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Your Ultimate Guide: How To Invest In SaaS

Want to know more about SaaS? Let’s dive into the essentials of this emerging field so you can decide whether this is the right industry for your investment capital. Being 100% honest, if you are like me, you may have known that SaaS has something to do with technology and software, but may have been afraid to ask. Here is a simple explanation: Back in the day, you would have to buy an expensive compact disc if you wanted to install a software like Adobe. Aside from the considerable amount of cash you had to shell out, it also took a large amount of memory on your computer, and you could only use it on one device. It was a bane for users and a big disadvantage for companies like Adobe Systems.

 

SaaS

SaaS changed all that

Saas, or Software-as-a-Service, is a software licensing and delivery model. Examples of this include Google Drive, Salesforce, Intuit, and of course, Adobe. Only people who are living under a rock have not experienced using SaaS at least once in their lives; it is as mainstream as the water we drink. Whether it is an individual user, a small brick-and-mortar shop down the street, or a huge corporation in Silicon Valley, we all use the strengths of a cloud platform as a deployment method to deliver software.

SaaS allows businesses and users to access data from a desktop, laptop, smartphone, or any device that has an internet connection and a web browser. Most people now prefer cloud-based platforms rather than on-premise platforms because they are safer, easier, and cheaper to use.

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Why invest in SaaS?

The answer is quite simple: those who invested in SaaS solutions in the past have gained huge benefits. Cloud computing has become so popular that it is bringing in great results for investors. Widespread use of this platform is the driving force behind all of this.

Cisco Global Cloud Index explains that as organizations' trust in SaaS continues to build up, the adoption of SaaS-type applications still does not show signs of slowing down. For businesses, SaaS provides a consistent stream of revenue while getting the all-inclusive solutions that they need for accomplishing daily tasks.

International Data Corporation, a top market research firm, reported that sales for SaaS in 2015 stood at $67 Billion and $85 Billion the following year. The firm believes that by 2021, sales will reach $200 Billion. It also believes that huge opportunities exist for disruptive upstarts who can create new software solutions and challenge larger companies who are slow to adjust.

Top SaaS Investment funds

Demand for SaaS products continues to rise, and along with it, there will surely be a growing interest among private investors, institutional investors, and venture capitalists. These people are willing to invest in hopes of earning a massive payday over the next 5 to 10 years. These investors are now looking into entering the micro-cap space, a proven hotbed of SaaS activity and handsome returns.

Here are a few highly regarded SaaS investment funds for 2020.


1. LTV SaaS Fund

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LTV SaaS Fund is backed by over half a century of investment banking experience. Dubbed as “the world’s leading dedicated mid-cap SaaS investment fund”, LTV SaaS flexes its expertise in mid and long-term investments and boasts huge returns on investments of 3 years or more. Its core projects are in the United States, with a focus on recurring marketplace apps and SaaS businesses. It also has a presence in Europe and Asia. So far, the LTV SaaS fund is the most globally recognized of all the funds on this list.

LTV is the first SaaS investment fund in the world dedicated to the mid-cap space. As such, it has been able to raise five funds. Furthermore, it seeks to fund short and long-term opportunities, with an expected rate of returns as high as 174% over a term of 3 to 5 years.

 

2. Indie.VC

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This is a 1-year program created for founders whose goals are to build profitable companies. They help entrepreneurs focus on profit growth strategies without having to exert any effort on raising funds. Indie.VC promises double the revenue growth rate after 1 year, and then 300% after 2 years for companies they back.

Indie.VC provides funding from $100,000 to $3 Million, the average investment being around $285,000. They also offer to connect business owners through summits that feature panels with experts.

 

3. Constellation Software

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Constellation Software buys, manages, and constructs industry-specific software businesses. This provides essential software solutions to clients from the private and public sectors.

Constellation prefers complete ownership in the companies that they acquire but is willing to buy less than that if the founders still want to be involved.

 

 

4. Maple Media

zxtmtqvd4cgtmvoy3x0iBased in Los Angeles, Maple Media is an advertising, mobile media, and technology firm that buys and operates mobile-based applications and games. Backed by Shamrock Capital, a private equity firm, Maple Media boasts of an impressive portfolio featuring more than 100 top applications from Google Play stores and the App Store. These apps have a combined reach of more than 35 million users monthly. For Maple Media to acquire an app, it should have at least 50,000 users.

5. SaaS Venture Capital

SaaS Venture Capital invests in businesses throughout North America. It helps founders by selecting a lead investor when investing in rounds, thus cutting off having to deal with multiple investors. SaaS Ventures does not prioritize joining the board of companies and instead contribute where there is a lead investor already.SaaS

How to invest in SaaS

 

To minimize your exposure to risks, learn how to assess how a SaaS company is performing. We have listed below the specific metrics you should keep an eye on.

Annual Recurring Revenue (ARR) - ARR gives us a clearer picture rather than focusing on revenue growth. It refers to the yearly value of a subscription.
Total user growth - SaaS companies typically issue press releases regarding their user growth, so you would not find it hard to find this piece of information. Such growth indicates that the SaaS offering is far better than what else is available.
Cost of customer acquisition - A company that is adding lots of users would naturally see an increase in sales and marketing expenses. This is fine as long as these costs increase at a slower rate than the jumps in ARR.

Of course, any experienced investor knows that getting customers is just half the battle. Companies will have to make sure they retain these customers. This could be a bit more difficult to track than measuring customer growth. Some businesses publish the number of customers that leave every year, and this is a telling metric to measure.

The industry-wide practice, however, is measuring Revenue Retention Rate, or RRR. It measures the money that existing customers spent in the first year and compares it to the money spent by this same group of customers the following year. This would then exclude the money spent by new customers and their effect on revenue and gives companies enough data to work on analyzing customer retention. This is normally published annually.

Risks

All businesses come with risks and SaaS is no exception. There are so many companies in the SaaS industry that have high valuations, that any signs of a slowdown in a company’s growth can sharply pull down stocks.

This is a normal occurrence for high-profile industries, so it is something you should expect with SaaS stocks. If you are into SaaS, be sure you have the intestinal fortitude to ride through the wild ups and downs.

Conclusion

As more businesses, whether startups or mature brands, move toward the SaaS model, investors have begun to take notice. With that said, investors need to find a company’s inherent value aside from its current share price and simply being involved in a hot growth market. It pays to put in a little research before jumping into any industry, even one with such a high perception of inherent value.