Just Where Are SaaS Companies Priced After the 2018 Correction?

Tomasz Tunguz

Just where are we pricing SaaS companies today? The answer is yes, they have, but enterprise value to forward revenue multiples are still at some of the highest levels for SaaS companies in the past eight years. Reading the news in the past week made me wonder.

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Do SaaS Startups Still Require Less Capital than 10 Years Ago?

Tomasz Tunguz

In 2014 we saw increasing efficiencies over time, which was very exciting because it reaffirmed the efficiency of SaaS go-to-market. SaaS companies go public later. In 2014, I published a post called Do Startup Require Less Capital to Succeed than 10 Years Ago ?

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Why Startups Face Increasing Competition In Raising Series As And Bs

Gust

Invested Interests content marketing saas Startup Funding startup management By Tomasz Tunguz , Partner at Redpoint Ventures. Has it become harder to raise money? is a question I hear all the time. On one hand, the total dollars invested by VCs is relatively flat at just under $30B per year, according to the NVCA. On the other hand, the stories of difficulty raising series As and Bs have become a steady drumbeat.

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SaaS Fundraising in 2017

Tomasz Tunguz

When I analyzed the SaaS fundraising market in 2016 , three trends emerged. The number of SaaS companies raising rounds had stalled, while the total number of dollars plateaued. A year later, those trends have continued to converge, and SaaS valuations have resurged, reaching their highs of the 2014-2015 boom. In contrast to these seemingly monotonic increases in round sizes, the total amount of SaaS fundraising peaked in 2015 at $4.2

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Has SaaS Become Commodified?

Tomasz Tunguz

A founder asked me if we had reached the point that SaaS is commodified. “Can you build a venture scale SaaS company anymore?” First, the technology barriers to starting a SaaS company continue to fall. Whether it’s Predictable Revenue written by Aaron Ross or Mark Roberge’s The Sales Acceleration Formula, or others, authoritative texts describe step by step how to structure, manage and measure a SaaS sales team.

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The Rising Stakes in SaaS

Tomasz Tunguz

Last week, I participated in two discussions about the changes in the SaaS world. The level of competition in many core SaaS segments is intense. The SaaS era is about 20 years old. Over that 20 year period, annual SaaS investment has increased 20x, peaking in 2014 at $7B. This sea of SaaS startups have reshaped the market. SaaS company formation has fallen by 44% in the last 3 years. I’m using SaaS seed rounds as a proxy metric.

Why Churn Rates Can Spike When Your SaaS Startup Experiences Hypergrowth

Tomasz Tunguz

If your SaaS business is growing really fast, and you’re wondering why churn is growing despite high NPS (net promoter score) or other metrics, this is why In Rethinking Customer Churn Rate & LTV/CAC , Thibaud Clement illuminates a counter-intuitive concept about churn. The faster you increase your growth rate (acceleration rate), the higher the churn rate.

7 Predictions for SaaS in 2018

Tomasz Tunguz

Several landscape altering SaaS acquisitions will come to fruition because of cash availability from repatriation and because there are enough public SaaS companies at scale to add material revenue and market cap to buyers. The SaaS fundraising market remains ebullient through 2018 as vibrant M&A and an open IPO window trigger substantial liquidity for shareholders. Below are 7 predictions about the startup software ecosystem. How many of them do you agree with?

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Mitigating Myopia in SaaS Marketing

Tomasz Tunguz

As a SaaS startup scales from finding initial product market fit to building its go to market organization, one of the most important goals in building that go to market organization is developing a multifaceted marketing team. Marketing’s role in SaaS sales has expanded to the success of SaaS companies as customers prefer to educate themselves more than they have in the past. Many early stage SaaS companies focus on a single channel of customer acquisition at the outset.

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The SaaS Valuation Bubble

Tomasz Tunguz

The value of publicly traded SaaS companies has grown by 200 to 400% while the underlying customer unit economics of those businesses hasn’t changed. Below is a chart of the ratio between enterprise value to revenue for two segments of SaaS companies. The All Segment contains 36 publicly traded SaaS companies. From about 2004 to 2011, the average publicly traded SaaS company held an EV/Rev multiple of 3 to 5x.

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Backing Radformation: How Many Physicists Does it Take to Build a SaaS Company?

This is going to be BIG.

Long gone are the days when NYC was just a place to build a fintech company or an ad platform. In the first half of 2018, we saw Flatiron Health’s $1.9 Billion acquisition, Quentis Therapeutics picking up $48 million in financing, and Paige.ai raising $25 Million--all to fight cancer. Making cancer treatment easier to plan for clinicians was the goal of a founding team of three physicists who cold e-mailed me around New Years.

