Software-as-a-service startup Demandware said Monday it received $12 million in a second round of funding to ramp up its sales and marketing operations, hire new people, and continue to build out its e-commerce service, which it markets to online merchants on an on-demand basis.

The round was co-led by Demandware’s first-round backers, General Catalyst Partners and North Bridge Venture Partners. The latest round brings the company’s total raised capital to $22 million.

“This year is about building our business to prove we’re able to grow and deliver software as a service to more and more customers,” said Stephan Schambach, Demandware’s CEO. “We’ll want to get new customers, make them happy, and add a few more sales offices around the U.S.”

Demandware’s approach is to offer merchants an e-commerce platform based on service-oriented architecture. Merchants pay a usage fee and get an on-demand hosted service for their e-commerce site. They also get an applications development environment that lets them easily customize applications.

“We compete with other models—packaged software and old-style ASPs [application service providers]. That’s what we’re finding out there, and we’re fighting and winning," said Mr. Schambach. 

Demandware has so far signed up customers like Vermont Teddy Bear, Gardener’s Supply, and famed New York specialty delicatessen Zabar’s, to name a few.

“Prior to our company, merchants had to either be in the software development business or outsource their platform completely, and so lose control of their ability to merchandise,” Mr. Schambach said. “Our approach lets them use their core corporate competencies to their fullest.”

Significant Growth

All this comes at a time when industry analysts are seeing significant growth both in software as a service and online shopping.

Retailers are spending an increasing amount on information technology. According to a recent Gartner report, retailer’s IT spending will increase to $136 billion in 2009 from $109 billion in 2003.

Simultaneously, consumers are increasingly willing to buy online. A JupiterResearch forecast expects online retail spending to grow to $95 billion this year from $81 billion in 2005. By 2010, the report said 71 percent of online users will use the Internet to shop compared to 65 percent in 2005.

That’s good growth, but there’s a caveat. Online retailers will find it difficult to find new nonbuyers to convert. That means online retailers will have to find new ways to get existing users to spend more money online.