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?