After 200 Conversations About SaaS, Here’s What We’ve Learned

Since forming Triangle Digital Ventures we’ve been busy talking with founders and investors. The goal of these conversations has been multi-fold, but primarily:

1) learn about as many businesses as possible; and

2) generate deal flow.

To date, we’ve spoken with 129 SaaS founders, 41 VCs, 9 lenders, and 21 accelerators. All are US-based and work in a range of verticals. We are now in diligence with two companies for acquisition.

One by-product of these conversations is deep learning about the mechanics of investing in and operating SaaS businesses today. In the interest of shared learning, here are some of the key takeaways:

From Founders:

1) SaaS is more competitive than ever. Competition from low-cost alternatives is eroding margins by increasing CAC. Simple solutions are easily replicated by overseas startups providing functional (if uglier) alternatives. “We’re seeing our ad words cost go up weekly – and our competitor’s dev costs are less than half our own,” said one CEO.

2) Inside sales is busted. There are just too many startups pitching the same companies. Success lies in either a light-touch, self-service model or a high-touch, $100k+ ACV model. Anything in between is getting squeezed.

3) Despite these challenges, large swaths of the modern workplace are ripe for automation. HR, purchasing, and finance are underserved by SaaS, while marketing and sales are saturated. Product opportunities abound; bridging solutions to sustainable, defensible businesses is the next-order challenge.

From Investors / Lenders:

1) “We’re learning to be patient.” This is the sentiment echoed in nearly every conversation. With few exceptions, even businesses with great products and happy customers are negotiating long (+90 day) sales cycles, up from 60 days a year ago. Investors attribute this trend to SaaS overload in key, budget rich functions (marketing, IT). This doesn’t mean the deals aren’t getting closed – it’s just taking longer (read: costing more) than expected.

2) “We can’t all sell to Salesforce. Or SAP. Or Microsoft.” Identifying options for strategic exits has become a preoccupation of post-Series A SaaS businesses. There just aren’t enough acquirers in the market. “Consolidation is the natural next phase of this market, but these technologies don’t just ‘roll up’ neatly,” one investor told me.

3) Debt is the new growth capital. Commercial lenders, banks and otherwise, are giving founders “non-dilutive” options to accelerate customer acquisition. SaaS lenders – whose positions are secured and usually senior to the VCs – are financing expansion (and sometimes operations) at between 10-20% APR. How this additional leverage plays out over time is going to be interesting. We have seen debt from SaaS lenders on ~40% of the balance sheets we’ve looked at.