Early-stage SaaS investment is growing for very good reasons
By: Birgit Thümecke
According to business information platform, Crunchbase, things are looking up for early-stage venture investment in SaaS companies. After crunching (because that’s what they do) the numbers from more than 9,400 deals on their platform, they were able to reveal a substantial jump in SaaS investment from the latter half of 2017 to the first six months of 2018.
The numbers don’t lie
It’s telling that the growth in SaaS investment covers both seed and early-stage rounds. The value of Series A and B rounds for SaaS companies is up 56 percent to about $2 billion, while seed and angel investments in the same category of companies increased by 47 percent. Even late stage rounds (series C – E) saw investment activity grow by 33.5 percent to $2.78 billion, indicating robust and sustained interest across the SaaS field.
Why is this happening?
According to Crunchbase the surge in early-stage SaaS investment has been fueled by a demand for high-margin recurring revenue as evidenced by the strong performance of public SaaS companies. To paraphrase Marc Andreessen, if software is eating the world, then SaaS is the Pac-Man of software, precisely because of its recurring revenue model.
A recent comparison between public SaaS companies and traditional software companies has shown 27.5% YOY revenue growth for the prior versus 12.3% for the latter. The numbers make sense if you take into account that recurring revenue (such as subscriptions) delivers higher profit margins due to lower sales and marketing costs, and also offers predictable income as well as higher customer lifetime value. All of which have contributed to the higher market valuations of businesses with recurring revenue models.
Crunchbase does offer another interesting, slightly acerbic, reason for the uptick in early-stage SaaS investment since 2017 – crypto currencies.
“The second half of 2017 was the six months in which Silicon Valley and the broader technology sector went crypto-crazy. Perhaps investors woke up from their token reverie and started to invest once again in things simple enough for them to understand.”
Crypto aside, it’s obvious that savvy investors have caught on to the huge potential of the SaaS market. No small wonder, when you have examples such as Adobe which increased its market cap more than tenfold, from $12 billion in 2012 to $130 billion today, by switching to a monthly subscription model. Of course, getting in on the early-stage ground floor tends to provide the best returns on investment, but that expectation has to be supported by risk-mitigating factors (aka business value drivers, if you are of a more positive disposition) such as:
Future growth potential
Detailed financial forecasts
A high-performance management team
Quality products and services
Strong sales and marketing plans
Well-designed systems and processes
Defensible IP and trademarks
However, with a plethora of early-stage companies out there, it can be difficult to identify the right opportunity. So let’s make this easy. After three years of development and ticking all the abovementioned boxes, Eventerprise, a SaaS platform for the entire events industry, has kicked off its Series A round. If this looks like your investment cup of tea and you like the sound of ‘recurring revenue’ get in touch with co-founder, Charlie Wright.