is an ongoing transition from the “cloud-first” mentality in
software design and planning to a “cloud-only” stance. A recent study
predicts that more than 30 percent of the 100 largest vendors' new
software investments will shift from cloud-first to cloud-only by 2019.
Gartner also forecasts that
the public cloud services market will grow 18 percent in 2017, totaling
$246.8 billion. SaaS is expected to be a major driver of growth,
reaching $75.7 billion by 2020. Better Buys’ 2016 Report on the
State of SaaS underlines that 78 percent of businesses indicate that
they plan to expand the number of SaaS platforms they use over the next
three years, raising the average number of applications used from three
to seven.
SaaS Industry Trends
The SaaS market is entering
a new, more mature phase, in which growing competitiveness will lead to
more flexibility and enhanced user experience. The widespread adoption
of SaaS comes hand in hand with higher expectations for service
performance and availability, as well as with an increased demand for
customized solutions. Overall, the massive flow of complex user data
along with an unprecedented multiplication of digital channels call for
constant improvements and adaptation. Below are some important trends
for innovation in the SaaS market:
Industry
Cloud
SaaS start-ups have two
different approaches to the business-to-business software market. Some
of them focus on solutions that target the needs of a specific
industry, such as education, real estate, and finance. This avenue is
called vertical SaaS, or Industry Cloud. Other companies prefer a
horizontal approach, focusing on a particular software category that
addresses general business processes and can serve various industries
(examples include CRM, HR, and accounting). Vertical SaaS has
experienced faster growth than horizontal solutions, as demand for
industry-specific features intensifies. Healthcare and energy have been
major drivers of this trend. Chemicals, industrial products, and retail
are promising areas for growth.
Artificial
Intelligence
Machine learning technology
is expected to play an increasingly prominent role in the SaaS
industry. Innovative SaaS companies are beginning to integrate an AI
layer to their applications. Tools such as deep learning, predictive
analytics, natural language processing, and smart data discovery
promise to revolutionize SaaS user experience, leading to continuous
improvements. Experts also forecast the emergence of AI as a Service
platforms, which could eventually extend machine learning capabilities
to different types of apps through a cloud-based system.
An interesting example of
how to combine SaaS and AI is New York City-based x.ai, the creator of
an artificially intelligent personal assistant that performs scheduling
tasks. The innovative company points out that scheduling meetings is a
time-consuming activity that takes its toll on productivity – in fact,
setting up a single meeting requires, on average, 8 emails back and
forth. Founded in 2014, x.ai has raised over $34 million in three
funding rounds.
Mobile
Mobile applications have
become essential for different business aspects, from mobilizing
workforce and external marketing to fostering customer interactions and
streamlining operations. As the mobile workforce reaches unprecedented
levels, enterprise mobile solutions gain momentum as a major trend in
the SaaS market. According to Strategy Analytics, “the need for flexibility, scale, and ease
of deployment and use is driving adoption of SaaS to support mobile
enterprise strategies. (…) This is a particularly attractive
proposition for small and midsized businesses.”
While traditional SaaS is
browser-based, mobile SaaS revolves around apps. A particularly
important aspect of this distinction is the app’s ability to provide
offline support on mobile devices that are not necessarily connected to
the Internet. A growing number of innovative companies are developing
SaaS solutions with custom apps that target specific needs. An
interesting example is Pleasanton, California-based ServiceMax,
provider of cloud-based, mobile-ready software solutions for field
service management. The company’s tools for logistics, work order
management, communication, and analytics are accessible through mobile
devices. In November 2016, GE Digital acquired ServiceMax for $915
million. The two companies have engaged in research aimed at
incorporating Internet of Things capabilities into enterprise mobile
SaaS solutions.
API-based
SaaS
Defined as a set of
routines, protocols, and tools for building software, the application
program interface (API) is increasingly central to the SaaS market. A
growing number of companies are developing APIs that are easier to use
and thus more accessible to non-tech customers. Going even further,
some pioneering companies are adopting an API-first strategy. Instead
of using a graphical user interface (GUI), these companies provide
interaction through a web-based API that allows users to access data
over the Internet. This new generation of companies often charge by the
number of requests made to the API and the amount of data that is
delivered through the API.
Founded in 2014, San
Francisco, California-based Clearbit is an interesting example of
API-based SaaS. The company specializes in business intelligence APIs
that search the web and other sources for publicly available
information on people and businesses. With clients that include Asana,
Braintree, Slack, and AdRoll, Clearbit has also created a Gmail add-in
named Connect, which consists of a sidebar that provides information on
the email’s recipients. The widget can also provide users with a
person’s email address, needing only the company’s domain and the
recipient’s name or title.
