Over the past eight years we have invested directly in more than sixty-five companies. We have also indirectly seeded hundreds more through incubators and other venture funds. We’ve learned many valuable lessons during this period. One of the most important things we’ve learned is that while SaaS companies may not be as “sexy” as their consumer facing counterparts, ultimately they are a lot more attractive to us.
Here’s what we love about SaaS companies:
- SaaS companies tend not to be zero-sum outcomes for investors and founders. While the returns tend to be lower the success rate is higher.
- At the early stage the business model tends to be clear and actionable whereas consumer companies can be a bit more depended on scale.
- You can be systematic about your approach to growing revenues by identifying a market and “dialing for dollars”. On the consumer side your success can be much more dependent on good press, word of mouth and large marketing budgets (bottling lightning).
- Businesses like SaaS as it can typically be deployed quick and cheaply.
- The products tend to be very sticky. This leads to high lifetime value and switching costs. On the consumer side individuals tend to be more fickle unless you build a true network effect like Facebook, Twitter and Instagram have done.
- MRR leads to greater predictability in forecasting and cash flows.
- There tends to be less (no) seasonality in SaaS companies. Tomasz Tunguz post on this — it’s a must read.
- There are accepted industry metrics that create a known lexicon and reporting structure.
- They can be extremely capital efficient. According to CB insights 49% of all VC-backed SaaS exited raised less than $10m before exiting.
- They tend to be less of an emotional rollercoaster (not to say there aren’t up’s and downs).
Our strategy is focused primarily capital efficient b2b SaaS investments. By no means do we think this is the only strategy that can be successful in venture. It’s the one we have determined we are best positioned to succeed around.