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The SaaS Correction of Late 2019

Tomasz Tunguz

Last week, SaaS stocks fell by about 18% on average. The chart above shows the most recent enterprise value to forward multiple for a basket of next-generation software companies. The red line is the value and the blue line is the median over the same time frame.

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The Innovator's Solution for SaaS Startups - The Flywheel SaaS Company

Tomasz Tunguz

In the Innovator’s Dilemma for SaaS Startups , I outlined the path of many software companies, which disrupt incumbents by first serving the small-to-medium business and then move up-market by transitioning to serve larger enterprises with outbound sales teams. But, as Kenny van Zant of Asana and Mike Cannon-Brookes of Atlassian told me , there’s another way, a novel way of building companies that still isn’t very well understood: the Flywheel SaaS Company.

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The Innovator's Dilemma for SaaS Startups

Tomasz Tunguz

See also: Innovator’s Solution for SaaS Startups. There’s a familiar path now to SaaS companies that start in the SMB (small-to-medium business) part of the market. Rather than invest several years to build an enterprise product broad enough to compete, many SaaS startups focus on the SMB part of the market. Over time, they seem to inevitably begin serving larger customers. Box, Hubspot, Zendesk and among many others have exhibited this pattern.

How Much Should A SaaS Startup Invest in Sales & Marketing?

Tomasz Tunguz

How much should a SaaS startup invest in sales and marketing at different stages of the business? Another way to answer this question is to use at Pacific Crest’s SaaS survey to build a bottoms up model. This growth rate is not representative of most SaaS companies, but I wanted to see whether the bottoms of model would yield a much more aggressive sales and marketing spend plan than that observed in the public markets.

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Series A SaaS Startup Benchmarks for 2018

Tomasz Tunguz

How far along was the typical SaaS Series A in 2018? The chart below shows a representative sample of SaaS Series As’ ARR and projected ARR growth rate for 2018. In 4 years, we’ve seen a 4x increase in the median MRR of a Series A SaaS company.

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The Compression in SaaS Valuations

Tomasz Tunguz

In 2015, SaaS companies trade at a 30% lower multiple of revenue than last year. In early 2014, the typical SaaS company traded at about 9.2x Almost every public SaaS company has seen multiple compression. But I wonder if this slow decline will impact prices in pre-IPO rounds and later stage growth rounds for SaaS companies. “Structure” as it’s called in industry parlance, has been a feature of several rounds in the most recent SaaS IPOs.

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The ROI of Cash Burn for SaaS Startups

Tomasz Tunguz

SaaS customers are annuities. In 2016, SaaS multiples fell 57% from their highs. What should be the return on investment of a startup’s cash burn? Fred Wilson posed this question last year in his post Some Thoughts on Burn Rates. In that post, he suggests, and I agree, that a 5x ROI on cash burn is a good target. How does one calculate ROI? It’s a simple formula: Cash_Burn_ROI = Revenue_Multiple/Revenue_Pay_Back_in_Years 1.

How Healthy is the SaaS IPO Market?

Tomasz Tunguz

More than 15% of all software revenue is now generated by software as a service companies, and there are more than 50 publicly traded SaaS companies today. After more than a decade of reinvention, I was curious how healthy the IPO market is for SaaS companies. According to the data, 2016 has the potential to be the worst SaaS IPO year in six. The chart above plots the number of SaaS IPOs. In gross dollar terms, SaaS companies raised more than $1.5

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Sales Efficiency Benchmarks for SaaS Startups

Tomasz Tunguz

One number investors use to benchmark SaaS startups across sectors and industries is sales efficiency. Below are the sales efficiency benchmarks for the approximately 20 publicly traded SaaS companies calculated on an annual basis by years since founding.

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When to Increase Your SaaS Startup's Burn

Tomasz Tunguz

SaaS startups often find themselves in one of three different states when contemplating their burn rate. The more complicated state is the one in between, and that is the one that most SaaS startup operate within. You have a SaaS startup. This is not a comprehensive list, but a collection of different scenarios that I’ve come across when meeting with founders of SaaS startups.

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The Next Era in SaaS

Tomasz Tunguz

Vik Singh wrote a great post in VentureBeat last week titled “ Why Salesforce Needed to Buy RelateIQ ” in which he talks about a new era in SaaS, the Predictive Era, the era of intelligent software. It’s no longer sufficient in most horizontal SaaS categories to provide a cloud-based alternative with similar features to traditional software incumbents. As a result, predictive SaaS companies can easily access this data.

