Here are a few reasons why SaaS startups are so highly sought after in the startup investment … [+] sphere.
If you’ve been a part of the startup ecosystem in the past 10 years, it’s difficult not to notice that software as a service (SaaS) companies are getting a lot of time in the limelight. Unlike many passing startup trends, the attention that SaaS is getting doesn’t seem to be going anywhere.
There are startup funds that specialize in SaaS businesses, and funds in smaller startup markets try to focus mostly on B2B startups, SaaS being the most sought-after startup business model.
Yet, despite their undisputed popularity in the startup community, SaaS companies are not that clearly visible to the general public. Although there are plenty of SaaS unicorns, the biggest tech giants are usually consumer-facing platforms and marketplaces. With this in mind, it’s interesting to explore the reason why SaaS startups are so highly sought after in the startup investment sphere.
SaaS B2B Vs. B2C
The reason investors in smaller startup markets prefer B2B rather than B2C companies is simple – B2C is riskier.
A B2B company could become large enough to justify an investment even after closing just a few big clients, especially in the enterprise space. In other words, the customer lifetime value of B2B is much higher.
In opposition, B2C companies rely on some form of virality to become large enough to justify the risk of the investment.
Because of this, a founder who is good in sales and well-connected in his industry can single-handedly carry a B2B startup to a certain level of success. This is rarely the case in B2C.
Easier To Set Up
Just as one good salesperson can make a SaaS company profitable, one good developer can usually build the MVP on their own. In the SOIS report, almost half of the founders of profitable SaaS companies who participated in the survey work on their startup part-time.
In comparison, B2C companies are usually more resource-intensive. This doesn’t mean that it’s easy to make a SaaS business big – in the same survey, a strong correlation was found between the hours worked by the founder and the revenue growth of the business. However, it means that the SaaS companies are less resource-intensive to set up and get going.
While the abovementioned benefits of B2B companies apply to e.g. consultancies and other service companies, SaaS startups have one other big benefit.
Unlike service companies that can only grow linearly, a SaaS is a technology business, which means that the cost of adding an additional client is very low. A SaaS startup could grow exponentially.
Marketplace and platform startups have a higher upside compared to most SaaS ideas, but they are usually much harder to get off the ground. Moreover, even this benefit isn’t a big one, as a successful SaaS company can often transition into a platform and diversify its offering to reach a higher ceiling.
In summary, the benefits of a SaaS startup are:
- The barrier to entry is smaller – setting up and validating a SaaS startup requires fewer resources.
- The customer LTV is high – an enterprise SaaS can become a big business with just a few clients.
- SaaS companies are just as scalable as other tech startups.
Source by www.forbes.com