Earlier today Zaid Farooqui tweeted that some of his hedge fund friends think Software-as-a-Service (SaaS) companies are over-valued due to low barriers to entry:
While I agree that some SaaS companies are priced to perfection due the expectation of massive growth, I don’t believe low barriers to entry plays much of a role. Here are a few thoughts on SaaS and barriers to entry:
- Once a software product works well, especially at a reasonable price, people are reluctant to switch (look at how many people are still using antiquated Microsoft software)
- Set-it-and-forget-it SaaS apps are more commonplace than realized, such that credit cards keep getting billed and no one notices unless something goes wrong
- App marketplaces, like Salesforce.com’s AppExchange, create a network effect of other products that integrate (products like the Kevy integration platform are working to decrease this network effect)
- Achieving scale in a market results in significant sales and marketing resources that only grows as the company grows
- If SaaS was susceptible to low barriers to entry, more upstarts would have to have successful businesses in the same market as category leaders
The hedge fund partners would do well to talk to their B-school classmates that have started SaaS companies and hear first-hand just how difficult it is to get one off the ground.
SaaS startups encounter a number of barriers to entry, especially in markets with dominate category leaders.
What else? What are some other thoughts on SaaS and barriers to entry?