Data and Privacy Concern Around SaaS Market Investments

The global SaaS market is expected to be worth $22.1 billion by 2015 according to analyst firm, Gartner. The growing SaaS market and widespread adoption of SaaS technologies across global business market sectors stems from increasing familiarity with these types of platforms and what they offer, says Sharon Mertz, the Research Director at Gartner. Gigaom Research author, Salvatore D’Agostino, says attraction for enterprise includes a reduction in cost and the time it takes to deploy and market systems as well as increased operation efficiencies. He reported that the IT investment in cloud technologies continue to grow amongst security breaches and increasing public concern for data sovereignty.

A 2013 survey by Constellation Research revealed that the number one concern from respondents regarding SaaS technologies was risk of data privacy, followed by security and loss of control. The 2014 Truste US Consumer Confidence Index revealed that at least 92% of consumers worry about privacy online, with compounding evidence that consumer trust has declined steadily over the last three years. Up to 89% of consumers agreed that they would avoid doing business with companies they didn’t believe were protecting their data online. Concern was higher amongst older demographics.

Global concern of end user data and privacy has in some cases been attributed to major breaches in end-user security. According to CNN Money, Imperva IMPV a data security company’s stock plunged 40% following the Heartbleed Bug fiasco. Other major Nasdaq stocks like Facebook FB, Amazon AMZN and Google GOOG also fell 4% following the same Heartbleed Bug attack.

Security continues to be the number one inhibitor to SaaS adoption amongst businesses, revealed IBM’s recent Global SaaS study. Companies who rely on various SaaS solutions are vulnerable because their customer’s data is in the hands of their SaaS vendor’s infrastructure. Fred Jacquet, is the owner of Chronogolf, a SaaS based solution for golf courses. In a private interview, he said “Data and privacy is a huge concern. This means it’s absolutely imperative that we have a world-class data center with biometric locks, 24-hour surveillance and ongoing maintenance and updates to ensure that everything is up to date. We also include an SSL encryption with all of our plans.” IT professionals have to be weary of vendor privacy policies and consider the nature of data to be collected and the vendor’s ability to secure that information.

The same risks that plague both the purveyors and end-users of the SaaS market pose similar financial risks for investors. New-to-market SaaS startups can be particularly risky for investors. These companies often face significant upfront costs, but lack the upfront licensing fees found with traditional software ventures that were able to fund infrastructure and marketing. For this reason SaaS providers have to position themselves defensively before going to market. Investors should look to analysts and firms that specialize in investing in software and cloud based products like Scale Venture Partners, August Equity and SaaS Capital. SaaS vendors and these types of investment firms recognize the potential for highly scalable, recurring revenue in this industry, despite concerns and market fluctuations regarding data security.