The SaaS Valuation Environment in Mid-2019

Tomasz Tunguz

Every six months or so, I take a look at how the public markets are valuing next-generation software companies. There’s been quite a bit of volatility over the last five years, and this update is no exception. As of mid-June, the public markets value software companies at all-time highs.

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Event Driven SaaS - The Workflow of the Future

Tomasz Tunguz

A senior SaaS executive once told me, “Reports sell software.” And new SaaS companies who aim to displace incumbent systems of record will architect their products in a radically different way. They will be event-driven SaaS companies. Event driven SaaS products consume events from data sources, data sources like social media, news, analytics data, marketing data, customer support data, sales data.

Important Changes in Revenue and Profitability Definitions for SaaS Companies

Tomasz Tunguz

Normally, accounting changes are not that interesting, but ASC 606 will change several of the key attributes and benchmarks SaaS startups use. Net income will increase markedly each quarter and may push many SaaS companies from a median -10% net income to a figure much closer to zero. Starting in January, public software companies will report their financials using ASC 606.

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Where are We in the SaaS Valuation Cycle?

Tomasz Tunguz

Recently, people have been asking just where are we in the SaaS valuation cycle. Since 2013, we seen an incredible amount of volatility in SaaS forward multiples. Since that moment, SaaS multiples have more than doubled from to 7.2x. SaaS is winning ever greater marketshare across all these segments. I last updated the chart above more than six months ago. The answer is close to ten year highs.

The Rising Table Stakes in SaaS

Tomasz Tunguz

Christoph Janz , one of the best seed stage SaaS investors, published a great tweetstorm on the state of the SaaS ecosystem yesterday. The mechanics of SaaS startups are becoming better and better understood as the community and sites like Jason Lemkin’s SaaStr and David Skok’s For Entrepreneurs and Christoph’s own blog curate the stories, explain the complexity and reveal the metrics behind the fastest growing SaaS companies of our time.

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Vertical SaaS Startups Require Different Go To Market than Horizontal SaaS Companies

Tomasz Tunguz

Vertical SaaS requires a different go-to-market than horizontal SaaS companies. Vertical software companies, a recent important trend in SaaS startups, pursue customers only in a particular industry. Because vertical SaaS companies limit their potential market size by focusing on just one type of customer, they must employ a differentiated strategy to win disproportionate share of smaller market. 50% greater than the public SaaS median.

What SaaS Startups Miss in User Onboarding

Tomasz Tunguz

Over dinner, a veteran product manager argued most SaaS products’ onboarding practices miss a crucial step: create value for the user in the first session. After that conversation, I signed up for many brand-name SaaS products pretending it was for the first time, and I couldn’t help but agree with him. Most SaaS products guide a user through three steps. While this may be the state-of-the-art for most SaaS startups, it’s not enough to optimize the funnel.

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Benchmarking Exceptional Series A SaaS Companies

Tomasz Tunguz

At SaaStr 2016 and SaaS Office Hours in New York , I shared an analysis of the fastest growing SaaS companies over the last 3 years. Benchmarking Exceptional Series A SaaS Companies from Tomasz Tunguz. These are the key bullet points from the deck about exceptional SaaS companies. This analysis considers only a small fraction of the total number of SaaS companies. Consequently, there are three major themes of 2016 for the Series A SaaS market.

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The Decline of New SaaS Company Formation

Tomasz Tunguz

Second, the key systems of record in SaaS are already in place. We haven’t really seen a discontinuity of the magnitude SaaS presented to server/client, yet. Machine learning in SaaS is nascent. The rate of new software company formation seems to have declined materially in the past few years. In 2011-2013, about 1450 software companies were founded each year on average. In 2014, that figure fell to 1186 and in 2015, we count 481.

The State of the SaaS Fundraising Market

Tomasz Tunguz

In a recent survey, 40% of VCs pointed to SaaS as the startup sector most likely to be impacted by a market correction. There’s no question that the early stage SaaS founders are benefiting from substantial multiple expansion and pre-money valuation increases. The typical SaaS/software company raised a $1.1M But I was curious about how widespread aggressive investments are in software companies.

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The Three Types of SaaS Value Propositions

Tomasz Tunguz

There are three kinds of software value propositions. Software that increases revenue, software that reduces cost, and software that promises improved productivity. To maximize the effectiveness of your customer success efforts, you need to understand which type of software company you are building. Software that increases revenue is the easiest to sell. For most companies, growth is the most important priority. Growth trumps cost-reduction because growth increases the value of the business more.