Security
By implementing SaaS
security applications, companies can save money and streamline
operations. Cloud-based services allow users to delegate their security
needs to specialized third-party providers, thereby eliminating a
considerable amount of on-premises software and hardware and reducing
the need for qualified in-house workers with advanced expertise in IT
security. Forklift upgrades and new implementations also cease to be an
issue, which brings much needed relief for many organizations. While
some SaaS companies target niche security services to complement
existing infrastructures, others take over end-to-end management.
New York City-based Avanan
works as a cloud access security broker (CASB). It enables companies to
implement the same sort of security policies they use internally (such
as authorization, device profiling, encryption, etc.) to their cloud
resources. While first generation CASBs were deployed on premises,
pioneering companies such as Avanan have developed a streamlined,
easy-to-use, completely out-of-band SaaS platform that requires no
proxy and can be deployed in just a few minutes.
Another example is
Boston-based EiQ Networks, which uses a hybrid SaaS model to provide
proactive, around-the-clock monitoring and assessment of network
security. EiQ works as an extension of the customer’s existing IT team,
offering cloud-based services such as vulnerability assessment, patch
management, and forensic analysis.
Integration
Platform
as a Service (IPaaS)
SaaS Integration Platforms
help users overcome complex integration challenges while also allowing
them to extract greater value from SaaS applications. They consist of a
set of cloud-based tools that enable software engineers to deploy,
manage, and integrate different on-premise and cloud-based processes,
services, applications, and data. IPaaS aims to go beyond
standalone software functionalities by creating comprehensive platforms
that fulfill all organizational needs. By integrating different
applications, they streamline process flows, enhance productivity, and
improve data management efficiency, avoiding duplication and increasing
synchronization.
Headquartered in
Minneapolis, Minnesota, DSYNC has built an innovative IPaaS system to
transform and synchronize data between multiple applications. Founded
in 2015, the company enables users to integrate applications, services,
and APIs. The system offers data connection in near real-time along
with a unique dashboard for mapping, applying filters, and setting
desired parameters between website, inventory, point of sale, and
financial software.
New York City SaaS Start-Ups
New York City has
established itself as a hub for SaaS start-ups. A recent study by
Primary Venture Partners reveals that SaaS activities have constantly
risen in NYC, both in number of funding rounds and dollars invested
between 2009 and 2014. The report underlines NYC’s increasingly
relevant role in the SaaS market, particularly when it comes to
domain-specific, vertical solutions targeted at sectors such as real
estate, finance, healthcare and pharmaceutical, insurance, advertising,
retail, etc.
NYC has a unique combination
of characteristics that make it an ideal ecosystem for the SaaS
entrepreneur. While it is home to over half a million small businesses,
it also has an unparalleled concentration of industry giants - 19
percent of all S&P 500 companies are headquartered in the tri-state
area (data from 2014). As pointed out by Primary Venture, the density
of potential customers as well as an inflow of talented and
well-trained technology graduates from all over the globe “drives innovation, facilitates business
model experimentation, and makes early customer acquisition especially
efficient.”
Online community Built in
NYC lists numerous SaaS start-ups that use cloud technology to “influence just about everything.”
Examples
of innovative NYC-based SaaS companies include:
Catchpoint
Systems: Founded in 2008, Catchpoint Systems offers digital
performance analytics through an innovative end-user experience
monitoring platform used by more than 350 companies in 30 countries.
Aiming to enable a smarter, faster way to preempt issues and optimize
service delivery, Catchpoint offers multiple solutions, including
integrated, synthetic, and real user monitoring, real-time analytics,
and real user measurement.
Namely:
With
offices in New York, San Francisco, Austin, and Atlanta, Namely is
an example of a horizontal SaaS provider. Founded in 2012, the company
provides cloud-based HR software that helps businesses handle functions
such as employee management, performance reviews, payroll, benefits,
workflow and approvals.
Handshake
Corp.: Focused on wholesale buying and selling, Handshake is a
cloud-based software that allows sales reps to replace paper catalogs
and order forms with mobile devices. The company offers features such
as instant syncing, barcode scanning, and quick access to inventory and
customer data.
Greenhouse
Software: Founded in 2012, Greenhouse provides recruiting
software designed to help businesses streamline and optimize hiring
efforts. Their HR-SaaS allows users to create job campaigns, plan
interviews, and make data-driven hiring decisions.
