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The re-focus on SaaS as the only class of investment that can reliably generate returns and avoid zeros or capital loss is a very real trend. Would emphasize y
by whoisnnamdi 7y ago
The re-focus on SaaS as the only class of investment that can reliably generate returns and avoid zeros or capital loss is a very real trend.
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.
[1] https://whoisnnamdi.com/high-retention-high-volatility/ https://whoisnnamdi.com/high-retention-high-volatility/
- tomkubik 7y agoRisk / return trade-off still holds - great insight! 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!
- doh 7y agoMy point wasn't that all SAAS business are going to be in trouble, rather than the growth equity is going to be impacted because they are funding only SAAS businesses. There is no hedging and as such, once business stop paying for certain SAAS services, they will in turn stop paying for others and so on and so on.
- doh 7y agoExactly, SAAS is much easier to analyze, that's why everyone moved to SAAS investing because it doesn't have many "flips of coin" in order to be successful. > 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.