The “other” SaaS

In 2016, it’s safe to say that Software-as-a-Service is kind of a big deal. But I don’t want to talk about that. Instead, I want to talk about something I’ve seen in the last few months working with entrepreneurs and thinking about startups as an associate at Hyde Park Angels. I made it up (although I certainly wouldn’t call it original), so it must be good. It’s called “Service-as-a-Service” — the “other” SaaS (oSaaS henceforth).

The old type of customer service. Some things don’t change…

oSaaS doesn’t necessarily have MRR, and it doesn’t even have margins of 80%+ (though it certainly can, and I commend you if it does). It is a business that serves customers by thinking about problems from their perspective, and providing a solution that goes above and beyond existing options. Clearly, giving your customer what he or she wants isn’t a groundbreaking idea. But it has to be a startup’s top priority in order to thrive. No matter the type of company, from enterprise software to consumer product, understanding customer needs is paramount for success. Three different models exist to solve a potential customer’s problem:

New Product/New Channel

On average, these are the most transformative businesses. As a founder, you anticipate a sea change in people’s needs and create a business that uncovers or simplifies a completely new sector. Think human connectivity & facebook (or friendster…or MySpace…), or data organization and Google (or Lycos…or Yahoo!). More recent vintages of examples like this are Magic Leap and Oculus. When you’re right, you have a chance to create an entire new segment of commerce. Investors like that!

Old Product/New Channel

In hindsight, many of these businesses seem like the “obvious” ones (at least to me). Companies like Casper, Dollar Shave Club/Harry’s, and the plethora of lending platforms (LendingClub, SoFi, Common Bond, many others) fall into this category. The thing companies like these have in common are the friction and frustration involved with buying them in the “traditional” channel. I would much rather order my comfy mattress online and have it delivered in a spiffy and oddly small box than spend an hour+ with a mattress salesperson lying down on showroom mattresses 15 miles outside of my downtown apartment (#millennialalert). The same goes for getting a pre-subscribed box of razors monthly instead of going to Target every few weeks. And I don’t think the complexity and frustration of the lending process needs to be explained in this post…Netflix is another great example in this category.

New Product/Old Channel

I struggled a little coming up with companies in this category. A few that came to mind were smartphones, Tesla, and even Uptake (a Chicago-based data-analytics Unicorn for industrial manufacturers like Caterpillar). These companies represent a technical leap in an existing process or service, which unlocks substantially more value than an incumbent product or service. Would love to hear your thoughts on other examples in this bucket.

For me, the bulk of investment opportunities lie in the Old Product/New Channel bucket. The difficult part comes back to the main idea of “oSaaS”: Is your product a breakthrough that consumers respond to in droves when given the choice, or is it a marginal enhancement over the status quo? As an investor, figuring this out is not easy. Whatever “traction” means, this is what you have to look for to determine whether a startup is on the right path. And there’s no doubt it looks really different at various stages.

For founders, this is the million- (or hopefully billion-) dollar question. But if you think about the question from the consumer’s perspective, it’s a lot more likely you’re going to find an answer.

Would love to hear your thoughts and feedback! Did I leave anything out? What do you look for to understand your fit with customers? What does “traction” mean to you?