A new breed of platform that accelerates time to revenue should have everyone changing the way they position and engage SaaS companies
From unicorns to walking dead most SaaS platforms are viewed as a kind of monolith. They’re usually categorized as one form or another of cloud-based computing power or money saving alternative to traditional IT deployments. While SaaS applications have been around for a while, a new breed of platform is changing the way companies in the space need to be assessed and marketed. These new platforms are more about addition than subtraction in that their true value lies in revenue lift for enterprises rather than operational savings. Yet, they are consistently evaluated according to the same financial metrics as other SaaS platforms despite data that suggests looking at all SaaS companies in the same way is like comparing apples and oranges.
Most VCs today simply don’t take into consideration whether a SaaS platform is an accelerator. They compare all SaaS companies based on the same core financial metrics such as MRR, ARR, ACV, churn rate and LTV. Accelerators, though, are qualitatively different and a deep dive into the data provided by public markets validates the need to filter these platforms first as accelerators will likely perform better overall and have higher valuations even at scale.
SaaS accelerators are qualitatively different
Traditionally, SaaS platforms have been designed to streamline operational and workflow inefficiencies. While platforms that help deliver cost savings undoubtedly have value, those designed specifically to accelerate the process of turning a prospect into a billable customer or drive incremental revenue have a decidedly different utility and corresponding worth. A platform that allows an enterprise to bill two months earlier or creates revenue opportunities out of efficiencies of scale is, in many ways, qualitatively different than a platform that helps reduce overheard or eliminates an organizational inefficiency. There is such a wide spectrum of definition around just what it means to be an accelerator, though, that it clouds the market and encourages a kind of inertia when it comes to assessing and engaging these types of SaaS companies.
Instnt, for example, is built on the premise that easing access to potential customers will result in more top-line revenue for businesses. While it does allow for the effective outsourcing of customer on-boarding, its primary value lay in its potential to lift customer acquisition and gross revenue. X-claim is a platform that creates a global electronic marketplace for bankruptcy claims. Locate.ai enables machine learning to optimize value in commercial real estate. Advisr allows sales teams to drive revenue through efficiencies powered by their platform. Companies like these are now multiplying across disparate industries with unique solution sets. They demonstrate how SaaS business leaders are increasingly focusing on developing revenue generating solutions to industry specific problems no matter the industry. This diversity of solution sets is also making them more resistant to easy categorization.
Many times the platforms themselves unintentionally muddy the waters simply because of the breadth of their offerings. It’s not uncommon for a platform to solve for both operational inefficiencies and revenue generation. Supply.ai, a returns management platform, not only streamlines the workflow around the retail returns process but also creates new revenue streams for retailers by offering exchange and upsell opportunities. While both types of attributes have appeal and value to retailers, the latter contributes more to growth and has a greater impact on the bottom line. When given the choice between which attribute to prioritize there’s really no choice at all. Yet, for companies in the space, marketing yourself as an accelerator brings its own unique challenges.
For accelerators it’s all about flipping the narrative with enterprises
Almost all SaaS companies, no matter the application, justify their annual license in some capacity. Customarily, companies will create an ROI Calculator to quantify both cost savings and revenue lift. However, many enterprises narrowly determine software value largely on headcount and other operational savings and fail to give these platforms credit for potential revenue acceleration. Identifying and crediting platforms for revenue generation can be complicated whereas OpEx savings are easier to identify.
It’s important for enterprises to be able to classify SaaS companies properly so as to apply the right financial analysis tools and operating insights when they engage. It’s ultimately about addressing sales acceleration needs versus cost efficiency needs and then applying a verifiable ROI calculator that backs it up. The challenge is that any ROI calculator needs to support acceleration with believable business assumptions that predictably realize outcomes as well as case studies that validate lift and support the calculator’s assumptions.
The effort, though, is worth it.
Platforms that are driving revenue acceleration as the primary return on investment are also growing faster and getting higher multiples. An analysis based on 47 publicly-traded, pure-play SaaS companies from the SaaS Capital Index revealed that the median multiple for revenue accelerators was almost 3x greater than the multiples for cost savers. Significantly, (and, perhaps, not surprisingly) enterprises are also spending more on SaaS platforms that help accelerate revenue on an annual basis when separated out and considered as a unique category. Looking at YoY growth from September 2018 to September 2019, the same analysis showed that the median growth rate for accelerators was 24% versus 19% for savers.
Understanding the business implications of positioning yourself as an accelerator is vital. If companies fail to position themselves at an early stage as accelerators (whether there is 100% buy-in or not) pricing on the downside is going to be independent of any sales lift and it’s extremely difficult to realize that backend lift over time. Whereas, if there is buy-in on sales lift out of the gate, they will have more opportunity to not only get a higher price for their solution but, ultimately, set up a framework that validates their positioning. That means they can charge more over time and reap the benefits of a higher valuation.
Whether as an investor, enterprise or platform, the value of recalibrating how we think about SaaS revenue accelerators is clear. The market values these platforms more (whether they know it or not) and their top line revenue is growing faster, as well. Additionally, most of these new platforms don’t cut into current operations and there’s also a larger revenue opportunity in terms of rev share vs. cost optimization. Either way, the data bears it out. In terms of attributes, growth and valuation, these accelerators are qualitatively different and, even though they’re still SaaS companies at the end of the day, need to be properly categorized as distinct.
