Only a little related to this, in recent months I've spoken to ~60 growth stage equity funds and found out that essentially all transformed to be SAAS focused investors.
That means they abandoned 1/3 portfolio strategy they used to have (1/3 loses money, 1/3 returns exactly 1, 1/3 returns fund) but instead are focusing on steady returns by SAAS companies at 2-3x of the investment.
There are a few major implications:
- for the founders; if you don't fit their narrative, for example you have big chunk of revenue coming from services or you have only few enterprise clients, then you are out of luck
- for the funds; the deals are overly competitive driving up the price and diminishing the returns
- for the market; up until the economy is up to the right, things will be fine. Once things start changing, the first things to go will be a lot of these "nice to have" SAAS companies. In turn they will take down growth equity and freeze funding at the later stage (Series B, C, D, ...).
The last point applies to also to the the article. You can build bootstrapped $1M ARR business, but can you defend it? I think that's the biggest question.
Former GE investor here - everything you've said is spot on.
Our modus operandi was that a growth equity investment should _never_ go to zero. The new portfolio thinking has shifted to the right: 1/3 make 1-2x, 1/3 make 2-3x, 1/3 make 3x or more.
The re-focus on SaaS as the only class of investment that can reliably generate returns and avoid zeros or capital loss is a very real trend.
Would emphasize your point around services - SaaS investors are generally allergic to this stuff and prefer services to make up as little of revenue as possible. It's typical low margin and not seen to be very "strategic" (though this could be debated).
SaaS is also much easier to analyze and diligence than the typical non-SaaS software company or consumer internet business. I won't say it's dead simple, but it's very much not rocket science. In combination with excess capital, this leads to prices getting bid up as such ease of diligence leads many investors to throw in a term sheet. It's just so easy to get comfortable with this stuff.
One caveat to all this that ties to your last point around the market / economy is volatility. You can see in the data that companies that generate a higher amount of the their growth from SaaS-like retention/upsell see higher valuation volatility when the market turns for any reason. [1] The "best" SaaS companies in the eyes of later-stage investors are typically those with high net revenue retention - but these are also the ones that get whacked the most in corrections.
As far as a downturn taking down growth equity - time will tell.
I think we'll need more examples then just Buffer. Everyone knows Buffer is a successfully bootstrapped company that grew kind of big but not massive.
If the author gave five other examples, then there's a case, but pointing out the one known example doesn't provide enough evidence in my opinion.
A separate point on style and punctuation: too many em dashes in the wrong places.
> What would make Buffer — a good investment?
No need for an em dash here.
> And, if you want to start a get-rich-slow SaaS fund — what is your target maturity?
Same.
> What if, at end of the holding period — investor sells the Buffer stake at market valuation?
Replace em dash with "the".
> But wait… that perpetuity — is a “paper valuation”.
Remove. The ellipsis could be an exclamation point, though it could be in the "personal style" bucket.
I would suggest removing every single em dash and practicing writing without them. They can be useful—for providing inline examples or explanation, for example—but should be used sparingly. Commas, colons, parentheticals, and semicolons can cover most of your use-cases.
Who says SaaS needs to be a startup? In the stockmarket we can find similar trends, with existing companies that switched to a SaaS model.
- Adobe (dominates DTP, can squeeze companies worldwide, small and large after switching to a subscription model)
- SAP (investors were overall pleased with their SaaS offerings)
- Microsoft (don't know the revenue stake Office 365 represents, but it's currently enough to subdue Slacks Post-IPO performance)
- Slack
But also mid- to small-cap companies like RIB Software, which offers SaaS for real-estate related industries.
Of course, thouse examples don't mean that their balance sheets provide evidence – but rather that stock market participants see SaaS-models as a path for constant high-margin low-volatilty growth.
I see more and more investors looking to do this especially as a solo-founder of a bootstrapped small SaaS business. As I march towards $1M ARR, the savvy investors are looking for ways to be valuable to my business as opposed to me begging investors for the next round of funding in traditional VC-backed ventures.