Redpoint SaaS Startup Key Metrics Template

Tomasz Tunguz

Over the last decade or so, I’ve compiled a metrics sheet to summarise a SaaS business. Redpoint SaaS Metrics Template. While no living document like this is ever perfect, this is currently the best board-level summary of the overall health of a business I have found. I’m sharing it so that others may benefit and improve it. If you have suggestions, please email me.

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Trends in Early Stage SaaS Fundraising Market of 2016

Tomasz Tunguz

About $1B has been invested in early stage SaaS startups as of November 1. If we compare these trends to the total aggregate market capitalization of public SaaS companies by buyer, we observe a few interesting patterns. This operations category hints at the rising importance in the fundraising market of vertical SaaS companies. Let’s take a quick look at the breakdown between horizontal and vertical SaaS companies.

The Challenge Facing Mobile-First SaaS Companies

Tomasz Tunguz

But the distribution advantages of mobile app stores hasn’t been observed as powerfully in SaaS or enterprise software for driving revenue. The difference between consumer and the SaaS startups’ effectiveness leveraging mobile app store distribution hinges on the end user. In SaaS, the end user is very infrequently the buyer. This second step, at least to date, has been the limiting factor in using mobile-app distribution to drive SaaS company growth.

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SaaS Office Hours in New York - A Q&A on the State of the SaaS Market

Tomasz Tunguz

Join me for SaaS Office Hours on February 22 in New York at the Axial headquarters. This is the first time we’ll be hosting SaaS Office Hours on the East Coast, and there will be more to follow. Given the volatility in the market and the number of inbound questions about the implications, this SaaS Office Hours will be focused on fundraising and the venture capital outlook for 2016.

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Sales Funnel Optimization for SaaS Startups

Tomasz Tunguz

There’s a magical property to the classic sales funnel SaaS startups use to evaluate the effectiveness of their go-to-market organizations: an increase in effectiveness at any stage of a sales funnel cascades through to the end funnel. But improvements to the early parts of the funnel are more important than those later in the funnel, because they meaningfully improve key SaaS metrics like cost-of-customer acquisition and pay-back period.

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3 Marketing Insights from a World Class SaaS Marketer

Tomasz Tunguz

MySQL, the most valuable open-source acquisition; Zendesk*, the $3B leader in customer support software; DataStax, The business commercializing Cassandra; and most recently Duo Security*, an Ann Arbor-based trusted access company that has some of the most sensational SaaS metrics I’ve ever seen. Recently, I had a chance to talk to Jeff and learn about the unique strategies they employ to drive one of the fastest growing and most efficient SaaS companies in the market today.

How Machine Learning Can Benefit Your SaaS Startup

Tomasz Tunguz

The innovation offered by machine learning techniques are real, and they will changed the SaaS world. Creating proprietary data through product usage, perhaps as an event-driven SaaS product, or through key partnerships is essential to creating sustainable competitive advantage. From the millions of Amazon Alexas to the self-driving car, new products are coming to market infused with machine learning.

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Modeling Your SaaS Startup's Revenue Growth Effectively

Tomasz Tunguz

At the core of effective revenue forecasts lie the Fundamental Unit of SaaS Growth. The Fundamental Unit of SaaS growth is the atomic go-to-market team of a startup. Conceptualizing a company’s revenue growth in teams, rather than individuals recognizes the interdependence of internal teams in SaaS companies for the business to succeed, and is one of the most effective ways I’ve seen to model the revenue growth of a SaaS company going to market with sales teams

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Just How Global is the SaaS Startup Phenomenon?

Tomasz Tunguz

SaaS startups are thriving in these countries and many more. According to Crunchbase data, US SaaS investment has grown tremendously since 2010 from about $1.5B Ex-US (or non-US) SaaS investment has grown 6.3x over the same time period, an encouraging data point for SaaS founders. Canada’s SaaS environment seems to be the most similar to the US in terms of stability and round size. A SaaS startup by any other name (or in any other geo…).

The Rising Importance of Reseller Channels in SaaS

Tomasz Tunguz

The notion of channel sales in SaaS companies is becoming more common than in has been in the last few years, and for some businesses like Intacct, channel partnerships drive more than 50% of sales. Most SaaS has little customization, manages all the delivery and are better suited to handling the support. Plus, value-added resellers charged buyers on a per-project basis which doesn’t align neatly with the recurring subscription intrinsic to SaaS.