Most SaaS companies have faced what’s called “bubble” that has almost burst in the recent times. The lack of true growth and money flowing in through generous investors, who believed and romanticized with the idea of growth at any cost, has abruptly come to a cruel end. The lack of true profit being the culprit, has left many SaaS companies either going down the dreaded curve or some larger companies pushed into doing down rounds with investors ;as the perceived valuation goes down. What’s more surprising is , where did things go wrong? Since, SaaS companies are known to stringently rely on hardcore metrics that are excellent indicators of a company’s progress. It sure is good for the general audience and some investors to judge a company’s progress based on its ARR and revenue per share and perfect for companies gone into public trading but the hard fact is SaaS is a lot different than just that.
The decisions based on the above stated facts can simply be disastrous. In olden days the ways were simpler for SAP and other giants, their revenues were solid representation of their earnings , like if a company would get their software for a year that would account to an addition to the company’s revenue as compared to software as a service model where the revenue and expenditure is completely mismatched.
Hence, the flow of cash is not what it seems for the SaaS companies. It is much tough, a lot of ease for the customer though as they pay once a month or a year at a time. For the older companies any upgrades to the software added a percentage to the existing cost of the license.
This trend leads to a whole lot of negative cash flow amounting to a longer time to reach a plateau where the customer actually starts paying for the software expenses. The more customers added to a SaaS model only lead to more diversion of the curve until a point comes when it starts gaining a bit of the momentum on positive aspect.
A newer SaaS startup has a lot more to catch up than just align with the cash flow. Investors mostly have little or no knowledge about the SaaS models with the exception of a few. A few brave enough to delve deeply enough to get success at it, specially Jason, Skok and Mark Suster. They bring a welcome change to he scenario and a have a deeper understanding of the SaaS companies than anyone out there. Their word of mouth and endeavors to make things easier for newer companies is commendable.
SaaS companies are evolving at a much faster rate than any traditional company and hence, it is better to bet your money at an advanced system that has more room for improvement and spends lesser cost on research, for SaaS the scalability is more profitable as the “one version” software is easy to upgrade and fix. The support and I always say, customer support is an epitome of success. Why do the recent wave of entrepreneurs and investors get excited by SaaS, its only because the customers have an odd but a very reasonable desire to stick to SaaS models and once a company signs up with them, they are theirs to play with. The top tier involvement in the company’s decision to adopt a certain system has brought in more space and adjust-ability to more educated and evolved SaaS products to come into focus. Thus, most companies hardly ever rely on IT alone to make such decisions.
SaaS companies are usually way more transparent in their billings and operations as they strictly follow all metrics involved, be it CAC, LTV, Churn or deffered revenue.
The news some times might get scary for SaaS companies but some of them are scaling, taking huge market chunks and just know their maths. These small SaaS companies have a desire and will probably take over the corporate world.
Also published on Medium.