I would be very happy to share 15-20% if the value-add is strong enough.
I own a few SaaS sites that I bought (because I don’t have the patience and focus to build one myself) that I then work to increase the value of (based on lessons from a previous SaaS company I worked at), and I’m always interested in private equity arrangements.
Investment opportunities that provide 15% return exist in the public markets with easy liquidity options, so what is the benefit of trying to squeeze that out of a private company where you can’t sell unless the company goes public or you try to find a buyer on the secondary market? Unless the company pays out a dividend I don’t see the appeal - usually VCs trade liquidity for the hope of massive returns that aren’t typically found in public markets.
Usually, if we're referring to SV VC, but there are others. Bain is notorious for squeezing dividends out of investments and they're categorized as Venture Capital.
Traditional private equity, ala Berkshire Hathaway, is still pretty prevalent. There are plenty of self-described VCs who aren't necessarily looking for a 10-100x return amongst 100 small investments, but 2-5x returns across dozens of investments.
The vast majority of companies will never have a significant exit event triggering liquidity (IPO, M&A). Does that mean they're not worth investing in?
At least with private equity, you hopefully have some ability to influence those steering the ship, and get to avoid all of the regulatory hurdles. Opaque quarterly reports and short-sellers aren't exactly encouraging.
Remember: Hacker News is not a financial service, and people upvoting articles about financial behaviour is not the same as financial advice. If it sounds too good to be true, it probably is, and was probably written by someone who mistook the luck of doing the right thing at the right time for a transferable skill.
Predicting that a company will grow at 10% a year forever (never flat, never down) when their growth has been steadily falling their entire history is particularly presumptuous.
[+] [-] doh|6 years ago|reply
That means they abandoned 1/3 portfolio strategy they used to have (1/3 loses money, 1/3 returns exactly 1, 1/3 returns fund) but instead are focusing on steady returns by SAAS companies at 2-3x of the investment.
There are a few major implications:
- for the founders; if you don't fit their narrative, for example you have big chunk of revenue coming from services or you have only few enterprise clients, then you are out of luck
- for the funds; the deals are overly competitive driving up the price and diminishing the returns
- for the market; up until the economy is up to the right, things will be fine. Once things start changing, the first things to go will be a lot of these "nice to have" SAAS companies. In turn they will take down growth equity and freeze funding at the later stage (Series B, C, D, ...).
The last point applies to also to the the article. You can build bootstrapped $1M ARR business, but can you defend it? I think that's the biggest question.
[+] [-] DenverR|6 years ago|reply
Our modus operandi was that a growth equity investment should _never_ go to zero. The new portfolio thinking has shifted to the right: 1/3 make 1-2x, 1/3 make 2-3x, 1/3 make 3x or more.
[+] [-] whoisnnamdi|6 years ago|reply
Would emphasize your point around services - SaaS investors are generally allergic to this stuff and prefer services to make up as little of revenue as possible. It's typical low margin and not seen to be very "strategic" (though this could be debated).
SaaS is also much easier to analyze and diligence than the typical non-SaaS software company or consumer internet business. I won't say it's dead simple, but it's very much not rocket science. In combination with excess capital, this leads to prices getting bid up as such ease of diligence leads many investors to throw in a term sheet. It's just so easy to get comfortable with this stuff.
One caveat to all this that ties to your last point around the market / economy is volatility. You can see in the data that companies that generate a higher amount of the their growth from SaaS-like retention/upsell see higher valuation volatility when the market turns for any reason. [1] The "best" SaaS companies in the eyes of later-stage investors are typically those with high net revenue retention - but these are also the ones that get whacked the most in corrections.
As far as a downturn taking down growth equity - time will tell.
