Is the Golden Age of SaaS Behind for Investors?

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This is a topic that many people have been discussing for some months in our industry: SaaS feels like a crowded space dominated by a few big companies (SalesForce, Google, Microsoft…) which are not only locking the market in terms of customer share but also have the power to acquire the new rising stars that could “threaten” them (See how SalesForce acquired many AI companies). As this Crunchbase article (The Slow Motion SaaS Crash) explains:

“with so many SaaS companies having been created in the past 10 years, it’s hard to justify, let alone back, new SaaS startups, which are by now competing against established SaaS players, not legacy perpetual license vendors.”

So, is the Golden Age of SaaS behind for investors?*

To answer this question I decided to take a closer look at the BVP Cloud Index and more specifically at the 43 public companies which are worth more than a billion $. I listed them on a spreadsheet with their founding dates:

This simple chart just shows the years when the current 43 $B public SaaS were founded (created, not funded):

  • 2006 was an exceptional year with 7 current public unicorns founded.
  • 2003–2008 seems like the early stage investors’ “SaaS Golden Age” during which they could have invested in companies such as Tableau, Shopify, Box, Workday, Hubspot, Xero, Zendesk, Veeva, New Relic (and more). More than half of the current public unicorns were founded during these 6 years.
  • Also keep in mind that these are public companies only. You have some big companies that were founded back then and are still private such as Dropbox (2007), Github (2008) or Docusign (2003). 2003–2008 was an exceptional period for the SaaS industry.
  • Only 3 companies of the BVP Cloud Index were founded past 2008. The “youngest” public unicorn being Hortonworks which was founded in 2011.

But I hear you already; you’ll argue with me that going public takes time and it’s normal that most of the companies on this list are more than 10 years old. The ones born past 2008 will arrive later on the public market.

As a consequence, I looked at the average and median values to IPO, and I found out that it takes on average 9.5 years for a SaaS company to go public (median value is 10 years). So yes, there are very high chances to see more $B companies founded past 2008 go public in the next years.

To double check that I’ve been on Crunchbase and filtered for each year (2009, 2010, 2011, 2012, 2013) the Cloud companies that were founded, have raised a significant amount of money as of today, and could become public Cloud unicorns:

Keep in mind that I don’t pretend it’s an exhaustive list. The aim was to quickly check whether I could find for each year potential billion-dollar SaaS. I’m well aware that I probably missed many companies (let me know, and I’ll add them). The point is just to see whether the trend of 3–4 unicorns born per year can continue after 2008 and it seems to be the case.

Note: if we add Nutanix, Purestorage and Sendgrid to the BVP list, then in 2009 we already have four public unicorns.

Conclusion: Is the “Golden Age of SaaS” behind for early stage investors?

  • Looking at the BVP Cloud Index only, 2003–2008 appears like the Golden Age for early stage SaaS investors (Tableau, Shopify, Box, Workday, Hubspot, Xero, Zendesk, Veeva, New Relic, Dropbox, Github, Docusign and more…)
  • If 2006 looks like an anomaly (7 public SaaS unicorns were founded that year), it seems that from 2003 on, 3 to 4 unicorns born per year is the norm.
  • And looking at the coming wave of still private big SaaS companies, we can keep this pace.

As a conclusion there’s no clear evidence that the Golden Age for early stage SaaS investors is behind us.

But undoubtedly times have changed:

  • The competition is now fiercer (for founders, for investors, for everyone).
  • The overall market is bigger but also probably more saturated and not as fast growing in many categories (in several software categories the majority of customers is probably already equipped with SaaS tools).
  • The “low hanging fruits” are now gone.

And it’s something that you can see from the list of private SaaS unicorns that I shared above. Many of them are not direct competitors to the current SaaS incumbents, but are kings of their “own” category (Invision for design, Onshape for cloud-based CAD tools, Zoom for B2B video communication etc.).

I think we’ll continue to see significant Cloud companies being created, especially in categories / verticals not dominated by SaaS incumbents and for emerging use cases enabled by new technological developments, such as AI & Decentralized Tech (this is why AI is “spreading” faster in industries where “SaaS” is not the dominant model yet, for example see Industry 4.0).

Note *: The notion of “Golden Age” depends on the point of view you chose. In this article I’m speaking about the Golden Age for VCs. But the Golden Age of SaaS for customers, founders or debt providers is not the same.