Is SaaS Dead? Depends on who you are asking

The ‘It depends’ answer always sounds like a cop-out. Often that is the most useful answer.

Founders will flip out and throw you off the building

If you ask a founder, 'Is SaaS dead?' they are going to flip out. Most founders had just decided to brand themselves as SaaS founder. Just when almost the entire ecosystem of startups, whether in emerging or developed economies, had decided it is safe for someone to be a B2B SaaS founder, and you ask if it is dead, then they are going to be shocked if not mad.

There are a lot of respectable $1m, $10m, and $100m ARR businesses that can be built in software and will continue to get built. Hundreds of thousands of them, or maybe even more.

I know a lot of happy founders at $10m or $20m ARR who were bootstrapped and a lot of unhappy founders at $50m and $100m ARR who fundraised. Now, it is not the tired old debate of bootstrapping vs. funding, which is a false dichotomy at any time. But it is about what you and your stakeholders want as an outcome and whether you are aligned there. How you put external capital to work in your business is what you have to be thoughtful about.?

Venture money is like rocket fuel; venture investors are after the ambition of hunting a rocket-like business and seeing it take off. That is their game. It is a fact of math that all businesses are not going to be that. By definition, outlier, i.e., rocket-like growth, is going to happen only with a handful of companies—maybe 2 out of 100. That does not mean that other businesses are bad or can't drive meaningful outcomes for founders; in fact, so many of them do.?

For those who did not raise any significant outside capital to deploy in their business and grew to $10-20m, this question is completely irrelevant.

But if you raised then it is not sufficient what do you alone think??

And the consensus about SaaS as a rocket-like growth business is changing.

That brings the question to the investor's perspective. If you ask them.

Investors will fist on the table and declare YES

Startup investor logic is very simple; it does not matter what stage you are in—pre-seed, Series D, or mezzanine—their logic is that they need outliers. Financial investors invest $100 and expect to get paid $115 in a certain period, expecting each investment to pay back. Venture investors are different; they make 10 investments of $100 each and expect many to fail to return but also expect each to return the expectation for money invested in all 10. Their incentive is increasingly focused on finding the one that can pay back so much that it covers the 10. That is why they are in pursuit of outliers. History is replete with sufficient examples that many have dedicated their lives to mastering this art. Math nerds call this the power law.

This is why outliers are important. More practically, investors expect investments in startups to go IPO in 10 years and give them more than 10X returns. A first-time founder may think that it is too far ahead to think about all of this, but that does not mean they are unaffected by this.

Applying this more practically for SaaS, you have to get beyond $400m in ARR for you to go IPO in the US market. Indian SaaS companies that crossed $100m in ARR are no doubt considered rockstars but they have not even crossed 25% of the expectation to the winning mark. Interestingly enough, as the Indian public markets opened, far better multiples are available here. Companies in India are listing close to a 10X multiple at $50m in revenue, whereas those aiming for the US have to get to $400m in ARR and get a 6X multiple. The risk versus effort tradeoff is too big to ignore.

This is bringing back the relevant old debate of where to incorporate as an Indian founder: India or the US. Demand for purchasing software in India is slowly picking up, but it is still nowhere close to what US demand is. The question then is whether you build a $50m business in India with an India HQ and list it in India, or do you build for the US market and see a path of getting to $400m?

What are the odds that you, as a SaaS company, will fit into one of these outlier paths or patterns? The consensus among investors is shaping up here as a no, i.e., it is not likely to happen.

Consensus is not useful even if it is right but first-time investors like first-time founders have their blind spots.? Markets alone can give that education, no one else can dare.

To know how an investor thinks, you can decipher it based on what is happening at the public market level. First public market sentiment affects Series D investors. If a Series D investor is saying "SaaS is dead," then a Series C investor parrots it,? and from there it spreads like fire to everyone downstream, up to the pre-seed, first money investor in startups.

Isn’t this too much speculation armchair analytical thinking? What does the enterprise customer think?

Enterprise Buyer are just tired of this all

They are not saying that SaaS is dead. They are just tired.

An Enterprise CMO today has 42 tools in his stack and spends over half a million dollars but still does not get half the outcomes he wants. All this spending feels meaningless. With the proliferation of SaaS tools, there are just too many of them. They are asking what is the solution to this. Some popular influencers told them that GenAI is the solution to all of this. Board members kicked in FOMO which is passed down the org and everyone is figuring it out just like how it happened at the dawn of a new tech wave. Is this a silver bullet to solve all my problems? Some of folks are selling more tools i.e. Gen AI tools to solve their too many tools problem. Few more sensible folks are going to their service partners like Accenture and TCS and asking how to use these GenAI tools and get to the outcomes that they were missing while the tools proliferated. This is early in its phase. As it plays out will affect the pricing model. Already in prosumer, you can see credit-based pre-paid models are gaining adoption.

If you are someone who would like to look out for weak signals, then this is the thing to watch. Being too early is a problem and being too late is also a problem. So timing is going to be key.

Pay attention to the weak signals

You can ignore the investor sentiment but never the customer sentiment. One can fault investors' views a lot for not being in the arena but often due to that, they can smell the shifts in customer sentiments far early.

An industry dies only when the buying behavior shifts; it first happens slowly, then suddenly. The best time to catch such things is early.

Look, If one doesn’t write blog posts or tweet threads using such provocative titles, admit it even you are not going to read the posts and gloss over them. So, most titles go for a hyperbole. Don’t get scared by clickbaity titles, but then also don’t sleep on your coding IDE. Talk to a few of your customers and ask them what have they changed. What tools have they put on hold, and why? Was it the CFO then that may be a cash constraint issue? Was it the CIO then that means that needs or priorities may be changing? What new things have they decided to buy, and from whom? Why are they doing it? If they are getting pressure from their board to implement, are they seeing usage?

If you say as a founder you only deal with small to medium businesses, not enterprises, then watch the retention curves.

Whatever type of customer you have, look for weak signals of behavior change and come to your own conclusion.