Flatiron
Health: An example of vertical SaaS, Flatiron Health specializes
in oncology software. Their cloud-based platform connects cancer
centers across the U.S. with the objective of centralizing information
to improve treatments and accelerate research. Founded in 2012, the
company has over 400,000 patient visits logged into the platform per
month.
Betterment:
Aiming
to provide a smarter way to invest, Betterment builds algorithms
for wealth management. Its platform is designed for optimal returns at
every level of risk. The company was founded in 2008 and has raised
over $205 million in 6 funding rounds since then.
Datadog:
With
a client base that includes Netflix, Airbnb, Twilio, Spotify, and
Warner Bros, Datadog is a SaaS-monitoring platform that helps companies
centralize important metrics from apps, tools, and services. Datadog
was founded in 2010 and has since helped customers avoid downtime, fix
performance problems, and streamline development and cycles.
Moat:
Founded in 2010, Moat measures real-time attention analytics over 19
billion times per day. Their SaaS analytics solution covers multiple
devices and platforms, from desktop to mobile, from content to video.
Moat provides actionable metrics including ad viewability, human vs.
non-human traffic, and ad attention. Clients include Unilever, The New
York Times, Twitter, Facebook, among many others.
Teckst:
Founded
in 2014, this telecommunications start-up has created a
cloud-based texting platform that helps customer service teams
communicate with clients. The easy-to-use, customizable solution can be
integrated with different CRM software, no developers required.
Custora:
This
predictive marketing platform allows online retailers to gather
valuable customer data for optimized advertising efforts. Custora’s
cloud-based software analyzes data to predict how customers will behave
in the future. Founded in 2011, the company has worked with major
clients including but not limited to Crocs, Guess, and Loft.
Routehappy:
Founded
in 2013, this New York-based start-up targets the airline
industry. Its SaaS platform intends to improve the customer booking
experience by providing data such as scores and “happiness factors.”
Dataminr:
This
cloud-based platform uses proprietary algorithms to gather
real-time data from Twitter and other public datasets in order to
detect actionable signals of interest to finance, public sector, news,
corporate security and crisis management clients. By instantly
analyzing publicly available data, Dataminr delivers the earliest
alerts for real-world events.
Boston-based SaaS Innovators
Boston-based SaaS start-ups
are helping reshape the infrastructure of business operations across
various industries. These innovative companies offer cloud-based
solutions that are not only scalable and easy to implement, but also
cost-effective and customizable. The following examples, originally
featured in Built in Boston, shed light on the diversity of innovative
SaaS-related activities in Boston.
EverTrue:
Founded
2010, EverTrue aims to bring the technological advances of the
for-profit sector to the mission-driven nonprofit world. The company
has created a cloud-based platform that combines institutional data
with social insights to optimize constituent engagement and maximize
giving potential. EverTrue has over 300 customers with solutions that
include alumni relations, annual giving, prospect research, and gift
officers.
InsightSquared:
Founded
in 2010, InsightSquared delivers sales performance analytics
for SaaS business of all sizes. With hundreds of pre-built reports for
every major sales metric, the company helps users optimize sales
performance. Its visual, maintenance-free reports and dashboards work
as a real-time, custom lens into sales performance. InsightSquared has
over twenty thousand active users. It has been named a “Top-Rated BI”
software provider by TrustRadius and G2Crowd.
Localytics:
This
cloud-based mobile engagement platform for mobile and web apps
uses advanced data analytics to create unique marketing experiences.
Its solutions include more relevant and effective push notifications as
well as timely and targeted in-app messages. Localytics client base
includes Microsoft, ESPN, Tumblr, among many others.
Yesware:
Founded
in 2010, Yesware is a sales acceleration platform that enables
salespeople to connect with prospects, track engagement, and close
deals. The innovative solution delivers prescriptive analytics and
advice based on recent sales activities as well as an array of tools,
such as email automation, phone dialer, sales prospecting, etc. By
injecting data insights and sales communication tools into its
customers’ existing email workspace, Yesware enhances productivity and
empowers sales teams to make smarter decisions, faster.
Codeship:
This
innovative start-up focuses on facilitating software development
by optimizing testing and release processes. It works as a hosted
continuous delivery platform that helps release software quickly,
automatically, and multiple times a day, thus shortening the
development cycle and reducing the risk of bugs.
Toast:
Founded in 2011, Toast is an all-in-one point-of-sale and restaurant
management platform. The cloud-based system presents advanced
functionalities such as tableside ordering, quick menu modifications,
real-time enterprise reporting, online ordering, and labor management.
Carbonite:
This
cyber security SaaS start-up offers cloud and data protection that
includes advanced backup, rapid recovery, and anywhere access for small
and midsize businesses or individuals.
