Get Rich Slow And Steady in Software
Sneak peek at future of SaaS investing — Tiny Capital and Buffer
2010s was a unicorn decade. 2020s — might belong to a humble thoroughbred… with a golden horseshoe.
Get Rich Fast
Launch quickly. Raise a lot. Iterate. Scale, scale, scale. Then… exit, at sky-high valuation.
That has been the battle cry of 2010s. Big payout, but also — significant volatility. Few companies make it to the finish line.
New Asset Class?
Another breed of a tech company — grows at its own pace. No turbocharging. Often, bootstrapped. Focused on reaching break-even. And, upon becoming profitable — it can start paying dividends.
As an investor — what are you looking at here? Think: mature SaaS companies. Subscription-based revenues. Recurring, and relatively predictable. Stable gross margins. Ongoing costs of maintenance, and development… Need to keep those API running, and execute on new features. Profitable, and able to return funds to shareholders. Think: cashflows over time. Get rich slow.
Case In Point: Buffer
Buffer — social media account management, for businesses. Promising product. Huge TAM, competitors including Sprout Social, Hootsuite, Salesforce. Founded in 2010, accepted investment by Tiny Capital in 2016. Demonstrably, Tiny Capital expects to generate returns from dividends and buy-backs. What would make Buffer — a good investment?
Buffer: Financial Projections
For purpose of this analysis — we leveraged datapoints available on Wikipedia, and tweetstorms by Andrew Wilkinson and Joel Gascoigne. Future assumptions — same sources, extrapolated.
Simplifications aplenty: using reported ARR as annual revenue figure, and having a fixed net profit margin (30%). Entry ticket — $60m was valuation paid, not Tiny Capital’s investment. Overall, we are focusing on IRR here, so nominals are less relevant.
Finally, payout ratio for shareholder distributions is set at 50%. In line with Wall Street’s ballpark average — and, with Buffer’s own approach to buying out investors.
Buffer: Returns Profile
So… what would make Buffer a good investment? With an attractive returns profile vis-a-vis other asset classes? And, if you want to start a get-rich-slow SaaS fund — what is your target maturity?
“Payouts and perpetuity” scenario yields returns in high single-digits, or low teens. At the end of holding period, investor still holds the shares, retaining rights to future dividends. Value of those, you can estimate as perpetuity — here, at a discount rate of 15%, ballpark figure for cost of equity.
But wait… that perpetuity — is a “paper valuation”. No money changes hands, unless the investor sells at that level. Why would they, assuming significant growth left in the business? What if, at end of the holding period — investor sells the Buffer stake at market valuation?
For a liquidity event, a 5x EV/Revenue exit multiple is assumed. Low? Perhaps, by today’s standards — and for today’s Buffer. Mature software businesses, like Oracle — do trade around 5x. Another simplification: net debt is zero.
New Breed of Investing
Can a SaaS company sustainably grow revenues at a 10% yoy? — key question this. If you believe it can — then, a get-rich-slow fund, with a liquidity event, works at 10-year maturity. For Buffer — this scenario generated returns between 15–17%. Competitively positioned between infrastructure investing (13% IRR), and private equity (18% IRR).
Why 10% is linchpin? Because all other assumptions — profit margins, payout ratios, exit multiples — are close to market-levels already. That “10% growth” — is the big unknown.
Time will tell how many new funds will join them — but, out there, you can already find investors in SaaS, getting rich — slow and steady. Apace.
GRSSaaS? GRASS. A thoroughbred’s favorite.
Post Scriptum: Reservations and Limitations
Huge sample bias here: what makes Buffer, a single company, the poster child for get-rich-slow investing? Perhaps, average returns profile in SaaS won’t look anything like Buffer. In reality — too early to tell, as cohorts of SaaS companies are yet to mature.
But, at this point — Buffer is a fair specimen of its kind: ~bootstrapped, moderately-sized, with a strong cost discipline, and a long-term approach… The sort of check that a get-rich-slow investor would write.
