In September 2016, Philippe Botteri from Accel released a landscape with 110 promising European SaaS companies including 9 portfolio companies from Point Nine. The list is based on some factors such as market attractiveness, traction and team for example. The goal of this landscape was not to provide a complete list but rather a comprehensive overview of several great SaaS companies in Europe.
In recent weeks I did an analysis of the landscape for Point Nine and dug deeper into the numbers. It’s striking me that those SaaS companies have been built in very different ways, which makes it impossible to lump them together or to derive successful patterns. Therefore, I’d like to point out some insights and additional comments which could be helpful for founders and some thoughts they might want to bear in mind when building a company.
Take into account though, that strategies and best practices from other companies are neither easy to replicate nor can one apply them to every company although you might share the same business model.
Please note: This analysis relies on the data from Crunchbase which might not be 100% accurate.
1) US Software market remains important, 30% of SaaS companies flip to the US
More than 30% of the SaaS companies mentioned in that landscape have their headquarters in the US now according to Crunchbase. The leading group among that 30% comes from Israel where ca. 60% companies have their headquarter in the US today.
If you look at the German SaaS companies from that landscape, it’s interesting to see that 67% of them have a US presence but not a single one flipped their HQ to the US (yet). Our French neighbors are similar though. Three of the 19 French companies — PeopleDoc, Algolia and Visiblee have their headquarter in the US now. However — and it’s important to mention — this analysis is based on small sample so it is very hard to judge how it looks across 1000 German or French SaaS companies but I would be very interested in that analysis in case you are working on that.
What does that mean for founders?
- The US is a huge market to sell your software since it accounts for ca. 50% of the global software market
- It might be easier to raise money from US investors later on
- Possible early SaaS adoption from big US (tech) companies
- You do not have to flip the entire company but outline a strategy on how to win the US market at some point in the future
- Vertical SaaS companies might not have to go to the US to become a $100M+ company if their “vertical” is big enough without the US, e.g. Docplanner
2) US investors are nearly inevitable for big growth rounds
Until today, Trustpilot is the only company out of this relatively small sample where all the lead investors are based in Europe: Series C led by Draper Esprit, Series D lead by Vitruvian Partners. For the other three companies, US investors such as Iconiq Capital, Salesforce Ventures or Bessemer Venture Partners seem to be necessary — at least — to participate in those bigger rounds. This article here also points out some reasons why we see more growth rounds for EU startups led by US VCs in general, e.g. increased quality of European startups or EU countries as a better ground for some categories for new companies.
What does that mean for founders?
- Before choosing your seed investors, look and ask which later stage VCs invested in their portfolio companies and to whom they have a close relationship
- Ask growth investors how they can support you in scaling your team and your company e.g. to the US. Index, for example, put together a great piece for US tech companies about setting up their presence in Europe
- Depending on your business model and industry you should figure out which VCs you want to attract and how much capital you might need in the long run — maybe you want to start your business already in the US? I’m always wondering whether it would have been possible to start Uber in Europe and scale it to the stage where it is today?
3) Some companies skip the seed and only raise a big growth round
This is in particular interesting for seed funds such as Point Nine because there will be companies that simply skip the Seed and Series A, not giving us even the chance to invest :-)
In general, these companies can be described as businesses that bootstrap for a few years or raise a small angel round, and after a couple of years, they raise a big growth round of much more than $10M for internationalization and further growth. It is noteworthy that these companies are often Enterprise SaaS businesses and reach profitability fast which helps them to grow from their profits. Some examples:
- Celonis: the Munich-based process mining company started with around $10k, bootstrapped for five years and then raised $27.5M from 83Noth and Accel among others to grow in the US. They heavily focused to get things right for their first handful of customers which allowed them to grow. Moreover, the distribution through the SAP Reseller Agreement (as one of the only startups) gave them even more tailwind to win more customers. Nowadays, they just tripled revenue to €20M in the last 12 months and want to IPO in 2020 in the US — quite an ambitious plan that I like.
- Signavio: also in the process management space, the company is a spin-off from the HPI in Potsdam. They got €100k from their first customer (German health insurance AOK Brandenburg) which was enough money to fuel their growth. Interestingly, they also opened a small office in SF a couple of years later and gained Airbnb as one of its first international customers. The whole expansion was paid by its revenue until they raised $34M in late 2015.
- Ecointense: while not in the landscape, the story of the Software for health & safety, environment and sustainability is relatively similar. Just recently the company raised €22M after it raised a Seed round of ca. €900k in 2008 already — without any financing round in between.
