SaaS Industry 2019 Observations and Thoughts for 2020

Below are some thoughts on the SaaS industry this past year, our perspective on the market going forward, and a short recap of our previous year and decade.

2019 SaaS market observations:

• SaaS is about to enter its third decade, and technical debt hasn’t really been an issue before because everyone’s product was so new. It is now definitely becoming a concern but cannot be defined to a specific point; it is more of a continuum with an eventual tipping point. The tipping point arrives when you can no longer update the existing codebase and must ask customers to “migrate” to the next version. Forced migration is an excellent shopping opportunity for customers.
• Surprisingly, across the hundreds of businesses we have worked with, we have seen no obvious correlation between growth rate and burn rate.
• Private equity recapitalizations of SaaS companies are more popular than ever and offer a new myriad of potential buyers. However, in our experience, no two recaps are the same; they are customized with unique terms, carve outs, securities, preferences, share re-ups, and more. “Sellers” in a recap need to be aware of all the different nuances, and perhaps consider a SaaS-specific banker to help navigate.
• We generally have seen fractional CFOs to be very effective.
• Implementing NetSuite will not solve reporting problems. Plenty of companies under $20 million in revenue have excellent reporting with QuickBooks, or perhaps QuickBooks + SaaSOptics.
• A new ratio we’re thinking more about: Retained Revenue ÷ Customer Success Cost.
• In January, the US Patent and Trademark Office changed its criteria around software, which had traditionally been hard to patent. It is much easier now, and while maybe not a core strategy, you should at least be aware of these changes and consider IP offense and defense in 2020 and beyond.

We continue to believe that the economy and capital markets will tighten over the next several years. However, there is now a large pool of committed PE dollars to support the stronger SaaS companies through a downturn. Related, we have recently seen more support for profitability, or at least more controlled losses, among the VC and startup communities that have previously decreed growth at all costs.

Lastly, we reflect back on the year and decade. In the past year, we have:

• Committed a total of $39.5 million in growth debt to 9 new borrowers, with another 2 transactions for a total of $5 million likely to close by year-end.
• Exited 5 companies in strategic sales and PE recaps with 2 additionally possible before year-end.
• Updated our valuation white paper and created our own SaaS Capital Index using data from the public markets and our portfolio. We plan to launch the index in January and update monthly going forward.
• Published several research briefs analyzing data from our annual survey, including one on employee stock plans to be posted in two weeks.

In December 2009, SaaS Capital was just a prototype, having funded 3 companies with no committed fund. In the ten years since, we have:

• Raised three funds, totaling $156 million in LP commitments.
• With recycling in those funds, lent out a total of $209.5 million in growth debt to 65 companies.
• Helped founders and management teams create $753 million in equity value.

If you (or a SaaS company you know) plan to raise capital in 2020, please keep us in mind for growth debt. We lend $2 million to $10 million to B2B SaaS companies with $3M in ARR and up, based in the US, UK, and Canada.