Happy New Year to everyone. I hope you are ready launch into another SaaS year. I have spent a fair bit of time over the holidays thinking about some of the big topics related to SaaS. You will hear much more about my ideas over the coming months. For this first blog of 2016, I want to concentrate on one specific topic. Cash.
Every SaaS is looking for money
When I look at the SaaS companies I advise and/or invest in, almost all have one common feature. They have either raised funds in the recent past or they are planning to raise in 2016. In some cases both! So I was thinking about why SaaS businesses always seem to need money. And I came across this post from Jason Lemkin - Why Can’t SaaS Just Mint Cash? Here is one of the gurus of SaaS looking at the exact question. How come even successful SaaS needs more and more money to sustain progress?
It also reminded me of an earlier post by another legend, Tom Tunguz. One of his themes is to analyse the published number of listed US SaaS companies. I think he has a basket of 51 that he tracks. This article highlights numbers for that group of SaaS companies. Almost none of these businesses are generating free cash flow or GAAP profits. Only 18 (of 48 at the time of the post) have ever recorded even 1 year with positive net income. The cash position is better but it still takes on average 6 years for SaaS to become cash positive.
Why does SaaS eat cash?
Why should this be? And does the SaaS business model still make sense if the overall economics are so tough? I believe it does because these numbers are a product of growth. Not the result of a fundamental flaw. That does not mean you can relax if your SaaS is swallowing cash. Growth is one factor but it can also highlight areas of the business model that need attention.
The key challenges that create cash burn are:
Is Enterprise the only answer?
One option to work your way out of the cash bind is to go up market. Enterprise sales generate more cash. Big organisations are great for upset. More users. New modules. Extra locations. It all adds up to a strong ongoing revenue stream.
This option is not open to everyone. Selling to the enterprise means a substantial investment in sales and service capability. You will get the cash flow right in time. But only if you can raise more cash up front. $100m plus rounds are common in the US. This type of funding is much harder in other startup ecosystems.
4 SMB SaaS ideas for 2016
And maybe that is not how you want to run your SaaS business. Your product and market may be squarely in the SMB sector. In this case spending heavy to hire sales people and sell to multi nationals would be the wrong strategy.
So we are back to the start. Every SaaS business needs cash. 2016 could be a year when the business environment gets tough. Fundraising may soon be harder than ever. If you are growing an SMB SaaS business, what can you do to mitigate the cash burn?
I have no easy answers. These 4 ideas are worth trying:
Don’t be afraid to invest in what works. When you find a model. Or a channel. Or a person. Back them. One thing for sure. You will never succeed if you don’t spend the money you do have. Find the right solutions and go for it.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.