Software-as-a-service has been the in vogue business model of the past few years. And for good reason. The first generation of software giants – Adobe and Microsoft amongst them – transformed their businesses from one-off software purchases to recurring software subscriptions. And just like that Annual Recurring Revenue become the most important metric in the software industry. And a generation of software entrepreneurs knew exactly what they needed to do. Canva, MailChimp, Slack, Atlassian, Zoom, DocuSign – almost every software company we interact with today operates under a SaaS model.
And this market crash has been brutal for these companies. The past six months have been the largest period of value destruction in SaaS’ history (which isn’t saying a lot, it was a business model born in a bull market). Overall, an index of SaaS companies in the US is down 50% from it’s all time highs of 2021. Although, it is worth noting that together they are still above their pre-COVID levels.
This article takes a deep dive on the state of the SaaS business. It looks at what has happened and how we can analyse these businesses going forward, and also features case studies of Salesforce and NetSuite during the 2008 Global Financial Crisis.
Two words have defined the greatness of the SaaS business model – operating leverage. With largely fixed costs, the majority of revenue from each incremental sale flows directly down to the profit line. That is, if these companies can make it there. Today, most of them are unprofitable and have been punished as growth stocks sell off. But that creates an opportunity for us. If we can do the work and find the right companies, we might be finding the next Microsoft, Salesforce or Adobe on sale.
This is an excerpt from our Thought Starters email. Once a week we send you 5 interesting articles that have caught our attention, to get you thinking. No spam, we guarantee.