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I'm not sure if this is fraud, or simply how VCs operate, but we're going to see a massive collapse of SaaS startups and their customers in the near future. Thi

I'm not sure if this is fraud, or simply how VCs operate, but we're going to see a massive collapse of SaaS startups and their customers in the near future. This is why: 1) Tech valuations over the past ~5 years were based entirely on annual revenue multiples. 25x was the norm, while 50-100x wasn't hard to find. 2) Let's say your VC firm owns 5% of CompanySaaS, which you paid $1M for, and the company is valued at 25x ARR ($800k * 25). 3) Now you invest $100k in CompanyWhatever. As their VC and valued advisor, convince them they should spend $100k/yr utilizing CompanySaaS's products. 4) CompanySaaS is now worth $900k * 25 (probably higher multiple since revenue is growing so fast), or $22.5M, and you just turned $100k into $125k. Rinse and repeat. It's a self-perpetuating bubble, and it's going to come crashing down hard. It's already happened but they've still got enough runway for another 6-24mos.

lumost 4y ago
I'd be curious how extensive this is. Presumably the entire ecosystem can't be running on VC... however I'm not sure how much of it is pure VC. Are SaaS firms on average going to see a 10% decline in revenues or a 70% decline? Or a 1% decline?
- lazide 4y ago
  Definitely not all the revenue/ecosystem, but I'd be surprised if it wasn't at least 25%.
hedora 4y ago
This would only be a bubble / ponzi scheme if a significant fraction of B2B customers were currently backed by VC money. That isn't the case. Instead, these deals help bootstrap companies. Late phase investors insist on seeing per-customer revenue breakdowns specifically to avoid the issue you are describing. It is likely that startups that are becoming revenue-dependent in 2022-2023 are in trouble though.
- lazide 4y ago
  A LOT of startup business comes from other businesses within the same VCs portfolio.
  - keepquestioning 4y ago
    If this is true then it's eyeopening. I often wonder, who actually uses SaaS?
    - lazide 4y ago
      Quite a few companies do, if the SaaS has value to them. The challenge is, which SaaS companies have real value, and which ones have been working hard to LOOK like they have value? In the wise words of Mr. Buffett - "It's only when the tide goes out that you learn who has been swimming naked." Well, the tide is going out. Time to grab some popcorn!
    - ajb 4y ago
      There are plenty of small companies without their own IT staff, for whom the low onboarding friction of SaaS is very attractive. Other startups use them because they too are small companies, not because they are startups.
    - liquidgecka 4y ago
      There are some problems that are just easier to offboard, even for huge companies. Very few companies at any level run their own email, LDAP, even HR packages these days. That's all SaaS now. But there are other problems that are just easier to outsource too. Who runs a ticketing system inhouse these days? Who runs chat services like slack inhouse? SaaS is entrenched and not going anywhere. The problem is what people think companies will pay for and how much. I will happily pay for a service to manage a deploy pipeline but one of the ones I talked to recently was going to charge $80 per POD in our line cluster. That would have easily made them a 6 figure SaaS for us which isn't going to fly, meanwhile we pay for somebody to host our monitoring dashboards because it's only $1k or so total a month.
    - 4y ago
paxys 4y ago
That's not how it works. If you invest $100K in a company and ask them to spend all of that $100K to buy products from another one of your companies, they will laugh at your face.
- datalopers 4y ago
  It's an oversimplified example to illustrate how revenue-multiple valuations lead to perverse but rational investment strategies.
  - paxys 4y ago
    If you plug in realistic numbers in that example you will see that yes, while network effects from your VC's portfolio is definitely a thing, it isn't some crazy scam that is due to collapse. The most a VC can do is get you 5-10 early customers and try to generate some word of mouth buzz.
- PheonixPharts 4y ago
  I'm not sure what industry you work in, but at least in the world of US tech startups there's long been a huge culture of buying services from VCs and their friends other startups. It's almost a point of pride to be using some other early, but promising startup's SaaS product before everyone else. Just take a look at Snowflake for probably the most successful example (though they still don't make a profit). It seemed like over night ever "big data" tech company I knew started using them aggressively with little other reason than they were the next cool startup whose product you wanted to be using.
  - deleted 4y ago
    [deleted]
jrm4 4y ago
So not hard to see from a purely theoretical standpoint; free/open source or similar is always around the corner to eat your lunch. Unless you can figure out "What, EXACTLY, is the thing that I can charge them for -- meaning that they cannot get unless they pay me for it," you're done. And that space is pretty small. Not nonexistent, but small.
deleted 4y ago
[deleted]
015a 4y ago
I agree with this take, and I'd also add: the broader macroeconomic issue with SaaS concerns how quickly companies lose its utility from downsizing their expenses. If I, as a customer of Canva, stop paying for Canva; its safe to assume I was paying for it for a utilitarian, revenue-generating reason, and if I cancel it I immediately lose the ability to capitalize on that utility. This hurts my business, which then cascades further. In comparison, choosing not to upgrade to Office 2007 or whatever isn't an ideal choice, its one a healthy business may not make, but it is one that an unhealthy business attempting to survive a period of lowered revenue may make; Office 2003 works just fine. In that sense, the cascade effect is actually bidirectional; canceling Canva immediately hurts Canva, but it also hurts my customers; more acutely than, say, waiting a year to upgrade to the latest version. Additionally, many people talk about bullshit jobs, and it seems obvious to me that subscription based billing has been a driving factor in this phenomena. If, revisiting the previous example, Office 2007 doesn't deliver enough value to Me The Customer to convince me to upgrade; I won't. Under subscription based billing, I'm given no choice; it follows that we enter a pattern where companies are far less incentivized to deliver innovation. When speaking on a domain where there's little competition, this effect is heightened, but the move to subscription-based billing subtly removes even another competitor from the domain: your past product. The other thing I think about when it comes to software companies: how little inherent value they have. While not the only area where it matters: think about bankruptcy liquidation. Their value (at insane valuations, to be clear) was in the service they provide, but when the rubber hits the road the code really doesn't have much value (its kind of like that old story about the guy who stole coke's secret formula and tried selling to pepsi; even if you could obtain it legally, why would you want it?). Maybe the data does, for some companies. Most of these companies don't have servers; they may buy their employees laptops. Many are moving to full-remote; so no real estate (which may have been rented anyway). When revenue starts plateauing and the veil is lifted, the reckoning will be so much harder. Point being, I think the pricing, expense, and operational model in typical SV-style corporations is subtly unsustainable.

