by Miguel Fernandez Larrea, Co-Founder & CEO of Capchase
Software-as-a-service companies are among the fastest growing segment in the IT industry, growing twelvefold since 2010. Working on a subscription basis and centrally located on a remote cloud network, SaaS models are becoming the go-to for many organisations for a multitude of reasons, not least the flexibility and affordability they provide. While some industries took a beating during the pandemic, SaaS remained robust. SaaS startups raised 39 $100m+ rounds in 2021, as the uplift in remote working created an ever greater need for the sector.
There are many different reports on the SaaS industry with varying projections, but they are all agreed on the fact that the market will continue to grow in coming years. One such projection, from Allied Market Research, valued the global SaaS market size at $121 billion in 2020, and predicts that it will reach $702 billion by 2030. While not always the most ‘flashy’ of startups, they are proving to offer some of the most disruptive and most useful solutions for customers, and, as a result, investors.
What is the secret formula that lies behind the rapid growth of this sector, and that allows it to have continued appeal for investment in these current testing times?
Tapping into modern consumer attitudes
A key component behind the rise of SaaS is the simple, but crucial, fact that the market already exists for the SaaS business model. The modern consumer no longer wants to invest huge sums of capital into a single purchase for their IT infrastructure that they own for a long period of time, preferring flexible, lower-priced products that can be accessed instantly and cancelled easily. With the premise of the model being that a piece of software is hosted on a cloud infrastructure and businesses pay a monthly fee to get access to it, SaaS solutions are a low risk, cost-effective and hassle-free route for businesses. SaaS applications mean companies can avoid complicated set-up processes, and do not have to take on the responsibility for security and maintenance themselves: it is all done for them.
So it is unsurprising that SaaS applications are becoming indispensable to the operation of more and more businesses. If the SaaS application is a winner and the target audience loves it, then there will be a huge number of subscription sign ups as people adopt the application, and potential for explosive growth.
Predictable recurring revenue potential
With the market in place, the subscription model used by SaaS companies yields the dream scenario: recurring income. This is the ideal scenario for many who get involved with startup businesses. As customers are renting the software on a monthly or quarterly basis, this model guarantees reliable ongoing income potential as opposed to a one-off payment. It means that SaaS startups can predict forward-looking revenue, and enables smoother operations, better forecasting and fewer financial worries. Attention can instead be focused on business growth opportunities.
It is obviously not all plain sailing, as there will be churn and customers cancelling their subscriptions mid-month requiring a refund, but the reliability of the revenue offers investors comfort, and with the subscription economy fast becoming the norm, it does not look like this will change any time soon.
Capital efficiency
With businesses across the board needing to reconsider their operations to reflect an uncertain future, we’ve seen a transition to a phase where capital efficiency and profitability are valued more as a metric for success than has been the case in recent years. The SaaS business model can offer a way to bridge two seemingly opposing objectives: maximising growth while minimising cash burn. When you dig down into capital spend, the financial efficiency of SaaS companies becomes clear – an asset-light nature means lower overhead costs, fewer logistics and more streamlined operations. SaaS startups can take on as many subscribers as they want with more or less the same fixed costs, potentially creating huge revenue. This means that a large, profitable business can be built without requiring the capital investment of another sector with comparable revenue.
Ability to scale
With software at its core, SaaS offers the ability to scale while maintaining a high cost -performance ratio. At Capchase, where we work closely with SaaS firms to finance and support their growth, we have seen their scope to expand to other regions relatively easily and at little additional cost. After all, they can serve customers virtually anywhere. With this potential for rapid growth alongside predictable revenue, and in a world where capital efficiency is king, it is perhaps not surprising that the SaaS business model continues to garner interest from investors and founders alike. It may well be that it offers the blueprint to achieving success in this turbulent economic time.
