SaaS has been the most requested new monetization by our investors for good reason.
Predictable, high-margin, and scalable; SaaS’s recurring revenue creates unparalleled stability and profitability as a business model.
Furthermore, high-quality SaaS businesses consistently sell at strong multiples, making SaaS assets one of the most powerful investment vehicles in the industry.
This is why WebStreet is excited to add SaaS as a monetization for our upcoming rounds. Strong, consistent SaaS provides security and upside for investors, making it an obvious choice for passive investors looking for diversification.
Let’s explore the magic of SaaS and why this investment asset is a game-changer for investors.
What is SaaS?
SaaS has a ubiquitous presence in our daily lives.
Remember buying albums for $10 each? Now, countless tracks are immediately accessible on Spotify for $9.99/month.
Paying for individual editing and creative tools that would rack up thousands of dollars? Adobe Creative Cloud allows access to every software you could possibly need for $54.99/month.
Used to buy heavy, clunky hard drives for $150 to back up your data? Now Google Workspace gives terabytes of storage in the cloud for just $12/month.
We’ve been living through SaaS’ revolution without taking much stock of how it’s changed our entire consumption and spending patterns.
SaaS’ subscription-based service model made offering solutions at scale easier than ever. A simple sign up online leads to a product or service, hooking millions to hand over their credit cards to be billed monthly for continued access to their favorite software solution.
SaaS businesses thrive off of recurring membership revenue. Customers choose their desired membership fee in order to gain access to tiered service offerings, while SaaS business owners get to enjoy a degree of predictability in business performance via membership revenue.
While recurring revenue is one powerful element of SaaS businesses, customer lifetime value (LTV) creates further compound value. LTV is the cumulative total of all revenue a customer pays to the SaaS business over the lifetime of using its service. Customers that stay with a SaaS product for a long period can produce an overall high LTV for the business as well as data that can be used to optimize services and boost LTV across the customer base. Building up LTV is incredibly important for SaaS businesses and gives them an advantage when growing their base and revenue relative to ecommerce or content businesses.
In short: the predictability of SaaS is where the magic truly happens.
For SaaS owners, the business model makes it a reliable cash printing machine. For investors, SaaS is an exciting prospect because they can look forward to stable returns and profiting off an exit.
Predictability and stability are key attributes but SaaS as a model offers much more. We break down the benefits below to showcase what sets SaaS apart.
Benefits of SaaS
Low Customer Churn Rate
Customers who buy into SaaS products are typically looking for an ongoing solution they can access for the foreseeable future. For SaaS businesses that provide critical or difficult-to-replace services, they become deeply embedded with their customer base.
This dependency often results in low churn rates, or the percentage of customers who cancel their subscription within a certain timeframe, adding to the business’s long-term stability.
In any business, customer loyalty is hard to build, but with SaaS, it’s built into the model.
Scalability
Being able to retain customers the way SaaS businesses do makes the model completely unique to other online business monetizations.
SaaS businesses don’t need to hunt to sell a product or create content to stay relevant with Google in order to retain homeostasis. They benefit from customer retention as a foundation to keep the business humming along as normal, and then use that foundation to scale more memberships and monthly revenue.
As the customer base grows, there is no need for significant increases in operational costs. This scalability means a well-managed SaaS business has the potential for exponential growth, creating an attractive upside for investors.
Valuable Customer Data
SaaS platforms generate a wealth of customer data, providing actionable insights into usage patterns, customer satisfaction, and growth opportunities.
This data is invaluable for improving services and creating targeted marketing strategies, like building out an engaged email list to promote new offers.
Thus, the inherent data generation of the business can significantly increase customer lifetime value and profitability while generating an in-house marketing machine.
High Gross Margins
SaaS companies often operate with high gross margins, mainly because the cost of serving an additional customer is relatively low.
Once the software is developed, the expenses related to hosting and customer support are generally marginal, allowing for better profit margins and, by extension, higher potential returns for business owners and investors.
Stability and Predictability
Thanks to its subscription-based revenue and low operational costs, SaaS businesses give owners an unparalleled ability to plan ahead in terms of budgets and operations. That means more energy and capital can go towards scaling the business with new ventures.
Even during economic downturns, businesses are more likely to maintain their essential software subscriptions, providing a sort of “economic moat” for SaaS companies.
These elements contribute to a resilient business model that promises steady returns and lower risk—even if the overall market is less stable.
Integration and Increasing Ease of SaaS
Everywhere you turn there is a new subscription being offered for online services. As a general market customers are used to the subscription model, largely due to software licensing becoming much more accessible and easier to deal with than in years past.
SaaS Market Today
We’ve arrived at a turning point in the online business acquisitions market.
Currently, sellers are still holding on to the idea that they can get the multiples they got in 2021. They have yet to accept it’s no longer the booming sellers’ market created by the pandemic and that the market power lies more with buyers.
Even though buyers have a slight upper hand, generally liquidity across the buying market is lower. Access to capital is more restricted in a higher interest rate environment, therefore buyers have to work harder to access cash for deals.
This is where WebStreet comes in with the advantage of cash in hand.
WebStreet can act quickly on great assets as they appear on the market. This is important as solid SaaS assets rarely stay on the market long.
Due to SaaS businesses’ stability and steady cash flow, SaaS owners often hold on to their businesses for extended periods of time. Therefore the SaaS market is generally smaller, and strong SaaS businesses tend to garner solid buyer interest—creating a tighter, competitive market for SaaS acquisitions.
SaaS acquisitions multiples tend to trend higher relative to other monetizations (a topic we will get to more in-depth below) but since the overall market is a bit down at the moment, SaaS multiples are lower than normal. This creates an excellent buying opportunity.
SaaS’ Exit Multiples and Power as an Investment Class
One of the greatest draws of SaaS as an investment vehicle is the eventual payout from an exit.
Take famous SaaS exits as inspiration:
- Afterpay was acquired by Square for $29B
- Mailchimp was bought by Intuit for $12B
- Github exited to Microsoft for $7.5B
SaaS businesses exit for incredible amounts of money because of their strength and performance as well as the irreplaceability with their customer base. A smart SaaS roll-up gives the acquiring company new services and an established audience, something tech companies are willing to spend billions on.
Such spectacular exits aren’t so uncommon in the world of middle market online business M&A.
Empire Flippers lists SaaS assets ranging from a 2-5x (or more!) annual profits. SaaS assets in the online business sphere generally command higher multiples than other assets as buyer demand outpaces the supply of SaaS assets.
So what does this all mean for passive investors with Webstreet?
Not only would investors receive distributions from a SaaS business’s monthly cash flow, they can look forward to having a piece of that SaaS business’s exit, one likely positioned for a lucrative sale multiple.
Worth mentioning, investing in SaaS brings a new layer of investment diversification to portfolios.
Adding another monetization to invest in, particularly one with uncorrelated risk factors, creates another layer of protection around investment within a fund. The more diversification the fund has, the higher likelihood of consistent returns over a prolonged period of time.
How to Invest in SaaS with WebStreet
Interested in a piece of the SaaS cashflow and the upside of a SaaS exit?
The opportunity to invest in SaaS businesses with our Round 6 fund is opening soon.. Investing with Webstreet is an easy, straightforward process once you register with our platform.
