
Sneak peek at future of SaaS investing - tomkubik
https://medium.com/@tom.kubik/get-rich-slow-in-software-57001f41f3a9
======
doh
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.

~~~
whoisnnamdi
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.

[1] [https://whoisnnamdi.com/high-retention-high-
volatility/](https://whoisnnamdi.com/high-retention-high-volatility/)

~~~
tomkubik
Risk / return trade-off still holds - great insight!

Performance through-the-cycle is a big question. One can point to Salesforce
(founded 1999, IPO 2004), which has been around for 20+ years... However, big
sample bias here (ditto for my article, with sample n = 1). Salesforce, a big-
category-defining company - may not be representative of moderately-sized
businesses.

Whoisnnamdi - per your post, revenue retention looks like a key metric driving
valuations!

~~~
doh
My point wasn't that _all_ SAAS business are going to be in trouble, rather
than the growth equity is going to be impacted because they are funding only
SAAS businesses. There is no hedging and as such, once business stop paying
for certain SAAS services, they will in turn stop paying for others and so on
and so on.

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tyre
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.

~~~
philipodonnell
I think the author uses these to imply a dramatic pause... like I sometimes do
with ellipses. :-)

~~~
tyre
Yes. It's an example of trying to write how you'd want it spoken.

The written word is a different medium.

It would be like writing:

> She enters the room. Pan left and there's a photo on the wall. Cut back to
> her, she's brushing a strand of hair from her face. Now cut to the
> bartender. Zoom in on him. He's polishing a glass, staring at nothing.

etc.

It's a pastiche of a movie scene.

It's not that you can't do it or that the reader won't know what you're trying
to do. Unless there's a specific reason to do so, it's probably not the best
option.

------
buf
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.

~~~
toomuchtodo
What does that value add look like to you?

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.

~~~
tehlike
How do you go about buying one. How do you get the leads?

~~~
cpach
Check out FE International:
[https://feinternational.com/](https://feinternational.com/)

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tc313
All of the unnecessary punctuation makes this article difficult to read.

~~~
tomkubik
Welcome feedback - you took the time for careful read-through, thank you!

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Havoc
Look at the return vs return std dev graph. The fact that fund of fund beats
VC on both metrics suggest VCs add negative value

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tempsy
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.

~~~
Ancalagon
What public investment continuously returns 15% yearly?

~~~
icedchai
Almost any tech heavy ETF such as XLK or VGT will get you there. 10 year
yearly returns are over 15%. For less risk, you could do a total stock market
index like VTSAX (10 year returns around 13%.) Nothing is guaranteed or
"continuous" though. This is less risky than investing in a single, private
company that probably has little liquidity.

~~~
robjan
Looking at 10 year returns isn't good enough because we have been in a bull
market for over ten years. You need to increase the horizon to get more
accurate returns

~~~
tempsy
Why would a private SaaS that sells to companies do better than the public
markets in bear market? If anything if the market suddenly turns then holding
a stake in a company that is illiquid is worse because you can’t sell if you
need to.

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rb808
30% profit margin? I though most tech companies had a lot of trouble breaking
even.

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TheRealPomax
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.

~~~
tempsy
boasting about a 15% annual return with an illiquid stake in a early to mid
stage private tech company is the opposite of “too good to be true”

~~~
SkyMarshal
I'm a little slow this morning but am having trouble parsing what the opposite
of "too good to be true" is. Too bad to be false?

~~~
tempsy
meaning it's plainly bad

the risk you take to earn 15% is way too high to justify such a small return.
if you want to earn 15% just invest in some REITs and call it a day

~~~
zepearl
Could you please expand "REITs"? (no clue what a REIT is)

~~~
icedchai
REITs are "real estate investment trusts." Basically they are stocks in
companies that own tons of property, bring in large amounts of rental income,
and have to pay out a percentage as dividends. Many people like them for that
guaranteed dividend.

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falcolas
Tiny capital is relative.

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
Tiny Capital is the name of the VC company.

~~~
metalab
It's not a VC company. We actually usually buy majority stakes, this was a bit
of an exception - www.tinycapital.com

