From 2,000 participants in 2016 when I attended last time, over 12,000 participants from 96 countries congregated in San Jose (Silicon Valley) this year to discuss, debate, network, and gather learnings +insights from some of the SaaS economy’s influencers, movers, and shakers. I plan to share some of my observations and key learnings below.
SaaS is growing yet is still early on the journey from software to SaaS globally
I remember back in the late 90s when I was part of building Asia Pacific subsidiaries for web platform companies like Broadvision and OpenText, cloud based enterprise apps were being promoted, sold, and deployed in the market as ‘Application Service Providers’ (ASPs). These were large, complex, and difficult to deploy solutions which we still stuck in old software architectures yet had the promise of ‘anywhere/anytime’ access and usage.
Roll ahead 20 years, and the software market has shifted towards a more sophisticated ‘usage based / recurring revenue’ software-as-a-service (SaaS) business model where the bottom layers of the tech stack have been compressed and commoditised enabling the proliferation of 10,000s of SaaS providers globally. At SaaStr 2019, I experienced the depth and breadth of the sector yet there is a long road ahead. We’re still early on the journey!
SaaStr 2019 had over 12,000 attendees, up from 2,000 in 2016 where I attended for the first time (when I was running 8common Ltd). Within 3 years of attending each SaaStr conference, it’s fair to say this time around I experienced a deeper level of learnings, data backed evidence of changes occuring in the market, more exits and IPOs, and a wider amount of specialists firms and providers surrounding the SaaS ecosystem.
Observation #1 : Two investment cohorts have formed dependent upon a SaaS company’s growth trajectory
With the growing list of SaaS companies around the globe, together with the predictability of future revenues and profits based on this business model, there has been a proliferation of VC, growth equity, revenue financing firms operating to serve the needs of different groups (cohorts) of SaaS providers. It was great to see more growth equity and revenue financing firms like Turn/River, TIMIA, and SaaS Capital present their experiences and frameworks on how they decide who and how to invest into SaaS companies.
It high level, my observation was that 2 cohorts of mindset / funding pathways have formed as follows:
- Early stage > later stage VC backed : SaaS companies who raise early stage VC backed capital who continue to raise more VC backed capital for Series A, B, C+ have a much high growth trajectory with a higher spend ($ burn rate) towards category leadership. This school of SaaS companies and investors would have ‘unicorn’ status mentioned in most sessions and the number of unicorns was growing year on year. E.g. Bessemer Ventures presented their State of the Cloud 2019 Report and predicted the SaaS sector would hit over $1 trillion in market cap by 2020! See below.
Great to see but I believe this is also fuelling the next big multi $bn VC funds this year in preparation for what’s coming in 2020. Bessemer also presented their new GRIT framework as they telling SaaS companies of all shapes and size to prepare themselves for a possible (most likely) correction coming in the near future. As mentioned by the Bessemer team, “At Bessemer, we recommend cloud founders operate on G.R.I.T. — a critical set of metrics that resilient, enduring cloud companies use as yardsticks of success.”
2. Founder Bootstrapped > Growth Capital backed : I got to meet many bootstrapped SaaS company founders who did not like or agree with the ‘hypergrowth at all costs’ velocity expected by the traditional VCs. They are comfortable in building good, organically growing SaaS companies, solving market needs with their SaaS products, by build distributed teams around the world (not expecting to have 100% of their workforce in San Francisco or Silicon Valley!). Because of the maturing evolution of the SaaS ecosystem globally and predictability in recurring revenues, new forms of financing have appeared enabling bootstrapped SaaS founders to continue to invest in growth with the aim of a more reasonable exit in years to come. Turn River Capital presented their SaaS Archetype at Scale framework. See below.
There are clearly 2 cohorts of SaaS company + investment capital in the market and the important learning is that SaaS founders must become of aware of these and recognise the type of capital they raise comes with certain growth trajectories and levels of risk which they need to be aligned with.
In addition, based on the evidence growing over the last few years, the compound effect of growing recurring revenues has demonstrated that SaaS founders may have exited too early or in the flip side acquirers bought great ‘value for money’ SaaS companies where they captured all the upside.
