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 StartupsRight 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. Next StepsWe 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! Keep following the best ideas to build great SaaS businesses. Sign up for our newsletter below.
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I have written this blog after being inspired by an infographic sent me by a reader. The subject is the growth of eCommerce. Retail and marketplace models dominate this space right now. But there is a big opportunity for SaaS innovation. Rent v Buy models are already emerging. Advertising style subscription models are also possible. Yet another source of value will lie with data and analytics. Time for SaaS to disrupt another industry. eCommerce - A SaaS OpportunityThis blog is a little different. It was inspired by an infographic sent to me by a regular reader - Max from Tracking Courier. Part of his work is in the header and you can download the full version below. I loved it and took the challenge to look into the subject matter and write about it. eCommerce is the theme of Max’s infographic. We all know the general story of explosive growth. The 5 minute guide highlights the statistics and trends which every startup should understand. Despite the expansion, a huge opportunity remains. But there is a lot of competition out there. Plenty of smart people and large amounts of investment are focused on eCommerce. Yet almost everything goes into two business models. Standard retail eCommerce and Marketplaces. Some of these businesses will achieve wild success. This will be a hard and expensive road. Why not try a more innovative approach? I think eCommerce is a great opportunity for SaaS which is not being exploited today. With some creative thought, SaaS could also open up many new opportunities. Rent v BuyOne SaaS route for eCommerce is to apply the rent v buy model from software to other goods and services. This is the essence of SaaS. eCommerce today is a sales business. Turning it into rental can offer better value for consumers. And a better business model for startups. This model would work well for digital goods. There are already companies experimenting. The most prominent example is Amazon’s Kindle Unlimited service. Subscribers (note the SaaS term!) to the service or to Amazon Prime can rent 5 books for a month. At no extra cost. Subscription Based AdvertisingAnother option is to adopt a B2C2B model. Great eCommerce sites are not just a platform for the retailer. They provide a massive audience for brands and channels. This lies at the heart of the marketplace model. But it also works for traditional sales models. The eCommerce business can build a SaaS revenue stream. By offering subscription based advertising services. Brand owners pay to place their goods or services in the shop window provided by the eCommerce site. SaaS Data And AnalyticsNot every eCommerce site is a channel for other brands. Many are the shopfront for a product or service. Even here a SaaS revenue stream is possible. Customers who visit your site will be attracted by many different things. Some will be buyers, some browsers others just visitors. Data about who comes and how they behave could have real value to many others. Imagine you run a travel site which specialises in trips to golf destinations in Scotland. Your visitors are also a possible audience for golf equipment and clothing brands. A regular feed of that data could provide a nice SaaS business. Time For DisruptionSo have a look at the infographic. And use it to inspire some creative thinking. eCommerce may be stuck in a bit of a rut. SaaS can be a vehicle to disrupt new industries as well as old. Let’s open up that opportunity. Thanks Max! Sharing ideas can be a great way to grow and develop your business. To receive the best SaaS thinking and ideas direct to your inbox every week, subscribe to our newsletter below.
