Note: SaaSForward is a biweekly in-depth analysis of global SaaS trends.

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Vanity SaaS startups are tumbling: 00:11
Capital-efficient growth is the popular chorus: 02:50
More Sleeper Hits in B2B SaaS compared to other domains: 03:46

Vanity SaaS startups are tumbling

In the last few months, the shaky foundation of Vanity SaaS startups is starting to crumble. Companies with tales of raising phenomenal valuation minus the right foundation are collapsing. Eventually, founders end up getting hurt.

Fast, a company run by Dominic Holland, was very noisy on social media a year or two ago. They raised an insane $120mn revenue. Without the basics of balancing equity rate and burn rate, they ended up burning it all. They had to shut shop as they failed to reach beyond $600K in ARR.

Zilingo, a celebrated South East Asian startup run by an ex-Sequoia analyst, had financial propriety issues. This forced the founder to be investigated and eventually suspended. The crux of the story is: the startup raised a ton of capital by projecting inflated valuations. They could not deliver on the promise and ultimately the founders were affected.

Though Vanity SaaS businesses may get a lot of fanfare initially, eventually they fizzle out, jeopardizing founders' interests. In contrast, startups with $3-5mn in Annual Revenue Return (ARR), which are profitable, can raise money at a very handsome valuation. They can garner sensible valuation multiples and have smooth conversations with investors. This is happening since they are backed by solid fundamentals of real valuation and profitable growth.

A similar trend is echoed in the public market, Cloud & SaaS. Valuation multiples are compressing leading to many calling this a SaaSacre. However, companies with good fundamentals are getting support.

A case in point is Microsoft, which released its earnings report last quarter. LinkedIn itself makes $3.4bn a quarter and $14bn in ARR. This makes their acquisition by Microsoft at $26bn five years ago look like a bargain.

A lot of the public market rhetoric included worry about macro trends like inflation and war that can be detrimental to businesses. However, despite the macro trends, many companies like LinkedIn and Microsoft have witnessed phenomenal quarters.

The key takeaway is that macro trends have little effect if companies are backed by solid fundamentals. If a company is built on strong values rather than on inflated stories and fluff, then it tides through troubles and thrives. Changing winds do not scratch solid surfaces.

Public and the private markets are now asking for solid evidence and it serves companies well to be prudent from the word go. Everyone in the market is singing the Value SaaS tune. It’s not just about growth at ALL costs, rather, it should be growth at OPTIMAL costs!

Putting this into context for cloud teams, it is crucial to find the right balance between growth rate and burn rate. This ensures that companies have a decent runway to weather upcoming uncertainty. More importantly, this balance has to be made given that investors are shifting their valuation lens to focus more on growth-plus-profitability correlation.

More Sleeper Hits in B2B SaaS compared to other domains

There is one common element between companies like Medallia, UiPath, Procore, and movies like Forrest Gump, Sholay, or Andhadun. They are all ‘Sleeper Hits’. Sleeper Hits usually refer to those movies which become successful in the long run despite opening to slow business initially. A Sleeper Hit in the movie industry is synonymous with what Upekkha calls Mispriced Optionality.

Medallia was founded in 2001. It raised Series A in 2011 and went IPO in 2019. Procore took 10 years to succeed, and after mobile took off, it is now worth $8bn in ARR. UiPath took 10 years to get to $1mn in ARR, and it is now worth $10bn in ARR.

In B2B and SaaS, there are more Sleeper Hits than in any other domain.

Some of the biggest successes that happen don't have a lot of fanfare. Those that glitter and create a lot of noise fast actually fade out fast. There is a saying that it takes 15 years to become an overnight success. Hence as a founder having deep domain expertise and solving a deep customer problem cultivates patience. It took 10 years for some of the iconic names to become iconic.


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