Kensho
Technologies: Founded out of MIT and Harvard in 2013, Kensho
deploys scalable machine intelligence and analytics systems across the
most critical government and commercial institutions in the world to
solve some of the hardest analytical problems of our time. Backed by
investors as diverse as Google Ventures, Goldman Sachs, and In-Q-Tel
(the venture capital arm of the CIA), this start-up has received
numerous awards. Named a Technology Pioneer by the World Economic
Forum, Kensho was listed among the 100 most promising artificial
intelligence companies globally.
Nanigans:
This
advertising automation SaaS platform empowers in-house marketing
teams to grow the revenue impact of their digital advertising. Founded
in 2010, Nanigans helps manage over $600 million in annualized ad
spend, with functionalities that include multichannel programmatic
media buying, predictive revenue optimization, and real-time business
intelligence across today’s most valuable digital channels.
Baltimore and Washington, D.C.
Baltimore and Washington,
D.C. are also home to numerous SaaS start-ups that can benefit from
R&D tax credits to support their innovative efforts. The following
paragraphs present a few examples:
FiscalNote:
Creator
of a Government Relationship Management Platform, Washington,
D.C.-based FiscalNote enables government affairs professionals and
executives to maximize their influence on legislation and regulatory
policy through automation, optimization, and the delivery of analytical
insights. Founded in 2013, the company uses proprietary analytics and
breakthrough machine-learning techniques to deliver contextual insights
and outreach tools that support an enterprise-based approach to modern
government affairs. FiscalNote has raised more than $30 million from
prominent early-stage investors.
Contactually:
Based
in Washington, D.C., this relationship marketing platform helps
companies and individuals keep and generate business from their
network. Contactually was founded in 2011 with the objective of
providing smarter tools for staying in touch with key contacts. The
platform is available as both a web and mobile-app. Its intuitive
dashboard concentrates outreach tasks while its customizable programs
allow for automatic sequences of actions according to contact
“buckets”.
EverFi:
This
award-winning, proprietary SaaS platform provides a highly
engaging experience for students, and features the latest in technology
and instructional design. Founded in 2008, Washington, D.C.-based
EverFi is the nation’s largest network for online education in
off-curriculum, as well as highly valuable content areas such as
financial literacy, student loan management, digital literacy, STEM
Readiness, health and wellness, and other key life skills for the 21st
century student. The company currently works with more than 12,000
schools, colleges, and universities in all 50 states and Canada.
AgSquared:
This
cloud-based platform for farm planning and management helps
farmers create yearly farm plans and turn such plans into day-to-day
practices through the course of the farming season. AgSquared gathers
data on farm operations to allow users to build a complete picture of
different metrics including productivity, profitability, and
sustainability. Founded in 2009, the Washington, D.C.-based company
focuses on small farms, which are too small to benefit from existing
precision agriculture technologies.
Aquicore:
Founded
in 2013, Aquicore provides an energy analytics and automation
software platform for energy efficiency management. Targeting
commercial and high-end residential spaces, the cloud-based solution
helps building owners, managers, engineers, and sustainability teams
operate more efficiently, save money, and reduce waste. Headquartered
in D.C., Aquicore also has offices in San Francisco.
410Labs:
This
Baltimore-based start-up is the creator of Mailstrom, an-email
management SaaS solution. Founded in 2010, 410Labs aims to help people
communicate and access information in new and better ways. The
innovative Mailstrom is a power tool that amplifies human intelligence.
Capable of working with Gmail, Google Apps Email, Outlook, Apple, AOL,
Exchange IMAP, and any other email service that supports IMAP,
Mailstrom identifies bundles of related mail, and makes it easy for
users to act on them as a group.
ZeroFOX:
Founded
in 2013, cyber security start-up ZeroFOX offers protection
against the dynamic risks of social media and digital channels. The
Baltimore-based company has developed a SaaS platform that processes
millions of posts and accounts across the social landscape (including
Facebook, LinkedIn, Twitter, Instagram, etc.). It combines data science
and machine learning to expose social media threats, explore attacker
tactics, and help drive technological innovations and best practices to
remediate threats.
Conclusion
SaaS solutions represent a
significant technological transition as well as a shift in business
models. The flexibility of cloud computing has opened the way for the
development of creative SaaS solutions that target an increasing range
of industries. As the number of SaaS companies reaches unprecedented
levels, innovation becomes the cornerstone of competitiveness. R&D
tax credits are available to support innovative SaaS start-ups in the
development of new and improved cloud-based solutions.