The story of SaaS is just beginning. The industry we see today is nascent. Its future shape will be different. Infrastructure and Enterprise software will be dominated by large global players. SMEs and other sectors will be served by a much wider variety of SaaS. Open platforms and integrations will allow many companies and models to flourish. The winners may already have been founded. But it is far too early to say who they are today. We are till in the early days of SaaS. The scale and revenues of traditional licence driven software companies dwarf the new service based model. Yet all the innovation is coming from the SaaS sector. No-one doubts it will be the business model of the future. All those legacy giants are scrambling to change path. As this nascent industry matures, what will it look like? Like all new industries it will be different. The early stage, unproven no legacy animal we see today will evolve. This will be the biggest shift in the structure and power bases of the B2B software industry in the next few years. Here are some ideas on how it might shape up. SaaS InfrastructureInfrastructure will become the domain of true global giants. It will be high barrier to entry, unsexy ow margin business. Big institutions and funds will love it for secure returns and heavy use of investment. HP, IBM and Huawei could evolve into these companies. Google and Amazon may also get there. Some telcos may also be able to adapt and play in this space. Software companies will take it for granted. SaaS Enterprise SoftwareCore enterprise software will also be dominated by a handful of players. There will also be large vertical players with less widespread brand recognition. These will emerge through consolidation of companies with large customers bases. But broken financial models. When funding becomes tight this process will kick in. SAP and Oracle may be among the winners but no guarantees. Either way products that look like and integrated suite will come back into fashion. The SME SaaS sector will also see consolidation. For this sector the big players will offer a portfolio of products. Rather than an integrated suite. There will also be room for a Mittelstand of vertical or functional specialists. Companies with few outside shareholders. Mid range revenues. And a trusted reputation right across their niche. There will be few geographic plays. Global will dominate even for smaller companies. Open PlatformsB2B SaaS will split between open platforms and walled gardens. Open companies will use APIs and other integration techniques. This approach is already emerging today. It will be easy for startups. Complementary software or even competitors to become part of the ecosystem. They will offer customers an option to plug and play any software they choose. Perhaps Zapier or its successor will be a software provider not just a connector. The walled gardens will survive in the market because they offer customers continuity. When the current funding cycle turns down there will be a lot of pain. Some companies and the data they hold disappear overnight. Buying the latest thing will look less attractive even if recovery is quite straightforward. Reliable supply will become as big a concern as security for a while. Winners In SaaSThe future leaders may already have been founded, maybe they are household names today. But this is harder than it seems to predict. Some of the big winners will be from India, China or elsewhere in Asia. At least one will be from Africa. Silicon Valley will continue to innovate and play a major role. But it will not be as dominant as it is now. The SaaS Revenue ModelTweaks and innovation in the revenue model will continue for a while. But in time 3 or 4 main models will become established. Software companies will flock to these arguing that this is how people buy. Margins will remain high. But GAAP profitability and strong predictable cash flows will also be important. An essential part of the financial story. Companies with these characteristics will appeal to investors. 10 year track records without dividends or profit will be less popular.
One day the numbers will have flipped. SaaS will be the only way to buy and use software. Then it will be time for the next disruption. To keep abreast of the latest and best SaaS thinking sign up for our newsletter below.
I have just returned from two fantastic days in Algeria. As part of my small business consulting for startups, I was helping the team from Ooredoo (a major mobile operator) that runs the first startup incubator in Algeria. The incubator is part of a joint initiative between the company and the Algerian Government called tStart. My role was to educate them about business plans. It was a great experience and I learned a huge amount from the group that I worked with. You can read more about the trip in my LinkedIn post here.
I have written a fair bit about business plans in the past. (If you sign up for my mailing list I will send you copy of my eBook - The Book of Business Plan Ephemera 2014.) This trip gave me a chance to pull together my thinking and create a bit of a guide for early stage startups. This post summarises some of the highlights. Get in touch if you would like to find out more.
Don't Panic - Its Only a Plan
To start with, don’t get hung up on the term “Business Plan.” People attach a lot of meaning and support it by much technical theory. Most of this is irrelevant when you start. In fact most of it is over complicated BS for any business. The main thing you need to do at any time is think about what is next for your business. That is, make a plan.
At some points someone will come along and ask you to write down your plan. For example, when you apply to an accelerator or incubator, when you pitch for investment and so on. When this happens you need to tell the story of your business, you need to paint a picture of the future and write down what comes next. Simples. Every business plan, whether for yourself, your team or a pitch is written at a point in time. You can only tell the story of what you have achieved to that point. You can only know the next couple of steps. Be credible, passionate and honest about these things. Don’t stress about all the stuff you don’t know.
Be Upfront About The Journey
From Idea To Your First Business Plan
A startup is a journey. Your business plan will reflect where you are on that journey. A company with no product and no customers that applies to an incubator. It will not have detailed financial projections. In 6 months when you apply for seed funding you might have initial traction and be able to build a model on some limited assumptions. A year after that when you are growing fast your numbers will be even better. Recognise where you are in the journey and reflect in any plan.
Entrepreneurs live with uncertainty every day. The business plan needs to show what you do know. Then you can be ambitious but honest about the unknown. Your plan will be to learn more about your customers so that you improve your business. Investors understand this. If they want more certainty before they invest they will tell you. For example “We will invest when you show real traction.” That’s OK. Don’t pretend you know something you don’t. In the end anyone who invests on this basis will be deceived.
