SaaS Headwinds — You all know me: I love to bash pre-profitability software-as-a-service companies, particularly as they have weighed on the Nasdaq this calendar year. Some of these businesses are as insane as penguin JPEGs or sh*tcoins going to the moon.
In the last six months, we’ve watched a ton of these names absolutely crater, shedding between 30 and 60% of their value. If you want to justify the Nasdaq’s dump down to 11k, look no further than this industry.
But some SaaS offerings are different. They meet a set of customers’ needs, accomplishing a series of valid use cases that have legit value in today’s business environment.
The issue for these companies is that if you’re not at scale and bringing in revenue, it’s hard to remain afloat in a fiscal environment not beneficial for growth.
Recently, the founder and CEO of Salesroom, Roy Solomon, said something that I interpret to be somewhat prescient: typically, these SaaS names have been successful in raising funds almost annually. Those days are over. That well is dry.
Expecting to burn through cash via talent acquisition or developmental investments is not doable anymore. You need to better conserve cash, operate efficiently, and deliver value to the market, all the while expecting to only have 24 months of runway available at any point in time.
In a tough macroeconomic environment, there is a realization amongst SaaS names that in order to survive, the business needs to scale. Both its mission and its product need to be flexible to enable scalability.
That’s not to say that founders should empower their engineers to bite on any shiny object. Oftentimes these “SQUIRREL!” moments are simply a distraction from operations that detract from a business’s march towards eventual profitability.
SaaS offerings are unique in that much of imparting your value to a customer comes through the sales process. Many cloud-based services don’t get this right. The software itself needs to either function in a way that provides value, like some consulting firms do, or provide support like a subject matter expert in the space for its slew of use cases.
Microsoft, Adobe, Salesforce… These cats aren’t going away. They have a nearly unlimited runway and smart money backing their every move.
But who will be the next can’t-live-without platform?
To find the next investable SaaS name, you need to make sure they meet the above criteria while not sporting a valuation that requires Alan from the Hangover to do the math for you.
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