Software-as-a-service companies have grown twelvefold since 2010. While some industries took a beating during Covid, SaaS remained robust, and its startups were even dubbed “kings of the coronavirus”.
And while SaaS startups aren’t always the most flashy or exciting — who would have thought years ago that one of Europe’s top startups would be a Romanian SaaS company UiPath — startups in the sector raised 39 $100m+ rounds in 2021.
But can SaaS sustain its rapid growth and keep investors interested?
SaaS is still growing — but not all growth is the right kind of growth.
Laura Urquizu, CEO of revenue recovery platform Red Points, says SaaS startups should be honing in on a specific target market to expand its customer base. To ensure Red Points’ growth, Urquizu focuses on people — both inside and outside the company — alongside product.
“My recommendation to SaaS leaders is not to focus on growth, but on healthy growth: to look beyond annual recurring revenue increase and pay attention to metrics like customer acquisition cost, payback period or lifetime value,” she says. “We have several strategic initiatives in place to ensure our business keeps growing at a fast pace, but the two fundamental principles are working on strengthening our world-class team, and constantly looking at new ways to innovate to deliver the best product.”
Christian Owens is the founder and CEO of Paddle, a payments Infrastructure platform for SaaS companies. He believes companies need to take a long term approach to growth and think about what their core principals are: “We’re not after a quick fix with easy revenue. You need to build genuine partnerships that will go the distance.”
“We decided very early on to focus on one type of customer,” he says. “We weren't going to chase whatever the shiny new thing was. We focused on a fairly large subset of businesses. We build the best product and focus on that rather than be all things to all people.”
We’re not after a quick fix with easy revenue. You need to build genuine partnerships that will go the distance
Owens adds that while Covid-19 accelerated the need for SaaS and the sector is still growing, there is now a higher baseline meaning there’s a long way to fall. But, he says, SaaS growth should continue as things such as remote working and Zoom meetings continue to be part of our everyday lives.
Investors are still in love
Philip Chopin is a partner at VC firm 83North, that participated in Paddle’s Series C round together with FTV Capital and Kindred Capital. He says Paddle handles a number of services for SaaS businesses, making it essential to their infrastructure and easy to scale.
“SaaS businesses are popular amongst VCs because those businesses provide predictable, recurring revenues, have the ability to easily scale internationally and are growing at unprecedented rates,” he tells Sifted.
This is what attracted 83North to Paddle in the first place. “Most investors look at typical SaaS metrics but what we find most interesting at 83North are SaaS companies that have the ambition to become category leaders. This is exactly what we think Paddle is doing, by essentially powering SaaS businesses across the world,” Chopin says.
Owens points out that software companies have really been popular with investors for decades — SaaS is just a change in the business model; the software is now in the cloud instead of a large office server.
“Due to the nature of them being scalable and the way you pay for them, they are predictable and compound over time. The customer pays you forever. These businesses are less seasonal… when investors are looking at all these things, it’s very attractive,” Owens says.
Due to the nature of [SaaS companies] being scalable and the way you pay for them, they are predictable and compound over time. The customer pays you forever
And SaaS is only becoming more essential to other sectors. Chopin says more and more businesses are embarking on a digitalisation process, which often requires specialised software that SaaS companies can provide.
Colin Lalouette, CEO of SaaS event company B2B Rocks, says SaaS can add value and efficiency to a company. “Use building a pyramid as analogous to building a SaaS. Before, we had to do everything. Mine, transport, design, and place the stones. Now with SaaS, like Legos, we just design and assemble. We are going to see more SaaS's, more innovation, and deeper integration of SaaS services into other business sectors,” Laouette says.
Tips and tricks
Startups have no control over market conditions, but there are certain things they can do to power through their next growth stage and keep their place in investors’ hearts. Here’s what our experts recommend.
Lalouette says startups should focus on creating strategic value: “We ask as phone users, ‘Is there an app for that?’ As entrepreneurs, we must ask, ‘Is there a SaaS for that?’ If so, between time-to-market and quality you are better off using a pre-existing SaaS solution than building something yourself.”
Urquizu says as the markets continue to change, SaaS companies should be investing in teams and fostering a culture of innovation in everything they do: “Each phase will come with its own challenges, and there's no one-size-fits-all formula to face them: only a strong team and a creative approach to change, which is a startup’s natural environment.”
“Deeply understand how you are unique, what differential value you are bringing to the market and how that compares to the rest of the options available for the customer. Define it and leverage it,” Urquizu says.
Chopin says startups should make customer feedback a priority: “We think that SaaS startups always need to listen closely to their customers as they are the best source of inputs for their product roadmap and to build a unique and differentiated product — this will go a long way in becoming a category leader.”
Deeply understand how you are unique, what differential value you are bringing to the market and how that compares to the rest of the options available for the customer. Define it and leverage it
Owens started Paddle when he was running a software company and ran headfirst into the problems that Paddle now solves. He recommends speaking to other people in the software industry and hearing their challenges: “Really understand the problems they are facing. Can you build a product that fills their needs and can you provide them with the best experience?”
To learn more about Paddle and how we are helping SaaS businesses to overcome their payment and billing challenges, visit paddle.com.