At the beginning of the workshop in Algeria, I asked everyone what they were hoping to learn over the two days. Several of the team asked “How do you go from an idea to your first business plan?” Good question, how do you start? At this point you know almost nothing. You may have discussed your idea with a few people but no more. Often the first months are a process of adding to the list of things you don’t know. Scary. But also reality.
To go from an idea you talk about over a coffee to a fledgling business your “plan” needs to answer a small number of basic questions:
Once you have these answers you have the outline of a plan. This is what the application form for an accelerator programme wants to know. Time to take the plunge. Either go with the business or not.
Understand and execute Your Customer Discovery
Next steps always need to be specific planned actions. No-one succeeds in business without a bias to action. No-one invests in a team which does not get stuff done. Right at the start these actions will concern two things: building a product and customer discovery.
I am not going to focus on product build in this post but I will be writing soon about product build for non technical people. Founders who code just get on with it anyway. Just building product is never enough. From day one you need to be out finding out about potential customers. It is vital not to confuse this with sales and/ or marketing. Sales and marketing can only start when you have a value proposition. You can only define this by getting out of the building and talking to potential customers. Listen to their problems and design something which meets their needs. Then go back and talk again. Refine your design and do it again. Repeat until you have something people will use and people will pay for. You also need to be able to describe the people who will use your product. And the people who will pay which may not be the same thing. Only then can you define a market and a proposition. Now go ahead and sell! Their is a massive pile of startup literature available. By all means keep reading and learning as much as you can. But time is limited so if you only read a couple of books then this is the area to focus on. Read The Lean Startup (what) and The Mom Test (how) . If you want more detail then read 4 Steps To the Epiphany as well. Make sure you understand Customer Discovery. And how to do it.
Get This One Thing Right: Talk To Real Customers
Every number, every assumption, every estimate in your business plan is built on this. Once you are selling and marketing, you are still doing customer discovery. It feels different but each transaction, each churn, each wow moment helps you learn. When your startup is mature enough to include addressable market or financial forecasts remember this point. Start your numbers from real data based on real customer interaction. No matter how small. Be clear about the assumptions you have used based on this customer interaction. By all means make them ambitious. But start from something real.
I hope the last paragraph is clear. Please let me know if it is not. This is the biggest mistake I see in startup plans. Too often I see a statement like “Gartner estimate the global market for Girl Scout Cookies will be $100 billion. We will take 1% of that market in five years.” No. When you have real customer feedback that shows your product solves a problem. And that problem is relevant to the market Gartner (or whoever) has forecast then you can use external validation. Not before. Choose The Best Startup Business Model For Your Company
Traction - There is no Number 5
Enough ranting. Once you start to have customer data the next big piece of the jigsaw is your business model. In simple terms this means how will you make money. Investors love this part!
There are many proven business models you can use. I have written about the six most common here. Each provides a powerful language to explain your business to investors. Good investors are familiar with the mechanics and metrics of a proven business model. It helps them understand your business and shines a,right on your vision, strategy and so on. But you need to choose the right model. Sometimes this obvious. If you are selling stuff online you will have an eCommerce business model for example. Often it is not. You need to understand how customers value your product and how they like to buy. Then develop a business model that works for real customers. Use a proven model but build it into the specific approach which suits your business and your customers. Slack is a great example of this approach. Its business model looks like a simple SaaS freemium model. It varies in two important ways. The benefit of paid plans is usage (history and integrations) not features. You only pay for active users. These small changes have helped it become a Unicorn in record time.
Once you have a business model and some real customer feedback you can interest investors with one more thing. Traction. Few external investors show interest without at least some sign that you can succeed in the market. The more signs you have, the greater the confidence of your audience. But it must be real. Traction only comes in 4 ways:
These are in order of importance - number 1 is worth more than number 2 etc. There is no number 5. Traction only comes from real customers.
