Private Equity Has a Hunch About Tech

Faced with an increasingly tough economy, private equity firms and venture capitalists are searching for smart investments in Web-based software services, according to experts at a recent conference at Columbia Business School in New York.

Tech companies touting Software-as-a-Service (SaaS) are increasingly attractive to the investment community, according to Laura Sachar, founding partner of VC firm StarVest Partners.

"In this environment people want to cut costs," she told TheStreet.com. "We have made about 10 investments in the SaaS space -- it's certainly a big focus for our fund."

The SaaS model, which Salesforce.com (CRM Quote) pioneered, uses the Internet to deliver on-demand services to users and has become one of the hottest technology areas in the last few years. With companies' hardware and software budgets increasingly stretched, SaaS is growing in popularity with users wary of upfront technology investments.

Although Web-hosting software companies may face slower growth than the traditional vendors they seek to replace, they are seen as a relatively safe bet in a recessionary climate. SaaS companies are more likely to benefit from frozen IT budgets because selling subscriptions requires less upfront money, according to Sachar.

"For SMBs, it doesn't have the same upfront costs and the same integration costs [as traditional hardware and software]," she said. "When you want to upgrade, it doesn't have all the infrastructure costs."

Sachar explained that StarVest likes the recurring revenue model offered by SaaS, as well as the fact that the technology is applicable to a number of different business sectors.