Just great to hear and experience these level of conversations this time around at SaaStr vs 2016 event. Again, the market is growing yet early on it’s journey in opinion!
Observation #2 : Growing understanding of the value in building ecosystems and categories and not just products by SaaS founders
I attended several sessions where successful SaaS founders were interviewed and presented their experiences along the long journey (it’s never less than 10 years!). Here are some of the observations from SaaS founder sessions at SaaStr 2019:
Automattic (and Wordpress) : Automattic’s founder and CEO Matt Mullenweg was interviewed by one of his early stage investors, Tony Conrad (True Ventures) about the long journey. Was great to hear about Matt’s higher purpose in building the Wordpress community and ecosystem to what it is today (worth over US$20bn). It’s what drives them to continue to foster this ecosystem and economy. Some people might say this is too ‘up in the clouds’ (sorry about the pun!) but I do believe in this being the next wave of maturity across the SaaS world.
Tradeshift : attending this session was eye opening and music to my ears at the same time! Was glad I attended SaaStr this year and hear Tradeshift’s CEO Christian Lanng share his journey in building and continuing to grow Tradeshift into the world’s ‘new SAP & LinkedIn’ combined (as he said). This session was another great example of the diversity in SaaS company across as their core proposition is complex and target market is large enterprise multinationals. Because of this, they recognised their Go To Market (GTM) model had to deal with the complexity of long difficult sales cycles and the value in investing in alliances for the long term.
They needed to also raise a lot of cash $400m to date with a high burn rate to build a complex product and have the patient capital to gain market share and build a closed ecosystem of supply chain participants globally.
Another great investment ‘hack’ I heard Christian share was their successful approach to raising a new round of funding without diluting their shareholdings! There recognised the future value of their company due to the beauty in long recurring revenues with very sticky customers and therefore decided to go direct to pension funds, borrowed $100m for the equivalent of 25% of their stake and backed themselves in the next round of funding. Great move! They were about to treat the $100m like a ‘bond’ from the pension funds have the doubled their shareholdings for minimum risk due to compounding value of SaaS ARR! Great move!
Qualtrics & SAP : another great story of the journey being long and never linear by Qualtrics cofounder & CEO, Ryan Smith. Nothing like staying ‘under the radar’ and being focused on building their business vs seeing their name in the news. I reckon the family affair of 2 brothers and a father played an important role in maintaining their sense of drive and perseverance during the first 10 years (of 17!) when trying to find their product/market fit in tertiary education and eventually have time give them the platform to grow as their 1st cohort of users entered corporate sector. They were also one of the first to create a new category and own it (Customer Experience Management) and for this were rewarded with a US$8bn exit to SAP recently. SAP provides the business with an amazing global reach with thousands of enterprise salespeople and has become the complimentary pillar to SAP’s next stage of growth. Time will tell…
Observation #3 : Great SaaS companies are being recognised globally with distributed workforces + open source are now sexy vs SaaStr in 2016
It was interesting to hear VCs speak highly of both distributed workforces and open source business models as validated operating business models for the first time.
Automattic also shared how their global distributed team of over 200 employees meet once a year in the same location to celebrate the year’s accomplishments and also connect face to face and plan for the year and mission ahead.
On a side note, having been on the board of several SaaS companies over the last 10+ years, I have experienced the power and value of distributed workforces for certain style of SaaS company; the inbound self serve SMB/mid market B2B operating model which is powered by a lean growth and customer success capabilities.
Attending SaaStr in 2016 and 2019 was great to experience and the timeframe of 3 years in between provided me with enough time to experience a positive shift across the SaaS ecosystem as it continues to grow, build momentum, and enable more specialist firms and SaaS companies serving the needs of this global community, the economy, and society overall.
Finally, here are my key takeaways:
- Maturing space with plenty of data yet still early on the journey towards a world dominated by recurring revenue / products as a service (SaaS) ecosystem;
- Velocity of growth driving specialisation with investment capital and mindset;
- Prepare for a economic downturn needs to be part of your planning; and
- Distributed global workforces have been recognised and validated.
Well done to the SaaStr team 2019!