And Tell Them About The Team
The biggest single differentiating factor for investors is the team. The same principle applies if you are planning just for your own business. Having the best people doing the right things is the recipe for success. This hard to capture in a written plan but there are a small number of things investors will look for:
Final point. In a business plan written to pitch for investment, tell investors what you are asking for. How much money. For what share. How will you spend it. You may get offered more. You may get offered less. But take an opening position. That’s all. The picture below shows you the list of what you need. Not long and not scary. Good luck.
Building and growing a startup is tough. Underneath all the Unicorns are hundreds of companies battling for investment. The growth of Slack or WhatsApp is record breaking. It challenges founders everywhere to hustle for traction. Read the endless articles on beautiful UX design. And remember the struggles to achieve product/ market fit.
Maybe that’s why entrepreneurs often ask for more help. But the best source of help is within. Startups are the best source of innovation in business and technology. Teams also advocate powerful values. Openness, sharing and learning are at the core of the startup dream. Innovation and values lay the foundations for amazing communities.
EIE15 - Scotland's Premier Startup Event
Here in Scotland we had the premier event for our startup community this week. EIE 15 brought together a bunch of amazing companies. The largest gathering of investors we see all year. And every advisor and supporter in the ecosystem. From inspirational speeches to 1 minute pitches with a heady brew of networking. Its an awesome day.
Community Makes the Difference
Anyone can see that it is impossible to recreate Silicon Valley in a 1,000 cities. Hero entrepreneurs and multi billion dollar funding rounds are beyond most places. But we all have the potential to build a great community. I love following and celebrating startup communities. Some of the best ideas and the biggest changes are rooted in community efforts. For example the startup community in South Africa is tackling the problem of xenophobia @iafrikan. Or explore the incredible startup world of Trondheim in Norway @arcticstartup.
Community brings startups three things. Working together means resources, experience and connections get shared. Everyone grows faster as a result. Openness allows small teams to build on the efforts of others. Testing products, linking APIs and tackling markets. Connected ecosystems offer support and encouragement. Just knowing that others have been through the fire and lived makes a difference. Small Business Consulting to Help Build and Grow
We Can All Be Part of Something Great
“Its not a zero sum game” is a favourite mantra. This is what it means.
How often do you hear that a startup is going to change the world? Communities of startups will change the world. Groups not individuals will be the mechanism. The future of work will be self employed, networked and varied. Fewer and fewer people will work in a corporation or for a government. The skills we learn in our twenties will need to evolve or transform. Everyone will have 4, 5 or 6 “careers”. Communities will support and celebrate this lifestyle. Work will be for a lifetime. The idea of retirement will become outmoded. Each individual will choose to vary the pace and intensity of work. Adapting to life circumstances along the way. It has to be this way. Demographics and economics will not support the current model. Technology is busy breaking it up. Not every startup community will be the home of billionaires and unicorns. The vast majority will consist of hard working people, co-operating and succeeding. Having fun and living life well. We all have the chance to be part of something great.
EIE15 reminded me that we have many of the elements in place here in Scotland. Structural basics include great universities and a supportive Government. Two incredible companies have reached “unicorn” status. Skyscanner and Fanduel - check them out. The exhibition hall was full of great entrepreneurs aspiring to join them.
More huge successes would be welcome. Our urgent need is to build a strong community of mid size growing businesses. Too many startups are caught in a trap of small. The billion dollar blowouts are great . We must back them with hundred or more in the $10-100million range. There are lots of companies with the potential. I could list 20 without thinking. The challenge is to make the step from early stage traction to established business easier. The community also needs a voice. We connect through big events like EIE15. A host of meetups and other small scale events are also available. Open Tech Calendar lists 68 right now. On a daily basis hubs like Codebase, Entrepreneurial Spark and Rookieoven (my favourite) are home to buzzing groups of founders. Someone needs to bring these stories together and tell them to the wider world. This week reminds me to keep helping startups grow and develop. My small business consulting is all about this focus. This is a community effort. It is about answering questions not a defined formula. If you want to join those discussions subscribe below.
Facebook and Google both published quarterly results in the last week. I highlighted 3 lessons for startups from these numbers in my LinkedIn column:
Recurring Revenue Model - These platforms are vital
I will be facilitating a group of Scottish SaaS companies on Tuesday. Our topic is customer acquisition. The two Internet giants are the main platforms for acquiring SME customers. The advertising reach and scale they provide is vital to the SaaS revenue model. The low cost also supports the economics of SaaS for SMEs.
