The SaaS Market is fragmented
Let me start by posing a question — will the SaaS market go the way of cars and PCs — massively consolidated from hundreds (or thousands) of manufacturers down to a few mega suppliers? Or will it go the way of restaurants and software — big chains as well as lots of boutiques and small franchises?
People — analysts, VCs, skeptics-in-general, always grill founders with “why wouldn’t [Microsoft or other BigCo] do this?” Articles get written forewarning of the end of startup opportunities. There are countless pitch deck templates and articles coaching entrepreneurs on how to get past these objections. The topic in SaaS is becoming more frequent now with Salesforce, Microsoft, Amazon, Google and a small handful of others growing larger and larger — hoovering up winners in tangental markets and building new products at a rate of knots.
I think the reality is SaaS is just like software has always been. The 2 ends of the spectrum — consumers and the Fortune 5000 — will be dominated by large players but the (substantial) middle market will be serviced by many verticalized SaaS tools, and challengers creating new ways of solving old problems. Lots of people have no love lost for Salesforce — and no amount of consolidation will stop people from using their preferred tool, or trying a new one- for example Hubspot has done a great job connecting sales to marketing with their new CRM. Similarly no amount of new features will take airlines away from using a vertical specialist SaaS company like Boxever.
The big players don’t really want to compete in the middle market.
Hand to hand combat with a scrappy startup willing to do anything to win a small customer just isn’t worth it for them. Telco’s didn’t seem to care much when a programmatic developer tool for calls started up — and Twilio seems to be doing pretty well now! They can wait until the prospect grows and, they assume, inevitably outgrows their current suite and moves to BigCo’s solution.
Average contract sizes grow as companies grow — this is one of the opportunities SaaS startups have — a tolerance for investing time in lower value deals, and still maintaining high gross margins. Ultimately, successful startups here increase their target contract size to the point where they create an opening for a leaner, hungrier startup to emerge and grab the lower-end.
Business is always changing — the customer, the end-customer, the market, the drive to grow in a thriving economy, or get more efficient in a downturn — and change creates opportunity. From where I sit, it’s unlikely that SaaS — like software before it that had large players and many small ones succeed in a highly functioning market — will get massively consolidated and remove the opportunities for new entrants.
It is, however, likely that we are in the go-go phase of SaaS and we have an overabundance of SaaS startups. But that’s a discussion for another day…