Earlier this week I was talking to a venture capitalist about the Software-as-a-Service (SaaS) market. Halfway through our conversation we got to talking about what’s going to happen to all the successful (greater than $2 million recurring revenue) SaaS companies that are providing a service that isn’t venture backable (hard to see how the business achieves a value of $100+ million). It’s tough for investors to make good money as the market for small acquisitions is tiny outside of Silicon Valley.
Here are a few thoughts on small SaaS companies:
- SaaS has such good cash flow, predictability, and gross margins that many of these small businesses can be very profitable, even sub-scale
- Investors will likely make their returns off of dividends once the business stops spending for growth and instead looks to maximize profitability
- Rollup companies will emerge that specialize in SaaS businesses (scale might need to be a bit higher e.g. $10+ million in revenue) much like Infor did for maintenance-focused enterprise software companies
- SaaS companies that are growing fast (greater than 40% year over year) get premium valuations (e.g. 7-10x revenue), and ones with lower growth are going to get smaller valuations (e.g. 2-4x revenue)
- SaaS as a delivery model for software is only going to grow, and more entrepreneurs are going to find unmet needs (a SaaS trend is to provide one component of a larger SaaS product in a format that’s better, faster, and cheaper)
Just like any cottage industry, more and more small SaaS companies are going to emerge and carve out their own profitable niche. While most won’t have splashy exits, they’ll be great businesses and provide nice lifestyles for the entrepreneurs.
What else? What are some other thoughts on what happens to small SaaS companies?
David Cummings on Startups 
I think you are right on David. The industry is only going to get larger, as more people realize what a great model SaaS is. There are no shortages of problems to solve and as more platforms get invented (and become popular) even more opportunities are realized.
I do know of some VCs that are doing what you mention…they will put up some money in the early stages and then want to get a percentage of dividends going forward.
I was offered such a deal for TribeBoost (http://TribeBoost.com) awhile back. At my growth rate the deal just did not seem worth it. I did not really need the money for anything either and did not want a new “boss”.
I can predict my monthly revenue almost to the dollar — what other businesses can do this? SaaS rules!
Looking back on my first business back 15 years ago (that was more of a traditional consulting business) and it was such a rocky ride. First year was well over 1/4 million in revenue and then the next year things just dropped off the table because I had just a few clients and lost a big one.
With SaaS it really does not matter when I lose even one of my best clients. I hate seeing them go, but never lose sleep as I have hundreds of clients paying a little instead of just a few paying a lot.
Our very positive exit echos this David. SharpSpring, A hypergrowth Marketing Automation SaaS startup sold last August, after less than a year in market, to NASDAQ-listed SMTP for a premium+ valuation (http://www.marketwatch.com/story/smtp-inc-to-acquire-graphicmail-and-sharpspring-2014-08-15). It was ALSO a mini roll-up as SMTP also acquired a second SaaS company GraphicMail. We’re now the growth engine for the newly combined company.