What does that mean for founders?
- Based on those examples it was possible to bootstrap an Enterprise SaaS business in recent years. Is this possible today? This is hard to say, but I’m more than happy to meet founders showing me that it is.
- You need patience at the beginning until you closed your first customers but if the ARPA is big enough — which should be the case if you are hunting elephants — you can reinvest that money to fuel your growth
- You do not have to work in Enterprise to found an Enterprise SaaS company, although that might be helpful of course. All three companies mentioned above were founded by students!
Aaron Levie, CEO of Box, gives a good advice on that topic: Spend a lot of time with people that work in Enterprise companies, ask them on what they are spending a lot of time and what kind of repeating processes they have to do and then try to think how can you solve that problem with technology and software
- You should not raise a Seed round just because you can. Think carefully about the implications — you might be better off if you raise a (larger) round later on when you can show more numbers and have a clearer strategy
- While it sounds simple on paper, it is incredibly hard to scale a bootstrapped SaaS company
4) Raising money from VCs is not a must
Although these are exceptions among the 110 companies, there are 6 (5.5%) companies that never raised any money according to Crunchbase. If the data is correct, this shows that you can create a relatively big successful SaaS company without external money although the possibility is fairly low.
Notably, 5 of the 6 companies were founded before 2008 and the majority is offering software for analytics, sales or marketing purposes. I assume that the adoption of these tools is in general relatively fast and most of them are self-service tools such as Readdle or SessionCam.
What does that mean for founders?
- Again, in recent years it was well possible to bootstrap an Enterprise SaaS business without any financing ever
- Most of those companies are very mature (>8 years old) and there was less competition from other SaaS companies during that time to grow to that size. Think about your unique angle and how you differentiate because there is just more competition today in SaaS — both in Enterprise and also in the SMB segment. So you might end up bootstrapping your company until let’s say $1–2M ARR. Scaling your company up to $20M or even $100M+ is a totally different game
- Avoid creating a product that searches for a problem, or to put it in the words of Jerry Chen from Greylock:
Companies that focus too much on technology without putting it in the context of a customer problem will be caught between a rock and a hard place — or as I like to say, ‘between open source and a cloud place.
5) Horizontal SaaS dominates — is vertical SaaS now on the rise?
With more than 80%, the majority of the 110 companies are horizontal SaaS, their product is not tight to a specific industry and their customers operate in different industries.
What does this mean for founders?
- There is just much more competition in horizontal SaaS. Take the HR market and Applicant Tracking Systems as an example. I looked at dozens of them and they have all good metrics in the early stage but this space is so competitive, it get’s really tough to scale the business up to a certain point
- Vertical SaaS companies have shown faster growth than horizontal ones
- Some industries have a slower adoption rate of software and new technologies. They move slowly but steadily to the cloud, providing new opportunities for Entrepreneurs because there are no category winners yet
- One way to look at great opportunities:
Implications for VCs
In total, there are also some implications for VCs:
- Strong domain expertise is a must-have if you want to get into these successful and fast profitable Enterprise SaaS companies as an investor because they do not rely on external funding. You need good arguments besides the money in order to invest in them
- There is little transparency in Enterprise SaaS (in Europe), and it’s not easy to find those companies early on. You also need some creative ways to find those companies, e.g. look at the growing number of employees on LinkedIn or at partnerships corporates have with startups or attend industry-specific fairs
- Develop pattern on how to spot great Enterprise SaaS companies if you’re in the early stage and you believe in the opportunity. Learn more about the behavior of big corporates to answer questions such as how do actually Enterprise companies buy software?
- Vertical SaaS companies and opportunities might be harder to detect since deep industry knowledge is required. Also, the team might not fit into the stereotype tech-founder pocket because they come from the industry, are very experienced with the problem but might know little about VCs and their processes. Develop strategies on how to attract vertical SaaS companies, e.g. do topic specific deep dives, have somebody in the team for doing research. Following this trend, we see more new funds that target specific industries such as Digital Health Ventures focusing on HealthTech or Vito Ventures focusing mostly on Industry 4.0 for example.
Also, there has been a lot of public debate about the future of SaaS recently, the growing dissonance between VC and SaaS companies, new moats, what comes after SaaS and that the next SaaS will look nothing like Salesforce. A good summary of all of that is also written here by ChartMogul.
70% of the software spend is still for on-premise Software, and even though VCs are rising the bar, there has never been a better time to start a SaaS company (in Europe).