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


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


. "We have made about 10 investments in the SaaS space -- it's certainly a big focus for our fund."

The SaaS model, which


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, 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


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.

The VC firm was an early investor in on-demand software specialist



, which went public in 2009. StarVest has also made investments in SaaS social networking company


, and in

Iron Solutions

, which provides data-as-a-service to the farm and construction equipment industry.

The firm's other SaaS target areas include business intelligence and the health sector, according to Sachar.

"We're also looking in some of the big health-care verticals for SaaS because we think that it might be an area that benefits from some of the stimulus packages," she said.

With the IT spending slowdown already hitting companies selling

networking equipment






traditional software

, there is a clear push towards selling software as a Web-based service.

Software giant


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, for example, recently spent $695 million to acquire security specialist




its SaaS story, and


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has also made moves in this space.

Despite all the SaaS brouhaha, Anand Radhakrishnan, principal of private equity firm


, explained that part of the financial sector has often shied away from tech investments.

"Most private equity firms traditionally don't like tech," he said. "I think that they are very scared of the idea that tech can move at unbelievable rates of change -- in tech you can be blind-sided with some disruptive technology, new invention or business model."

But Radhakrishnan, who specializes in deals involving small to medium-size tech companies, likes the software business model, particularly at a time of shrinking hardware budgets.

"At the end of the day, investors love software businesses -- they are high margin and tend to be recurring in revenue," he explained.

Investcorp, which was involved in


's 2006 spin-out from chip giant


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, is keen to identify growth areas within tech, and Radhakrishnan is looking at SaaS opportunities. This, he explained, could be anything from software-based teaching platforms to telematics, which has typically been used for tracking fleets of vehicles and freight.

"We all know that small businesses will be using this type of technology too, so that's a huge, under-represented market," he said.

Tech and telecom firms accounted for 10% of private equity exits during 2006 and 2007, according a study by

Ernst & Young

, which found that these were also the best-performing exits. Firms in these areas experienced 30% growth in their enterprise value (EV), or their theoretical takeover price, compared to just 10% growth for comparable publicly-traded companies, it said.