Sneak peek at future of SaaS investing
medium.com
medium.com
That means they abandoned 1/3 portfolio strategy they used to have (1/3 loses money, 1/3 returns exactly 1, 1/3 returns fund) but instead are focusing on steady returns by SAAS companies at 2-3x of the investment.
There are a few major implications:
- for the founders; if you don't fit their narrative, for example you have big chunk of revenue coming from services or you have only few enterprise clients, then you are out of luck
- for the funds; the deals are overly competitive driving up the price and diminishing the returns
- for the market; up until the economy is up to the right, things will be fine. Once things start changing, the first things to go will be a lot of these "nice to have" SAAS companies. In turn they will take down growth equity and freeze funding at the later stage (Series B, C, D, ...).
The last point applies to also to the the article. You can build bootstrapped $1M ARR business, but can you defend it? I think that's the biggest question.
Our modus operandi was that a growth equity investment should _never_ go to zero. The new portfolio thinking has shifted to the right: 1/3 make 1-2x, 1/3 make 2-3x, 1/3 make 3x or more.
Would emphasize your point around services - SaaS investors are generally allergic to this stuff and prefer services to make up as little of revenue as possible. It's typical low margin and not seen to be very "strategic" (though this could be debated).
SaaS is also much easier to analyze and diligence than the typical non-SaaS software company or consumer internet business. I won't say it's dead simple, but it's very much not rocket science. In combination with excess capital, this leads to prices getting bid up as such ease of diligence leads many investors to throw in a term sheet. It's just so easy to get comfortable with this stuff.
One caveat to all this that ties to your last point around the market / economy is volatility. You can see in the data that companies that generate a higher amount of the their growth from SaaS-like retention/upsell see higher valuation volatility when the market turns for any reason. [1] The "best" SaaS companies in the eyes of later-stage investors are typically those with high net revenue retention - but these are also the ones that get whacked the most in corrections.
As far as a downturn taking down growth equity - time will tell.
> As far as a downturn taking down growth equity - time will tell.
As with everything. My prediction is, as the concentration around SAAS increases, more funds will be created (especially if no other instruments can produce such a high predictable growth) leading to more concentration.
If I didn't have a business to run, I would be already trying to raise fund for Series A and B to focus on non-SAAS business. You get quite heavy discount on them as there is little competition and and you again get the 1/3 business model of early stage VC, which can produce outsized returns. over just 3x.
Performance through-the-cycle is a big question. One can point to Salesforce (founded 1999, IPO 2004), which has been around for 20+ years... However, big sample bias here (ditto for my article, with sample n = 1). Salesforce, a big-category-defining company - may not be representative of moderately-sized businesses.
Whoisnnamdi - per your post, revenue retention looks like a key metric driving valuations!
Can you clarify this? What do you mean by "large service revenue" and why does that mean the founders are out of luck?
[0] https://www.sequoiacap.com/china/en/article/measuring-produc...
Always right on time.
The area is moving to lower returns, which still can be good for smaller independent teams that can grow or bootstrap. They'll make a similar return to founders, since VC's cash was needed to fund large teams or infrastructure
If the author gave five other examples, then there's a case, but pointing out the one known example doesn't provide enough evidence in my opinion.
A separate point on style and punctuation: too many em dashes in the wrong places.
> What would make Buffer — a good investment?
No need for an em dash here.
> And, if you want to start a get-rich-slow SaaS fund — what is your target maturity?
Same.
> What if, at end of the holding period — investor sells the Buffer stake at market valuation?
Replace em dash with "the".
> But wait… that perpetuity — is a “paper valuation”.
Remove. The ellipsis could be an exclamation point, though it could be in the "personal style" bucket.
I would suggest removing every single em dash and practicing writing without them. They can be useful—for providing inline examples or explanation, for example—but should be used sparingly. Commas, colons, parentheticals, and semicolons can cover most of your use-cases.
The written word is a different medium.
It would be like writing:
> She enters the room. Pan left and there's a photo on the wall. Cut back to her, she's brushing a strand of hair from her face. Now cut to the bartender. Zoom in on him. He's polishing a glass, staring at nothing.
etc.
It's a pastiche of a movie scene.
It's not that you can't do it or that the reader won't know what you're trying to do. Unless there's a specific reason to do so, it's probably not the best option.
- Adobe (dominates DTP, can squeeze companies worldwide, small and large after switching to a subscription model)
- SAP (investors were overall pleased with their SaaS offerings)
- Microsoft (don't know the revenue stake Office 365 represents, but it's currently enough to subdue Slacks Post-IPO performance)
- Slack
But also mid- to small-cap companies like RIB Software, which offers SaaS for real-estate related industries.
Of course, thouse examples don't mean that their balance sheets provide evidence – but rather that stock market participants see SaaS-models as a path for constant high-margin low-volatilty growth.
I would be very happy to share 15-20% if the value-add is strong enough.
I own a few SaaS sites that I bought (because I don’t have the patience and focus to build one myself) that I then work to increase the value of (based on lessons from a previous SaaS company I worked at), and I’m always interested in private equity arrangements.
Do you mostly try to twist the dials a bit to boost net margins, e.g. increasing automation for a product that is "already written" and can go on maintenance mode, or is it something more nuanced? I'm super interested in this topic as I've been building out 2 pretty neat SaaS products (basically web APIs that solve concrete problems for developers, similar to a Stripe or Twilio model, but for an industry that is not quite as open as telecommunications/payments) and I'd love to hear how investors look at this segment. Thanks in advance!
Even that is achievable on my own if I put some effort into it, but I've been busy with another startup recently that's doing 20x my solo project. Also bootstrapped, but not entirely owned by me.
the past 10 years, yeah. but the prior 10 years were much worse.
Were you around during that time? Everyone thought they were going to have the next Amazon. Most folks wound up with Pets.com.
There certainly were a lot of bad companies without meaningful revenue seeking and getting investments, just like today.
But if you'd invested only in profitable small software companies doing 15% growth back in 2000, I think you'd have done well.
Traditional private equity, ala Berkshire Hathaway, is still pretty prevalent. There are plenty of self-described VCs who aren't necessarily looking for a 10-100x return amongst 100 small investments, but 2-5x returns across dozens of investments.
The vast majority of companies will never have a significant exit event triggering liquidity (IPO, M&A). Does that mean they're not worth investing in?
At least with private equity, you hopefully have some ability to influence those steering the ship, and get to avoid all of the regulatory hurdles. Opaque quarterly reports and short-sellers aren't exactly encouraging.
the risk you take to earn 15% is way too high to justify such a small return. if you want to earn 15% just invest in some REITs and call it a day
EDIT: It's also the name of the VC firm. D'oh! Keeping the rest for posterity.
Notice how there’s no actual values for what “tiny” means?
If you have cash to invest on a VC company, you’re most likely already quite well off, with an equal amount invested in less risky ventures.