Investors love businesses where the revenue and growth models are easily predictable. One of the best examples of this is in Enterprise SaaS, where customers essentially outsource the running of its software to the vendor. Additional software updates are made quickly and painlessly without time consuming and expensive on-site implementation. This ease of use tends to lead to customers sticking around for a long time.
As those customers stick around, the revenue continues to pour in without any additional sales and marketing costs for the company. All of the costs of customer acquisition were incurred upfront and many periods prior.
The SaaS growth curve: Costs (and negative cash flow) upfront, high margins later as sales and marketing spend no longer spent on “reacquiring” customer (via @a16z)
One of most the most alluring features of indexing heavily towards enterprise software it that it is essentially a bet on a proven and growing business model (Software as a Service) instead of one on a particular industry segment or vertical. Deal room software, for example, is used by large corporations of all stripes — from technology giants like Google to financial firms like JPMorganChase.
Startups focused on corporate users are benefiting also as employees adopt personal smartphones and tablets for work. This has triggered increased investment by companies in new tools to manage mobile and cloud-based computing. Web services for purchasing, security, back-office infrastructure, customer support, human resources, payroll, and salespeople have become popular within the private sector.
This “usefulness” and their clear path to revenue has buoyed both investment dollars and exits values for enterprise SaaS companies. In 2013, 70% of the 50 largest VC financing rounds were in enterprise software companies. And it is not just dollars going in. In that same year, 84% of the 50 largest U.S. VC-backed exits were enterprise software companies.
Originally published at institute.seedchange.com on July 3, 2015.