The shift to mobile seems linked to growth in cost per click. This number is falling for Google and rising for Facebook. The Facebook numbers are now high enough to cause real concern. As this post on the bubble shows. But mobile is a more engaged platform. So it may be that cost per acquisition is not rising at the same rate. CPA is the essential number for SaaS Unit Economics.
Emerging Markets - Opportunity and Threat
Facebook also provides useful geographic analysis of its numbers. This chart shows ARPU across for main regions. The split is by where the user action leading to revenue takes place. In other words it is a good proxy for the cost of advertising to customers in each region. You can see it is much more expensive to get to users in North America.
SMEs are a Global SaaS Opportunity
Which brings me to global ambition. SMEs are the dominant business form everywhere. The balance is more skewed in emerging markets. This is a great opportunity for SaaS growth. Providing customers in Asia and Africa with services at an affordable cost. Revenues and lifetime value will also be low. So pay careful attention to user economics.
The opportunity is not mobile first. It is mobile only. But this can also be a source of competition. Mobile first is not news for startups in these regions. The simplicity of solutions in Africa defines great user experience design. The scale of markets in Asia offers competitors real market muscle.
Innovation and Product Development are not Optional
Sitting in Scotland, global ambition is essential for real growth. Success will depend on lesson 3. Innovating and investing in great products are not optional strategies. Bringing your SME customer base with you will not be simple. Your SaaS product needs to keep delivering real business benefits. It must maintain a superb user experience.
Join PAR Equity and hear about Investor Ready
I invest and I offer small business consulting. I am looking for SaaS companies that offer SME customers a great, innovative, mobile product. I will be talking about this more on Wednesday this week. I will be at an Investor Ready workshop at Rookieoven in Govan. The main attraction will be Paul Munn from PAR Equity. Paul will be talking about the things Scotland’s best Angel syndicate looks for. You can register to attend through this page.
If you are trying to build or grow a startup you can pop along to my office hours session, also in Govan. I will be around every Monday between 9.00 and 12.00. You can book a slot here or just come along. If you can’t get to Glasgow, subscribe below for regular updates.
Questions, Questions
EU Commissioner for Competition Margrethe Vestager made a big splash this week. She announced a formal anti- trust probe into Google. The focus of the probe is the prominence of Google Shopping in search results. Google Shopping if you didn’t know - and I certainly didn’t - is a promoted advertising service. It pops up when you use internet search to try to find goods to buy online. Google makes money by taking a cut from the companies advertising. In Europe 90% of online searches are on Google . So Ms Vestager and her Directorate believe this is an abuse of market power.
I have no doubt Google makes plenty of money out of this service. On the face of it they also have tremendous market power. It is not hard to see how the Danish politician makes her case. The case will no doubt drag on for many years. It opens up some bigger questions. Questions about Europe and Google that are worth looking at.
For example, why is Google so dominant in search in Europe anyway? 90% is a lot higher than 67.5% in the US. The latter figures comes from Comscore. I could not easily find an independent source for the former. More of that below.
There is also a serious question about whether this is a genuine market. The reason I didn’t know about Google Shopping is that I would never think of a search engine for shopping. I just go to Amazon and find the best price. Amazon of course promotes its own products wherever possible. As a consumer this doesn’t bother me. I asked a couple of other people and the answer was either Amazon or eBay. If I lived in China then I would use Alibaba. Search is not the key driver of shopping.
A distraction for Europe
You won’t have to look far for concerns about the motives behind the probe. The most important question in this context is why the distraction? Europe has a terrible track record at the top end of the technology industry. True we dominated mobile for about 15 years before the iPhone arrived. Past glories were also in the news this week. Nokia is taking over Alcatel-Lucent. SAP also has a proud record in enterprise software. That is about it for Europe leading the digital world.
The chance for change
Today we are creating the conditions to change that. London and Berlin are two of the biggest and best startup locations in the world. Deep capital markets back startups in these locations. Elsewhere smaller startup communities are numerous and vibrant. Trondheim for example may have more startups per capita than anywhere else. I know from my small business consulting experience that Scotland is home to some great companies.
