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SaaS Companies: You Have an Unprecedented Opportunity

Posted on Monday, Jan 29th 2018

The current market is full of really interesting SaaS companies that have built up at least $100M in annual revenue run rate (ARR). Some have gone public. Some are waiting in the wings. There are also many more that are in the $50M to $100M ARR range.

They serve different segments. Some serve verticals. Some horizontal enterprise functions. Some large niches. Some enterprises. Some mid-market. Some SME.

Together, the SaaS market is a healthy, robust, exciting cauldron of innovation.

Unlike Social Media, Search or e-Commerce, SaaS is not an oligopoly. [ref: An Oligopoly, After All This?]

And these SaaS companies that have achieved critical mass in their own segments now have an unprecedented opportunity of scaling to become much larger businesses by broadening their footprints.

They can look within, and look outside to identify the growth levers.

Let me explain.

Look Within

Any company that has built a substantial business in any software category has core competency within its folds. It has highly capable engineers who have developed some degree of domain knowledge in their sphere. It has product managers who are in touch with customers. It has sales engineers who are in regular and even closer touch with customers. It has sales people who know the customers and the competition well.

You need to establish a methodology for  Intrapreneurship that systematically captures the tribal knowledge that is floating in your organization. You need to proactively identify the $50M, $100M, $200M blocks of opportunities that are adjacent to your current product line, and lying latent.

Look Outside

SaaS has been the most prolific area of entrepreneurship in recent times. There are numerous SaaS companies out there. Do you have a systematic process to harness this massive body of innovation that could very well be strategically aligned with your product strategy?

Which of these should you acquire?

Which of these should you invest in?

Which of these should you OEM?

Why Now?

You may be thinking that this has been true forever, in the history of software. What’s the big deal now?

Well, the big deal is that since 2013, every year, just in the US, 50,000 to 70,000 startups have received Seed funding. SaaS has been a major category in that pool.

Currently, this number has likely increased to ~100,000 just because the amount of money in the Seed market is much larger. Over 500 Micro VCs have come into the market in the last 3-5 years. These micro VCs range in $15M to $100M fund-sizes.

However, the Series A gap continues to broaden.

Only 1200 to 1500 companies get VC funding a year. And the metrics required for a company to qualify for a real Series A is a minimum of $1M ARR, often $2M ARR.

Not only that, Series A VCs want the velocity question answered before they take a leap. Is this company going to go from $1M to $3M to $10M to $25M to $50M to $75M to $100M in a seven-year timeframe?

Most companies, with or without seed funding, don’t get to these metrics.

This may sound counter-intuitive, but those who do are not necessarily your best acquisition targets. They may be good targets for investment alongside a series A VC syndicate, or perhaps, an OEM partnership opportunity whereby you white label their product to sell through your channel to get better ROI on your sales force.

But, in the other pool of tens of thousands of bootstrapped or seed-funded companies that have not cracked the velocity equation, there are rough diamonds for you to mine.

Does the company have product-market fit? If so, you need to take a long, hard look at why it hasn’t achieved velocity.

Could it be that they don’t have sales DNA? Many tech entrepreneurs start from the engineering side and don’t know how to build a repeatable sales process. Is that why they’re not scaling? And if yes, then what can your high-performing sales force do with the product? May be, YOUR sales force is the answer to their velocity question. This IS an excellent and very affordable acquisition opportunity for your company. You can probably acquire the company for $5M – $15M, depending on how far along it is.

And of course, if the company is very, very early, but with a talented product team with significant insights, but struggling to finance itself, then an acquihire is eminently possible.

The Global Opportunity

Note, also, that the opportunity is now global, not just the US, and certainly not just Silicon Valley. India is full of SaaS companies. Even Europe has them in plenty.

And in these emerging venture markets, exits tend to be few and far between. Entrepreneurs and investors are really hungry for exits, and their expectations are often not Silicon Valley scale.

India, especially, has billions of dollars of capital that has been deployed into startups, and very little has come out by way of exits.

You Need Process

To tap into this global opportunity fueled by a hyperactive SaaS startup trend, you need to craft precise process and methodology.

For the last five years, we at 1Mby1M have been involved in creating processes of this nature in collaboration with our software vendor partners. The experience has been enlightening to say the least.

A Few Examples

Our most successful enterprise software Intrapreneurship partner runs 1Mby1M challenges twice a year, open to their 130,000 global employee base. We train large number of engineers with no background in entrepreneurship to validate ideas and assess business cases, size markets, analyze ROI.

We’re unearthing multiple several hundred million product ideas a year, and even billion dollar ideas surface from time to time. All fully fleshed out, based on which investment or acquisition decisions can easily be made.

On the other side, in our community of half a million around the world, we constantly see companies that are finding product-market fit, and could be excellent acquisition targets for high-performing SaaS companies looking to grow. A recent example is from our January 4 mentoring roundtable where a small company from India called Vaultedge came to seek guidance. This company is applying AI to contract evaluation, and would be an excellent acquisition for Apttus, for example. [You can listen to the recording here.]

What’s Missing

I see a lot of ad-hoc efforts. I see a lot of catch-all corporate venture fund announcements. I see a lot of Brownian Motion.

My observation, with my hands deep and dirty in this game, is that it is far, far more complex to do this effectively and systematically.

But if you succeed, you have a goldmine out there.

You can become the next Salesforce. The next ServiceNow. The next Workday.

It is doable.

Eminently doable.

 

RELATED READING: In the summer of 2015, I spent half a day with approximately 40 Fortune 500 Chief Innovation Officers at Xerox PARC, and discussed our experience with corporate innovation methodology through the 1Mby1M Incubator In A Box program. A few months later, Jim Euchner, the CIO of Goodyear, interviewed me for the Research-Technology Management journal, which you can download here.

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