lumost 4y ago

I'd be curious how extensive this is. Presumably the entire ecosystem can't be running on VC... however I'm not sure how much of it is pure VC. Are SaaS firms on average going to see a 10% decline in revenues or a 70% decline? Or a 1% decline?

lazide 4y ago
Definitely not all the revenue/ecosystem, but I'd be surprised if it wasn't at least 25%.

hedora 4y ago

This would only be a bubble / ponzi scheme if a significant fraction of B2B customers were currently backed by VC money. That isn't the case. Instead, these deals help bootstrap companies. Late phase investors insist on seeing per-customer revenue breakdowns specifically to avoid the issue you are describing. It is likely that startups that are becoming revenue-dependent in 2022-2023 are in trouble though.

lazide 4y ago
A LOT of startup business comes from other businesses within the same VCs portfolio.
- keepquestioning 4y ago
  If this is true then it's eyeopening. I often wonder, who actually uses SaaS?
  - lazide 4y ago
    Quite a few companies do, if the SaaS has value to them. The challenge is, which SaaS companies have real value, and which ones have been working hard to LOOK like they have value? In the wise words of Mr. Buffett - "It's only when the tide goes out that you learn who has been swimming naked." Well, the tide is going out. Time to grab some popcorn!
  - ajb 4y ago
    There are plenty of small companies without their own IT staff, for whom the low onboarding friction of SaaS is very attractive. Other startups use them because they too are small companies, not because they are startups.
  - liquidgecka 4y ago
    There are some problems that are just easier to offboard, even for huge companies. Very few companies at any level run their own email, LDAP, even HR packages these days. That's all SaaS now. But there are other problems that are just easier to outsource too. Who runs a ticketing system inhouse these days? Who runs chat services like slack inhouse? SaaS is entrenched and not going anywhere. The problem is what people think companies will pay for and how much. I will happily pay for a service to manage a deploy pipeline but one of the ones I talked to recently was going to charge $80 per POD in our line cluster. That would have easily made them a 6 figure SaaS for us which isn't going to fly, meanwhile we pay for somebody to host our monitoring dashboards because it's only $1k or so total a month.
  - 4y ago