Politicians and regulators should be concentrating on enabling the growth of these communities. In late March a different branch of the EU announced its priority. The creation of a Digital Single Market. There is even a Commission Vice President responsible. Andrus Ansip from another Baltic state, Estonia. I am not sure if these proposals are workable or reach deep enough. I am confident this is the direction politicians should be taking.
Be serious Startup Britain
If there is one lesson from this it is that we in the startup community need to do it ourselves. Yet another stray data point this week was this survey from Silicon Valley Bank. It tells us UK entrepreneurs top wishes from whoever wins the UK General Election. More tax incentives and better access to capital. Seriously guys? We have the best regime of tax incentives anywhere in the world. Agencies like Scottish Enterprise boost capital input as well.
I am a serious political geek and even I am bored out of my skull by this campaign. The result may be exciting but the process is not. If you have a startup don’t waste your time. Focus on the product and the market and ignore the noise. Help me gather SaaS revenue model data
As it turns out this column has been almost a complete distraction. I will get back my focus on the SaaS revenue model for SMEs next week. Feeling better for a bit of a rant anyway!
Despite the above, I have not spent the entire week reading news articles. I have been trying to build up some information on the SaaS market in Scotland. This is not as easy as it sounds. In part this reflects a dearth of information on non US startup and tech markets. Hat tip to Tech.Eu and Arctic Startup for their consistent efforts to remedy the problem. SaaS specific material is even more of a challenge. This is the most important startup financial model. But it is tough to isolate SaaS focused data. See my quick guide to SaaS reading and check out Tom Tunguz for US public company SaaS data. That is about it. I am digging into the data for Scotland. There is a big risk that my efforts will be rubbish so I could use your help. If you are part of a SaaS business in Scotland or know of one (or more) please fill in the attached survey. It is dead simple and real quick. I will then triangulate with my own sources. Thanks for bearing with me. Late last year I started digging into the startup financial model. My whole career has been about how a business works. I don’t do blue sky strategy. I am not a system and process ops guy. I design, analyse and improve business models. This is the systematic view that works in my curious brain. I find myself poking around in a lot of different ideas. When I can see what works, I can help fix most things. SaaS is the leading business modelIn the startup world most things come back to software as a service (SaaS). Most of the businesses I am trying to help are SaaS based business models. The best startup ideas I see are SaaS based. The mechanics of the SaaS business model make sense. SaaS Metrics and the startup financial model hang together well. I have learned a whole lot about SaaS by working with some great companies. I read and follow a bunch of great people who share interesting stuff. (You can go here for my quick guide to the best SaaS reading). Revenue Models don't add upOver time though I have realised that there are some things which don’t quite add up. For example the sales model, some aspects of the economics, typical customer revenues. The experts view doesn't fit with my experience of real startups. I couldn’t make sense of this. Then it struck me when I was reading a post from AdEspresso. All the great stuff I read online is about SaaS companies that sell to the enterprise. But the companies I talk to are aiming at SME customers. How are SMEs different?So I started to think about why selling SaaS products to SMEs might be different. If so, what would that mean? This feels like it might be a long journey but here is what I have found so far:
SMEs want to take advantage of new digital technologies. There is a great small business market out there for SaaS companies. Helping small business changeAt the heart of any successful business software is change. Adopting any software product requires business change. In a big organisation there will be managers and consultants to drive this. For an SME change is much harder. It takes time and focus. It risks the precious business that the owner has spent so long building up. You need to take away the pain as far as possible. You need to provide the encouragement and show the benefits. I would love to learnI want to help great SaaS companies serve the SME market. I love consulting for startups. Helping find the right growth tools. I am fascinated by SaaS customer acquisition strategy. I understand the revenue models. How can those SaaS metrics work better when selling to SMEs? What kind of small business consulting and advice do startups need?
