Why Invest in SaaS
Why invest in software-as-a-service (SaaS) companies—companies that provide access to software on a subscription basis? For starters, SaaS companies have a built-in competitive advantage. They have little need for physical inventory, resulting in lower overhead costs. Companies with low overhead and little to no burden of warehousing don't require a lot of resources or infrastructure to grow rapidly. This gives SaaS companies a unique ability to scale quickly, making them potential high growth opportunities.
The recurring revenue SaaS companies can achieve is the gift that keeps on giving, and at little or no additional cost to them. The infinite scalability of these companies leads to high revenue multiples—the value of a company relative to generated revenue—and therefore large economic outcomes. While service companies may achieve 1.5x revenue multiples or consumer companies 8x multiples, SaaS companies can achieve up to 25x multiples as a result of recurring revenue from software. Therefore, when seeking to profit from a liquidity event (IPO or M&A), SaaS companies have a clear-cut advantage.
So why doesn’t everyone invest in SaaS startups? Three reasons. First, lack of knowledge. As Warren Buffett has so wisely counseled, people should invest in what they understand. Investors need a strong understanding of how SaaS companies function to identify promising investment opportunities. Second, few investors have access to SaaS startup founders and information about their companies. It’s important to be ingrained in SaaS networks. And third, investors should be able to add value to the SaaS companies they invest in. To access the most competitive SaaS deals, investors need to apply their own knowledge of software and specific related industries to help SaaS companies grow.
When it comes to investing in SaaS companies, Scout Ventures excels by drawing upon its extensive experience in software. Thanks to an exclusive network spanning research institutions and the national security community, Scout has access to a niche body of SaaS company founders and information about their companies. Scout has a team of prior SaaS company founders who have built software from scratch, tailored software to customer needs, and helped solve team imbalances. If a software service crashes or the wrong engineering stack is used, Scout investors have the experience to recognize and find solutions to these problems. Scout has taken several SaaS companies from their inception through to a successful exit, including companies like Unite Us, ID.me, and Olapic. Scout has exceeded industry averages, returned capital to every investor and achieved a blended lifetime internal rate of return of 23%. It’s precisely this extensive experience with software that allows Scout to thrive when it comes to investing in SaaS.