SaaS companies have been an investor favourite since they first flooded the market in the early 2000s. However, not all companies are created equal and there are many factors worth considering before investing in a SaaS company. Yannick Oswald, early-stage VC and partner at Mangrove Capital Partners, shares the six investment factors he considers before making an investment.
- The Market Pull
Before investing in a business, whether it be an enterprise or SME, one has to consider not only if there is a market pull but also how strong it is. “Growing a business to a couple of million revenue is not that hard, but finding a business that can sustain growth over time without throwing loads of money behind it, is a lot harder,” says Yannick.
When there is a real market pull and a company’s product taps into that, then selling the solution will almost, but only almost, go by itself. A related question an investor should always ask themselves is whether the market pull is sustainable and not just caused by contextual factors (e.g., video call platforms saw insane growth during Covid-19 but have slowed down since).
- The Onboarding Process
Crucial to the growth potential of a SaaS company is its onboarding process. If the market pull is a combination of the urgency and scale of the problem a company is trying to solve, then the onboarding process is the vehicle which can strengthen the market pull.
“For enterprises which work slowly you need to create a sense of urgency and show them a proven problem,” explains Yannick, adding: “We’re looking for an onboarding that is relatively frictionless and a strong marketing message that can reach a wide range of potential customers.”
- Inside Sales Teams
“Especially when it comes to SaaS companies, we like internal sales teams. This means we like teams that can sell their solution over the phone out of one local office to the rest of the world,” says Yannick.
In other words, if you need to have three lunches before being able to sell your product, you won’t achieve the sales velocity necessary for long-term scalable and sustainable growth.
- How Hooked Are Clients?
“Whatever metrics you use, we need to see that people are actually hooked and are continuing to use your product over a longer period of time,” says Yannick.
As an investor, you are always looking for companies that have the potential to achieve long-term growth. To achieve this it is crucial that the majority of clients are hooked to the product and don’t jump ship after their initial subscription ends.
- Net Revenue Retention
After SaaS companies hit revenue figures of more than €10m, it is essential for them to have high net revenue retention (NRR). A company’s NRR is a key SaaS metric which allows them to assess how sustainable the growth of their revenue is, thereby giving them a good idea of their long-term growth potential.
“You need to have +120% NRR in the SaaS space. The difficulty is that at the early stages, it is hard to know whether a company can achieve those numbers. However, usually, the great companies have a multiproduct strategy from the start which will help them achieve those numbers,” says Yannick.
- The Right “Mode”
With software being commoditised at a faster rate than ever before – in no small part thanks to LLMs like ChatGPT – SaaS companies need to start differentiating themselves in new ways.
“Either you have a tech differentiation and you build a product that is very difficult to build or you have a unique data set that allows you to build something nobody else can,” explains Yannick, adding: “Startups need to have a mode around them to be successful in the long run.”
In the early stages, most startups lack a clearly defined mode so this factor is harder to evaluate if you are an early-stage investor. “But that’s the bet an investor takes,” says Yannick.
SaaS is here to stay
Keeping these six factors in mind before deciding to invest in a software-first company seems like a good starting point. However, having a good understanding of the trends that are shaping the industry is just as important.
One of the more obvious ones is the massive growth of data we’re seeing, a trend which is showing no signs of slowing down this decade. A second trend is ongoing digitalisation across industries. While this trend has been happening for a while, most industries are still far from being fully digitalised, especially when it comes to integrating cloud services.
“Cloud computing penetration is only at 10-15% when it comes to SaaS companies and overall digitalisation across sectors is still only at 30-35%,” explains Yannick.
While the road for SaaS companies is far from over, there is little doubt in Yannick’s mind that the commoditisation of software will have significant impacts on the future of the industry.
“The long-term trend for software has not changed but investors are now more than ever looking for differentiation which they find in more high-end software,” explains Yannick.
This article was first published in the Silicon Luxembourg magazine. Get your copy.