I would love to hear from startups, entrepreneurs, growth hackers or customers. What are your ideas about how best to tackle SaaS for SMEs. Let me know your thoughts in the comments below. Or subscribe to my newsletter and receive my SaaS Revenue Model absolutely free. Part 3: What will be the wider impact of a bust in startup valuations? Scroll down for parts 1 and 2. A quick reminder. Private investment dominates the current boom in startup funding. Public traded stocks play a much smaller role than in the past. For example in the dotcom bubble most big companies went to IPO. One point of view is that this will contain the impact. A lot of private investors will lose money. But the fallout for the general economy will be small. I don’t think this will happen. I will explain at the end why this will be a good thing. But warning this next bit is a real downer. “There are some things you learn best in calm, and some in storm” Playing for High StakesFor a start there is just too much money involved. Mattermark identified more than $100 Billion of US investment over 10 years. This only covers rounds over $100 million. Globally the numbers are huge. The private investment factor amplifies the pain of losing. There is no liquidity in private markets. Investors cannot bail out if they see the downturn coming. Or even after it has hit. No-one can cut their losses and run into safe havens. Mark Cuban made this point in a recent post. Startups are not a portfolioA bigger factor is the herd mentality. Most other assets classes offer shocking performance. Big institutional investors are counting on startup investments to beef up their total returns. Much of the money derives from the same sources that piled into sub prime and the like. The problem is that institutional investment tends to adopt a herd mentality. It doesn’t matter if they are right or wrong. Too many investment adopt the same strategy. This makes the whole system vulnerable to shocks. This factor is also amplified. In this case by a misunderstanding of portfolio risk. You will see a lot of advice about the risk of investing in early stage companies. Invest in a large number of opportunities and the big winners will offset the wipeouts. Build a portfolio they say. This is not a portfolio. This is a buying a lot of tickets for the lottery. It may well work and it has for many funds. But it is not spreading risk. Every investment just adds another high risk. Pick enough and one will pay off is the theory. The problem arises when the lottery stops paying out. There is no balance in the portfolio. Everything turns bad. Remember this is how it will be. Even the big quoted companies destined to join the corporate elite will experience large falls in value. Its not just about the moneyLets not forget that it is not all about finance. A downturn in startups will also have wide impacts because this stuff matters. People and businesses rely on the software startups produce. The network feeds itself and consumers love it when it does. Enterprises are creating massive value by using mobile and digital to do business better. Mobile money, mobile health and green startups are changing the world. If some of these companies fail, people will care. Big knock on effects are possible. Many apps interconnect through APIs. Your business does not just depend on the software you have. Other applications and data sources are integrated. Sometimes these are invisible to the user. Consumers are in the same position. A Matrix of Possible OutcomesSo what will the impact look like? This is harder to understand. We understand how a big bust in public markets transmits to the wider economy. Because this is a bit different, the mechanism is less well understood. In reality we don’t know. What follows is educated speculation. I have not attempted a systemic analysis just picked out some specific possibilities.
Green ShootsBut the tech industry will emerge stronger and better from everything that happens. A startup valuation bust will be a beautiful thing for entrepreneurs as I wrote in part 1. It will also be great for the whole ecosystem. A downturn is a real opportunity for innovation. The best ideas emerge from the furnace of hard times.