[1] https://whoisnnamdi.com/high-retention-high-volatility/
[+] [-] reggieband|6 years ago|reply
Can you clarify this? What do you mean by "large service revenue" and why does that mean the founders are out of luck?
[+] [-] hogFeast|6 years ago|reply
Always right on time.
[+] [-] deyan|6 years ago|reply
[+] [-] tunesmith|6 years ago|reply
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] louisv|6 years ago|reply
[+] [-] tyre|6 years ago|reply
If the author gave five other examples, then there's a case, but pointing out the one known example doesn't provide enough evidence in my opinion.
A separate point on style and punctuation: too many em dashes in the wrong places.
> What would make Buffer — a good investment?
No need for an em dash here.
> And, if you want to start a get-rich-slow SaaS fund — what is your target maturity?
Same.
> What if, at end of the holding period — investor sells the Buffer stake at market valuation?
Replace em dash with "the".
> But wait… that perpetuity — is a “paper valuation”.
Remove. The ellipsis could be an exclamation point, though it could be in the "personal style" bucket.
I would suggest removing every single em dash and practicing writing without them. They can be useful—for providing inline examples or explanation, for example—but should be used sparingly. Commas, colons, parentheticals, and semicolons can cover most of your use-cases.
[+] [-] philipodonnell|6 years ago|reply
[+] [-] woodpanel|6 years ago|reply
- Adobe (dominates DTP, can squeeze companies worldwide, small and large after switching to a subscription model)
- SAP (investors were overall pleased with their SaaS offerings)
- Microsoft (don't know the revenue stake Office 365 represents, but it's currently enough to subdue Slacks Post-IPO performance)
- Slack
But also mid- to small-cap companies like RIB Software, which offers SaaS for real-estate related industries.
Of course, thouse examples don't mean that their balance sheets provide evidence – but rather that stock market participants see SaaS-models as a path for constant high-margin low-volatilty growth.
[+] [-] tguedes|6 years ago|reply
[+] [-] buf|6 years ago|reply
I would be very happy to share 15-20% if the value-add is strong enough.
[+] [-] toomuchtodo|6 years ago|reply
I own a few SaaS sites that I bought (because I don’t have the patience and focus to build one myself) that I then work to increase the value of (based on lessons from a previous SaaS company I worked at), and I’m always interested in private equity arrangements.
[+] [-] tc313|6 years ago|reply
[+] [-] tomkubik|6 years ago|reply
[+] [-] Havoc|6 years ago|reply
[+] [-] tempsy|6 years ago|reply
[+] [-] Ancalagon|6 years ago|reply
[+] [-] xyzzy_plugh|6 years ago|reply
Traditional private equity, ala Berkshire Hathaway, is still pretty prevalent. There are plenty of self-described VCs who aren't necessarily looking for a 10-100x return amongst 100 small investments, but 2-5x returns across dozens of investments.
The vast majority of companies will never have a significant exit event triggering liquidity (IPO, M&A). Does that mean they're not worth investing in?
At least with private equity, you hopefully have some ability to influence those steering the ship, and get to avoid all of the regulatory hurdles. Opaque quarterly reports and short-sellers aren't exactly encouraging.
[+] [-] unknown|6 years ago|reply
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[+] [-] unknown|6 years ago|reply
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[+] [-] rb808|6 years ago|reply
[+] [-] TheRealPomax|6 years ago|reply
[+] [-] tempsy|6 years ago|reply
[+] [-] zepearl|6 years ago|reply
[+] [-] walshemj|6 years ago|reply
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[+] [-] tomkubik|6 years ago|reply
[+] [-] loanfirm|6 years ago|reply
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[+] [-] falcolas|6 years ago|reply
EDIT: It's also the name of the VC firm. D'oh! Keeping the rest for posterity.
Notice how there’s no actual values for what “tiny” means?
If you have cash to invest on a VC company, you’re most likely already quite well off, with an equal amount invested in less risky ventures.
[+] [-] Fuzzwah|6 years ago|reply