Right now investor focus is on SaaS companies that can deliver hyper growth in customer numbers. And revenues. Profits and cash are secondary considerations. Look at the giant of the SaaS world. Salesforce.com doesn’t yet turn a profit. This makes sense as a land grab in a growing industry. Which is the exact place we are today. It is not sustainable as a long term investment strategy.
SaaS is going to be real. A major sector of the technology industry for many years to come. With good earnings and high (ish) margins.
What Happens When SaaS Goes Mainstream?
As we approach this phase we can see what type of SaaS business will be attractive to mainstream investors. The type of institutions and funds that drive the NYSE, Nasdaq, London Stock Exchange and other global bourses. There will be different sizes and specialisms. But the companies the main markets will love are going to have:
SaaS Is Not Just About Startups
Right now SaaS is seen as near pure startup play. It is all about exposure to explosive growth and high risk/ high return dynamics. That is fine. Startups like this will always exist. And the fashion (or asset allocation in the jargon) for this investment class will rise and fall.
SaaS is going to create a big sector of companies that are a solid and secure investment base. Far removed from the startup world of VCs and Angels. We are talking pension funds, income funds and hedge funds here. Revenues will range from $100 Million to $100 Billion. The common factors will be cash flows, margins and predictability.
One day we will be able to read the story of how SaaS led the Tech sector into the established world. Away from the wild fringes of the market. Into the ranks of cyclicals, defensives, growth stocks and the rest.
Unicorns and valuations in the stratosphere are wonderful. Building sustainable business that changes the world will be much more fun. Look out for the companies that transition to the next phase of SaaS. Excitement will be lower but achievement will be much more widespread.
We will see more IPOs. Indices that look at performance over a quarter, then a month and even real time. Specialist funds will emerge that invest in portfolios of SaaS businesses. Market analysts will develop expectations of margins and cash flow. Investment ratios. Churn analytics. Drama will be replaced by strong regular income.
SaaS will be a vital part of the long term, established economy. Integral to technology but also an element of almost all sectors. And of course new startups will emerge to disrupt the SaaS model!
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Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.