New HorizonsThere will also be big opportunities for individual entrepreneurs and investors. Remember two basic principles:
The startup ecosystem will shrink a bit. Those who are left will be the people with real vision and passion. A few years after the bust the industry that emerges will be bigger stronger and better than ever before. Writing these articles has reminded me I love startups. A real focus on change for the better and a great ecosystem of people to work with. These basics will not change if times get tough. I like to share the latest ideas for building a great business. If you would like these direct to your inbox, subscribe below. Thanks for bearing with me through this series. This is part two of a series of three articles on the impact of a bust in startup valuations. For part one read down below. For part three…be patient. Valuations and the real economyMattermark published a fascinating blog post in January. It explores the connection start up investment and US interest rates. Do historic low rates fuel explosive growth in funding? The article explores various trend correlations which support some basic economics. Extreme low yields (zero in the case of interest rates) will give a high nominal price. For any stream of earnings. Fred Wilson of Union Square Ventures explained the theory in depth in March 2014. 0% Interest drives high startup valuationsThis essential fact lies behind one of 3 megatrends. Together these have created the current funding landscape. Another way of looking at the first trend is to consider alternative forms of investment. Look at four major traditional options. Public equity markets, public debt markets, property and physical assets, and business investment. Returns on the first two categories are at historic lows. Debt markets are flooded by Government debt. Real interest rates have turned negative in many countries. Stock Market Indices are high but this reflects a lot of money chasing a small pool of return. P/E ratios are also in record high territory. The picture for property appears more mixed. This is because the focus tends to be on capital values. But the explanation for the rapid recovery of property values is the same. It is a reflection of diminishing returns. I admit that this trend is patchy with a heavy concentration in narrow markets. Think London and Silicon Valley. Cash is piling upBusiness investment is a window on two of our megatrends. In most developed economies, levels of business investment remain low. Business owners are refusing to invest because the returns are too low. Many corporations have huge piles of cash on their balance sheets. But they are not spending. The supply of cash is growing at an amazing rate. The US, UK and Japan have all printed epic amounts of money in the last 5 years. The US is now calling a halt (or at least a pause) but the EU is just about to start. This cash is not distributed in a broad or deep spectrum. The mechanism of QE is not a direct one. As a result, most of the printed money is sitting in 3 places. Corporate balance sheets. Sovereign wealth funds from commodity producing countries. And non banking financial institutions. Policy and regulation are keeping banks starved of funds. At the same time both private and public investment vehicles are awash. Little or nothing is trickling down to the bottom of the pyramid. Thomas Piketty’s treatise on inequality is a thorough reflection of this trend. New investment opportunities emergeA huge increase in cash concentrated in few hands. Historic low returns on many forms of investment. These trends create the conditions for massive investment in new structures and forms. This is exactly what we see. Our third megatrend is the current startup funding world itself. It is different from previous booms. Money is being invested through private vehicles. Much of the cash is institutional, corporate or from wealthy individuals. But it is hidden from the public markets. This means there is no liquidity. Investors cannot retrieve their cash. As Mark Cuban points out in this post, a fall in valuations of investments with no liquidity will be very painful. Where will the signal come from...This was going to be two articles about the impact of a correction in startup valuations. "Why the startup funding bust will be a beautiful thing” looked at the impact of a bust on startups. Part three will look at the wider economic and social changes a bust might bring. When I started writing I discovered that I needed this bit as well. Context is important. Changes in the direction of these trends will be the signal for the correction. When this signal is sent and how long it takes to transmit are big unknowns. In one view it could take a long time. In Europe the situation looks just like Japan 30 years ago. That has not unravelled yet. This applies to all Europe not just the Eurozone. The UK happens to be ahead but... We live in a dangerous worldOn a different view a dramatic turn could happen fast. The current fall in the oil price might be that early signal. Severe disruption caused by political factors is also a live possibility. Public statements from politicians and the media are depressing. In proper democracies are led by people who appear to understand nothing. Public discourse about the challenges on the borders of Russia or in the Middle East is verging on puerile. To describe most media coverage as First Grade level would be an exaggerated compliment. Other possible flashpoints - West Africa, the Horn of Africa, Korea/Japan, SE Asia. Not even on the radar. Startups could cause their own downfallWe must also acknowledge that startup ecosystem could be the cause of its own bust. People have come to rely on software in both personal and business lives. Many apps are interconnected in a web of APIs and integrations. A severe failure in the wrong place could cause massive disruption. Loss of trust and faith would cause investors to hold back. Valuations would fall.
Failure is not the only possible problem. There is a whole industry of naysayers just waiting to jump on a privacy breach. Security and integrity are vital to all our futures. Even a small problem could be magnified in the wrong circumstances. Again the issue is loss of trust and faith. Investment depends on sentiment as well as spreadsheets. Watch with interest. Tech start ups live in a global economy. It is one of the benefits of the digital revolution. That brings responsibility. Everyone in the ecosystem needs to pay attention to global trends. I am not an economist or an “expert”. My view could be way off. But there will be a down turn. I would love to hear what innovators and entrepreneurs think could be the cause. |
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AuthorKenny Fraser is the Director of Sunstone Communication and a personal investor in startups. Archives
September 2020
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