Blog post: SaaS is eating the world
Without really knowing it, most of us are using SaaS, also known as Software-as-a-Service, on a daily basis. Think of Microsoft’s collaboration tool Teams, the customer relationship management tool Salesforce, as well as the HR management tool Workday – all great examples of SaaS applications we are familiar with.
Ten years ago a famous technology entrepreneur and investor, Marc Andreessen, wrote a piece called ‘Software is eating the world’ suggesting:
“We are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy”
A decade later, and following a massive acceleration of growth in software-enabled businesses, we are in no doubt about Andreessen’s incredible foresight - seven out of top-10 companies (in market-cap) are software-related companies!
In this blog we will focus on an important enabler of this trend – the servitisation of software, also known as Software-as-a-Service (SaaS). Supported by the increasing acceptance of the cloud technology, we have seen a rapid emergence of SaaS companies that are creating a new standard of developing, distributing and adopting online services.
The remote accessibility of these services on multiple devices enabled a smooth shift to working from home during the pandemic for many companies and proved the advantages of SaaS to all of us. We believe that this trend will continue, or even accelerate in the coming years and expect the SaaS market to resume its strong growth.
Growth is a necessity…
Now let’s have a closer look at typical SaaS providers and their specific needs. In this fast-paced and often highly competitive environment it is crucial for these scaling companies to maintain a strong growth momentum. Not only to stay ahead of the competition in an often winner-takes-all market, but also due to the nature of the business model whereby revenue for a software product is not booked at once (as with the on-premises software) but spread out via recurring subscription fees, with a funding gap as result.
Growth is a matter of survival: crucial to finance your business and stay ahead of competition. For these reasons SaaS providers grow their customer base to generate additional revenue, which closes the funding gap. It provides (a share of) the funds necessary to cover the costs of running the business and enables them to invest in expansion.
…Leading to funding and M&A challenges and opportunities
In many cases, an upscaling SaaS company considers raising fresh equity from growth investors with valuation levels and total amount raised above pre-Covid levels. Alternatively, a business combination with a (larger) strategic partner is seen as the best way forward to propel growth. For example SalesForce acquired communication platform Slack for USD 28bn in Dec-20.
Onboarding equity investors most often leads to dilution, reduced -or even loss of- control and changes in governance structure. This is even more likely the case in a team-up with a (larger) enterprise. In recent years, we observed SaaS companies increasingly seeking non-dilutive debt financing, either as a stand-alone funding solution, or in combination with fresh equity (according to Pitchbook venture debt in the US grew from USD 5bn in 2010 to USD 25bn in 2020)
However, due to typical characteristics of many SaaS companies, such as the lack of tangible assets and a negative cash flow due to a high growth strategy, many banks are struggling to fulfil the debt financing preferences of fast growing SaaS companies.
NIBC as your partner for growth
In order to prevail over the competition and realise your growth ambition, you as a SaaS company can benefit from financial support during these decisive moments within your growth journey. Support from a partner, that is able to combine an in-depth sector network and intelligence with straightforward financial and strategic advice as well as providing growth funding for your business.
NIBC acknowledges the value of successful software businesses with high levels of recurring revenues and low churn rates. As an example, we are one of the few banks offering a specialised financing product for SaaS companies based on a customers’ lifetime value, rather than EBITDA (margin). In addition, for private equity investors interested in acquiring matured SaaS companies, we provide leveraged buy-out financing. Finally, we have a dedicated, hands-on M&A and capital raise advisory team providing you with bespoke advice to prepare and execute a broad range of M&A and capital raise projects.