Inc - The SaaS Decacorn is Back

So in the era of 2021, the time of 1,000 unicorns, it seemed like everyone and anyone someday, just might be a decacorn someday.  And then in 2022, the markets crashed hard in SaaS.

Since then, overall, SaaS multiples have stayed relatively low, at 6x ARR on average — for public SaaS companies.  For really, really good companies at nine figures in ARR.

But then in 2023 and into 2024, three things happened:

• First, almost everyone got much more efficient.  Almost every public SaaS leader has strong, positive operating margins now, often approaching 20% or more.
• Second, folks just kept on growing.  HubSpot crossed $2B in ARR, Monday and Confluent are crossing $1B ARR, and so on.  Sometimes, growth slowed a bit from the crazy pace of 2021.  But growth continued for many leaders.  And some like Cloudflare and Mongo hardly saw growth slow at all.
• So, a subset of SaaS and Cloud leaders have gone on a public market run lately.  Not everyone.   Many favorites from Zoom to Twilio have struggled to grow, and others like Bill have done well but suffer now from low ARR multiples.  But many of the best now trade at 10x-15x ARR, or even more.

So 3 years of strong growth, combined with 10x-15x ARR for the Best of the Best in SaaS has lead to … a revivial of the decacorn.

So there’s kind of a mean exercise I do at board meetings. It doesn’t sound mean, I do it very kindly.  But I’ll be honest, it’s a bit of a trick question.

A VP of Sales will do a deal review and talk about how they closed a new epic logo for a small initial deal that could be “much bigger”.  “Great!” I’ll say, “Incredible!”

”Now tell me, just out of curiosity, who are the top stakeholders at that account?”

They usually don’t know.  And then I know, that Big Logo deal is already at risk.

Every customer you close, the next day, is at some risk of churn. A month-to-month customer can basically cancel anytime. An annual contract customer can sort of cancel anytime, but that churn probably won’t show up for the better part of a year, even 2 or 3 (more on why Year 3 is the biggest risk for bigger customers here). You know this, of course.

But the riskiest deals of all are Small Deals at Large Companies. Yes, the logo looks great. Feels great. Is great. But you start off at an almost immediate risk of losing the deal.

Why is this? Because small deals at large customers are almost always just an experiment.

This edition of the SaaStr Daily is sponsored in part by Adyen

Welcome to the new era of platform potential –

See how platforms are revolutionizing SMB banking. Insights into the products with strongest SMB demand, quickest path to market, and revenue uplift potential of up to 70%.

We conducted global research with over 50 leading platforms and marketplaces and over 2,000 SMB users to evaluate the potential of embedded finance for platforms.

Want to partner with SaaStr? Click here to Sponsor our events, podcasts, newsletters and more.

So you can make fun of the Old School Enterprise software vendors if you like, the Oracles, the SAPs, the IBMs, etc. Yes, they aren’t growing like the Cloud leaders, although actually, most are doing pretty darn well right now.

But they do know one thing: what’s important to enterprise buyers.  Even if they don’t always have the most current state-of-the art products.

98% of start-ups just don’t get this right. If your product is in a brand-new category, then maybe it’s not a lot of work to rip out an old system. But most of you are displacing an existing solution.  If that’s paper, then there will still be onboarding costs.  If that’s Excel, again, real costs too.

Many folks are saying everyone from our kids to our SVPs and CEOs can’t take criticism anymore. It does seem to be more true, in my experience.

VCs are reluctant to be critical of founders, even as they run out of money. VPs of Sales are reluctant to push reps missing quota, again and again. Customer success reps are defended, even if their top customers churn without there even having been a conversation.

Everyone is worried they be called toxic, or things will blow up, if they’re critical of almost everyone today. It’s probably true, to a large extent.

I can only share one life learning:

Criticism stings. It stings me too, even today, albeit less than before.

The criticism that stings the most is the advice you actually need to hear.

The “criticism” that’s just mean? That isn’t actionable? That’s truly unfair? That annoys, but in the end we brush it off.

No, it’s the painful criticism that’s right that stings the most.

• That yes, we have to sell even harder.
• That yes, if we don’t make changes, we may run out of money.
• That yes, our churn rate is too high or our NRR too low.
• That yes, maybe we’re not as competitive as we used to be.

I needed a good arse kicking a few times as a founder. Not every week or every month, but a few times especially when I was feeling a bit sorry for myself.

MARCH 6, 2024 / WYNWOOD

SaaStr is coming (back) to Miami for an epic evening of networking and community to kick-off a year of events. Join 300 SaaS execs, founders + VCs. 
Grab your ticket to join us on Wednesday, March 6, and get ready to meet some incredible SaaStr speakers and talk about all things SaaS!

Featuring Amazing content! with:

• Jason Lemkin, CEO and Founder of SaaStr
• Sam Blond, Partner at Founders Fund and Host of CRO Confidential,
• and Adam Gross, CEO of Vimeo

So I’ve been investing since 2013. Some of my top investments at seed stage include Pipedrive, Salesloft, Talkdesk, Algolia, Gorgias, Greenhouse, RevenueCat, Owner, Treasury Prime and more:

The goal for SaaStr Fund is to invest in 2-4 of the very top seed / late seed startups from $10k-$150k in MRR.  Earlier than that is too early for us to see it; after that is a bit too late.

We write checks from $750k-$4m and ideally lead or co-lead the round.

“Doubling Down” is a new series where we hear from top B2B SaaS investors on their most recent activities and takes on the current market. We had a great one last time with Hilarie Koplow-McAdams, Venture Partner at NEA. Check that out here.

This week we’re focusing on Harpinder Singh, Partner @ Innovation Endeavors!

Back when I started investing, in 2013, VCs worked on getting acquihires for their struggling startups.  A lot of energy was put in to find a “soft landing” for struggling investments running out of money, even if the returns might be nickels on the dollars.

Today? VCs for the most part don’t care.  They don’t want to put in the energy to getting pennies on the dollar.

It still is helpful to VCs vs the human drama of shutting something down.  That’s not without costs.  And for smaller investments, no one cares.  If you put in $500k out of a $200m fund into something that didn’t work out, there are a lot of issues in shutting down a company, it’s a time sink with a lot of drama, and you don’t many any money, that way either.

And it is better for the team to find a good home even if the return is essentially 0x.

Maybe you can invest in the team again on the next one, and it’s much better for them.  And you don’t have to go through the headaches of a shut-down, at least not as many of them, usually.

But VCs don’t put in the time and energy they used to.  They just quietly letting the ones running out of money … run out.

© SaaStr 2024

644 Emerson St. Suite 200, Palo Alto, CA, 94301

If you'd like to stop receiving the SaaStr Daily, click here