SaaS companies make up a significant chunk of the Luxembourg startup ecosystem. Romain Hoffmann, long-time investor, head of investment committee and board director of Luxembourg Business Angel Network (LBAN) shares his views on the state of SaaS investments, the challenges of scaling and the risks of AI.
How prevalent are SaaS investments for LBAN?
The SaaS model is by far the most popular investment segment of LBAN’s members and it is also the model we see the most at our pitching events. Around 70% of the deals are in b2b SaaS, 20% in b2c SaaS and 10% in marketplaces. One of the reasons this model is chosen so frequently is because of its recurring and predictable nature, and the fact that it’s cloud-based reduces distribution and transaction costs, which helps generate a high-margin model.
What are some of the biggest SaaS trends you are observing today?
I distinguish between vertical and horizontal SaaS companies. Simply put, vertical SaaS solutions only focus on the specific needs of one industry – good Luxembourg examples are Doctena and Salonkee. A horizontal SaaS is software designed for a use case or problem relevant across a range of industries. Previously, vertical SaaS were considered a bit boring but recently VCs have turned their attention back to them because they are more resilient in times of crisis. Also, AI is a perfect match with vertical SaaS solutions because data comes from a single industry and leads to more efficient data processing, better decision making and better user experiences.
So, the rise of vertical SaaS is definitely one of the trends I am seeing. Integration of data analytics and AI is also a big one that will only increase in the future. I think that low-code and no-code platforms are becoming more popular for entrepreneurs too. These are also trends that I am observing with Luxembourg SaaS companies, which tend to integrate ESG or climate-friendly aspects too.
What advice do you have for startups looking to attract SaaS investment in Luxembourg?
I learned that playing a small role in a big market is not sustainable because there is so much competition nowadays. That’s why it’s important to always listen to your customers and integrate as much feedback as possible from them. Nowadays you have so much competition in the market that the only way to survive long-term is to distinguish yourself from them by offering a unique value proposition, building a strong brand and creating an exceptional customer experience.
At the end of the day, many solutions on the market offer quite similar advantages and the real differentiator is your team. At each growth stage of a company, the difficulty and complexity increase, that’s why it’s crucial to have the right management team that is able to change mindset at every stage. And in my experience, the best teams are those that know exactly in advance, how to grow the team, and how to make the whole company scalable.
How does one create such a team?
One of the best SaaS teams I’ve encountered was led by a founding team who embraced the entrepreneurial mindset completely. They have read all the books possible and learnt from the best companies and managed to “crack company culture”. Now they keep getting rated as the best place to work on the one hand and on the other hand they grow their sales exponentially because they treat that side of the business very pragmatically. This is really the part that many startups struggle with when they hit higher revenue figures because they fail to align the entire team with the right objectives. Lastly, exceptional teams will always succeed because they are not afraid to put their product on the market early and learn from the feedback they are getting.
How big of a challenge do LLMs such as ChatGPT pose to SaaS companies?
I think that many startups are already experimenting with them to see how they can grow faster. I do not think that they pose any risk of replacing them in the near future because SaaS solutions are constantly evolving and require hands-on experience that cannot be replicated by LLMs. They can be seen more as a complement to enhance SaaS offerings and provide more personalised and efficient solutions to their customers. However, for startups where the main solution revolves around AI or machine learning, I do think that LLMs could pose some difficulties. Here again, I think that horizontal SaaS solutions will struggle a lot more than vertical ones because their solutions are too generic and therefore more easily replaced by AI.
How do Luxembourg’s SaaS companies compare to our neighbours?
When I compare our SaaS models to our bigger neighbours such as France or Germany, one of our main advantages is that we have a small market which on the one hand allows our companies to test their products and on the other hand forces them to expand beyond the country’s borders quite quickly.
Of course, going abroad is always difficult because you have to adapt to a new culture and market but since we are multicultural from the get-go, Luxembourg companies usually fare better abroad than those of our neighbours. This is also something you can see in their valuations which generally tend to be higher and also in the fact that they scale faster outside of their home market than neighbouring SaaS companies abroad.
This article was first published in the Silicon Luxembourg magazine. Get your copy.