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

SaaS 64

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.

SaaS 63

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

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.

SaaS 63

Insightful Study of 386 SaaS Startup Pricing Pages

OnStartups

Late last year, I combed through the Montclare SaaS 250 — a directory of the biggest SaaS companies in the world — to find common trends in what I thought would be a significant dataset. As it turned out, 80% of the 250 biggest SaaS companies didn’t have a pricing page at all. Of the remaining 386 which hadn’t shut down, I found that startups are around twice as likely to show their pricing than their enterprise SaaS big brothers. saas pricing

SaaS 61

What is the Structure of the Typical SaaS Company as it Scales?

Tomasz Tunguz

This post is part of a series leading up to SaaS Office GTM Edition on June 24 in which we’re reviewing the results of the 2020 Redpoint GTM survey. CMOs in SaaS companies head 35% of companies in the $20-50M ARR range, 40% at $50-100M and 53% at $100M+. Today, we’re answering the question: how do teams grow as a startup scales? We can derive the table above if we look over the entire respondent base and bucket headcount by ARR.

SaaS 87

Secret To SaaS Success: Recognize That You're Not Selling Software

OnStartups

Many software companies are now Software as a Service (SaaS) companies. Now, naive folks that are new to SaaS often make the mistake of thinking they're still selling software. SaaS = Success as a Service. If you're in the SaaS business, the only way to survive in the long-term is not to just deliver software. HubSpot is a textbook SaaS company. I've been working in the software industry for over 25 years.

SaaS 42

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. And despite the overall change in multiples, more SaaS companies have benefitted from multiple expansion over the last 12 months than those whose multiples have compressed. Reading the news in the past week made me wonder.

SaaS 59

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. Because of the surfeit of capital, SaaS startups face increasing competition and monotonically increasing costs of customer acquisition , increasing their capital consumption; to say nothing of increasing wages in San Francisco and across the US. SaaS companies go public later.

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.

SaaS 62

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.

SaaS 64

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.

SaaS 40

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.

SaaS 40

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.

SaaS 168

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.

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.

SaaS 62

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.

SaaS 61

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.

SaaS 40

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.

SaaS 65

Can You Still Make Money Starting a SaaS Company?

Tomasz Tunguz

Where is the SaaS world relative to how far it can go? Assuming a $10k SaaS budget per year for those workers, we obtain a theoretical market size of about $720b annually. And this doesn’t account for the new software spend as vertical SaaS reaches deeper and more businesses modernize.

SaaS 66

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

SaaS 41

The AI Agency - A Novel GTM for Machine Learning SaaS Startups

Tomasz Tunguz

In 2015, I wrote about the trade-off facing vertical SaaS companies. Vertical SaaS companies focus their efforts on a particular group of customers. There is a new twist in SaaS with a parallel dynamic. Procore targets construction with their software and Veeva targets pharmaceuticals with their CRM. This concentration limits the market size, but improves product market fit. Both of those businesses are now worth more than $3B.

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.

SaaS 40

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.

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.

SaaS 115

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.

SaaS 40

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.

SaaS 40

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.

SaaS 40

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.

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.

SaaS 40

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 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.

SaaS 40

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.

SaaS 40

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.

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.

The 2014 Class of SaaS IPOs

Tomasz Tunguz

2014 has been a great year for SaaS companies. Meanwhile, SaaS companies in both the public and private markets continue to fetch premium valuations. To illustrate the rapid appreciation in the value of these SaaS companies, I’ve plotted the share price by round of each business. Second, once these SaaS companies trade in the public markets, they pop. Third, the average SaaS IPO in 2014 raised 4 rounds of capital.

SaaS 40

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. Most SaaS companies operate around the 0.8

SaaS 53

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.

SaaS 48