The Golden Age of SaaS and Subscriptions (2010-2022) vs The Golden Age of Services, The Rise of Private Equity, and The Fall of Venture Capital (2023-????) The Golden Age of SaaS and Subscriptions (2010-2022): - Everything needs to be a subscription even if the customer doesn’t agree - If we goose enough metrics, we can dramatically overspend and build a bloated business while justifying it the whole time to ourselves - We need a new local FTE for every new task that pops us - Low interest rates tell us to keep getting high on free money - Don’t do anything that isn’t recurring revenue. Recurring revenue gets a 40x multiple. Services are boring and uninteresting. - What’s EBITDA? What’s Gross Margin? What’s a burn multiple? Topline growth is all that counts. - Venture capital becomes 10x larger than it’s ever been even though there are the same number of great companies - “We’ll spend as much as we need to to hit the ARR target before we raise in Q1” - IPO, M&A or bust baby! The Golden Age of Services, The Rise of Private Equity, The Fall of Venture Capital (2023 - ????) - Call it whatever you want, it’s got 60% gross margin and throws off a ton of cash - We need clear Return on Invested Capital to keep spending otherwise we’re focused on steady profitability - We can do more with less using automation, offshore support, and, soon, AI - There’s no more money coming - we better figure out how to make this work - If it’s not recurring revenue it still might be valuable. Let’s see how it contributes to bottom line profit. And if that impacts valuation, so be it. We’ll be at this awhile. - We made the cuts in 2023. We’re not burning. We’re profitable. Even if the business contracts. - Venture capital is right-sized because at its heart it’s a boutique business. The number of amazing companies that is formed every year is not correlated to the amount of capital. - Private Equity has a blast buying companies at depressed valuations that are solid, profitable and durable, holding for 7 years, and selling for 2-3x what they paid. - Investors that don’t need power law returns to justify their strategies reclaim their seat at the table. - “We’re gonna get to $200M in revenue and $50M in EBITDA this year and we haven’t even inserted a subscription platform yet.” - Once the balance sheet hits $50M we can do a recap, a leveraged buy-out, or a ton of dividends. Turns out profitability creates tons of liquidity options if you have the patience. The phase shift is straightforward. With lower costs of execution, all kinds of businesses that used to look uninteresting can now become far more interesting. And if you have the patience you can make a lot of money building, running, and investing in those businesses. The primacy of SaaS is receding.
This is such a strong narrative, Sam, and it's the way businesses should always have been thinking. We're out of the VC lottery game and into a world where businesses MUST have strong fundamentals AND an actual strategy with the appropriate leverage to sustain long term profitability in significant markets.
Great sounds like SaaS business start behaving like normal businesses. And I thought my business and econ study was useless.
Quality post Sam Jacobs
Maybe we need to flip the Acronym SaaS = Software as a Service becomes SaaS = Service as a Software :) :) :) Also doesn't EBITDA sounds like something from a star wars movie? General Equity is hiding in the EBITDA system :)
Ben O'Rourke Adam Gluck
Spot on Sam
100% spot on!
100% agree with many of the points you are sharing!
I am not sure I buy this. Sure, nothing wrong with one-time revenue. But, the brilliance of recurring subscription businesses with 100+% retention is that you can stop investing in new customer acquisition at anytime and skyrocket your margins. Can't do that with a services businesses that's based off of 1-time project revenue. In SaaS, I expect to see consolidation (backed by PE investors). But, it'll be more about combining similar businesses for cross-sell or just to build up marketshare. This already happens and will accelerate as later stage VC is going to stick to putting bigger checks behind fewer companies. The lack of late stage checks is going to push seed-stage/A-stage SaaS companies to look for other options. Some will partner with a PE to buy up others. Some will sell to those firms. Key will be for those SaaS companies to turn themselves into platforms. The SaaS platforms are going to just keep taking marketshare as they and their ISV partners keep building out functionality. RE: the services business, it's about going one of two ways: 1) get niche or 2) get big. Both are viable. Going niche can build a very profitable business as can going big. But, the in between isn't profitable.