paxys 4y ago

That's not how it works. If you invest $100K in a company and ask them to spend all of that $100K to buy products from another one of your companies, they will laugh at your face.

datalopers 4y ago
It's an oversimplified example to illustrate how revenue-multiple valuations lead to perverse but rational investment strategies.
- paxys 4y ago
  If you plug in realistic numbers in that example you will see that yes, while network effects from your VC's portfolio is definitely a thing, it isn't some crazy scam that is due to collapse. The most a VC can do is get you 5-10 early customers and try to generate some word of mouth buzz.
PheonixPharts 4y ago
I'm not sure what industry you work in, but at least in the world of US tech startups there's long been a huge culture of buying services from VCs and their friends other startups. It's almost a point of pride to be using some other early, but promising startup's SaaS product before everyone else. Just take a look at Snowflake for probably the most successful example (though they still don't make a profit). It seemed like over night ever "big data" tech company I knew started using them aggressively with little other reason than they were the next cool startup whose product you wanted to be using.
- deleted 4y ago
  [deleted]

jrm4 4y ago

So not hard to see from a purely theoretical standpoint; free/open source or similar is always around the corner to eat your lunch. Unless you can figure out "What, EXACTLY, is the thing that I can charge them for -- meaning that they cannot get unless they pay me for it," you're done. And that space is pretty small. Not nonexistent, but small.

deleted 4y ago

[deleted]

015a 4y ago

I agree with this take, and I'd also add: the broader macroeconomic issue with SaaS concerns how quickly companies lose its utility from downsizing their expenses. If I, as a customer of Canva, stop paying for Canva; its safe to assume I was paying for it for a utilitarian, revenue-generating reason, and if I cancel it I immediately lose the ability to capitalize on that utility. This hurts my business, which then cascades further. In comparison, choosing not to upgrade to Office 2007 or whatever isn't an ideal choice, its one a healthy business may not make, but it is one that an unhealthy business attempting to survive a period of lowered revenue may make; Office 2003 works just fine. In that sense, the cascade effect is actually bidirectional; canceling Canva immediately hurts Canva, but it also hurts my customers; more acutely than, say, waiting a year to upgrade to the latest version. Additionally, many people talk about bullshit jobs, and it seems obvious to me that subscription based billing has been a driving factor in this phenomena. If, revisiting the previous example, Office 2007 doesn't deliver enough value to Me The Customer to convince me to upgrade; I won't. Under subscription based billing, I'm given no choice; it follows that we enter a pattern where companies are far less incentivized to deliver innovation. When speaking on a domain where there's little competition, this effect is heightened, but the move to subscription-based billing subtly removes even another competitor from the domain: your past product. The other thing I think about when it comes to software companies: how little inherent value they have. While not the only area where it matters: think about bankruptcy liquidation. Their value (at insane valuations, to be clear) was in the service they provide, but when the rubber hits the road the code really doesn't have much value (its kind of like that old story about the guy who stole coke's secret formula and tried selling to pepsi; even if you could obtain it legally, why would you want it?). Maybe the data does, for some companies. Most of these companies don't have servers; they may buy their employees laptops. Many are moving to full-remote; so no real estate (which may have been rented anyway). When revenue starts plateauing and the veil is lifted, the reckoning will be so much harder. Point being, I think the pricing, expense, and operational model in typical SV-style corporations is subtly unsustainable.