"The cloud" became a business-world trend when Salesforce launched in 1999, and its popularity has been growing ever since. The ensuing years have seen more and more internal business applications leaving companies' data centers to live in the ether, followed by the companies' own products. Cloud platforms like AWS and Azure have enabled a decade of startups to ship software products without ever buying servers, let alone calculating the capital depreciation on them.

Now, almost two decades after Salesforce's debut, new enterprise tech companies almost inevitably default to the SaaS model, both when choosing products for internal use and when deciding how to bring their own products to market.

In this atmosphere, Sapho is an anomaly: it's a hot young startup with a penchant for on-premise software. On Wednesday the company announced a $14 million Series B led by Caffeinated Capital, explaining in a statement that the funds will go to building out a global sales team. Sapho wants to serve large companies that are still using and maintaining the legacy systems that they once paid millions for. Notably, Sapho's own product is most popular as an on-premise application.

Cofounder and CEO Fouad ElNaggar described the product to Inc. as an "engagement layer," which integrates all of the business software that a client company might use. Custom workflows and mobile support help large enterprises bring their internal tech stacks up to speed, since Sapho's friendly interface satisfies the usability expectations of modern employees. (ElNaggar compared the aesthetic of legacy systems to tax forms -- using them feels arduous when you're familiar with Facebook or Gmail's intuitive designs.)

In other words, Sapho pulls data from disparate applications, whether they're legacy on-premise solutions or trendy new SaaS options, and makes the information easy to work with. Veritas CEO Bill Coleman, who sits on Sapho's advisory board, called Sapho's product "an operating system for work" that acts as "the connective tissue between systems of record and the end user."

Data Center Destiny

ElNaggar emphasized that making Sapho available as an on-premise application was critical to the company's success, not least because of potential clients' security concerns. "These are all mission-critical systems that have very, very sensitive data -- very sensitive data," he said. "A lot of these large companies, by law, their security and compliance regime will not allow that HR data, or that ERP data, to get put into someone's public cloud."

"We have one very large telecom that we work with, and they deployed us," ElNaggar said. "They laughed a little bit about these startups that come in with their cloud solutions, and they're like, 'We have an indemnification policy that any cloud vendor has to sign that puts them on the hook for $5 billion if anything should go wrong with their cloud.'" ElNaggar pointed out that most startups wouldn't be able to touch that deal.

Silicon Valley ageism holds that younger founders are better able to recognize new trends. But it also means they might overrate the impact of those trends and undervalue older but durable ways of doing business.

"One of our biggest competitive advantages is that we're old," ElNaggar said, referring to himself and his cofounder. "We've been around for a while. We know what the situation actually is like at a bunch of these large companies that are based in places like Cleveland, and Charlotte, and Little Rock, Arkansas. These aren't Silicon Valley companies, living Silicon Valley dreams with 15 employees. These are places that have 100,000 employees or 300,000 employees."

ElNaggar added, "We're trying to work in the world of reality where AS/400s and zSeries mainframes are still running critical business applications, still running critical workflows for companies that are doing tens of billions of dollars of revenue."

Sapho's founders are aware that their approach bucks the trend in Silicon Valley. "Let me tell you, a lot of people on Sand Hill Road looked at us like we were insane," ElNaggar recounted. "They'd say, 'On-premises software? You're stupid. You're an idiot. That's not how people buy.' A lot of very famous VCs here on Sand Hill Road looked at us like we were nutjobs. And the reality is that they don't really understand what the buy situation is like at a lot of these large companies."

Steve Comstock is the CIO at CBS Interactive, where he uses an on-premise instance of Sapho to integrate his legacy systems with newer tools like Slack. "We use all the cool toys," he explained, "but the other challenge is, how do you connect them all? And how do I connect it back to my legacy stuff like Oracle?" That's where Sapho comes in -- it enables CBS Interactive to keep getting value out of the software that they've already committed to.

"I'm never going to say that we're never going to get off of [Oracle], but there's an investment that we made years ago," Comstock said. "Not just perpetual licenses, but workflows, process, how does accounting close books, all that kind of stuff."

Skepticism Abides

Jay Chaudhry, the CEO of cloud-based security company Zscaler, wouldn't make a bet that on-premise software will be around for the long haul. Chaudhry is a serial tech entrepreneur who has watched the status quo change over the past couple of decades. "If you asked me this question two years ago, I would have said it's a viable strategy for some market segments, like financial services, that want to keep all of the data and applications on-prem because of regulations," he told Inc.

"Today, even financial services are embracing the cloud. And it's driven by two reasons. Number one, the cost competitiveness and the speed at which the development is happening with cloud applications, so they can get them faster. And two, better technologies are evolving to make sure data can be protected and regulatory requirements can be met."

Sean Byrnes is the CEO of Outlier.ai, a startup that provides automated business intelligence. "It may take [large enterprises] another 15 years to replace all the on-premise solutions with something in the cloud," he speculated. Byrnes also cited financial pressure as a compelling reason to switch over.

"The cloud is so much cheaper than running things yourself," he explained. "If you've been running things yourself on-premise, you essentially have the hangover of the past investment. But the next minute you look at reinvesting in that infrastructure it's going to be intimidating compared to the cost of the cloud, because the cost of the cloud is plummeting so fast that if you're going to go replace your server farm with a new server farm, you're looking at money that might buy you 10 years worth of cloud service, which would get you through yet another generation of on-premise replacement."

Venture capitalist Ash Fontana, who specializes in AI at Zetta Venture Partners, noted that another part of the cloud's value proposition is the ability to leverage new "smart" analytics and features. "The benefits you get from using intelligent systems in the enterprise are so great that they're going to really provide companies with a motivation to move to the cloud," he said.

"You want to not only get the advantage of running learning algorithms over all of your own data, but running learning algorithms over all of the data of the customers of the provider you're using. And so you get these data network effects between customers, across customers, between industries, within industries," Fontana explained, which he says isn't feasible for on-premise software.

No Definitive Answer

The disagreement over whether the future of business software will live in the cloud versus on-premise -- or both -- can't be settled overnight. Ultimately, investments like the $14 million one that Sapho and Caffeinated Capital announced today, and like the countless investments made in cloud-based SaaS startups, will drive innovation on both sides. The market will be the ultimate arbiter, as it always is. At least one set of bets will pay off.

Published on: Apr 19, 2017