Knowhow for SaaS investors
The world of investments, mergers and acquisitions is full of buzzwords that would guarantee a great investment. In the field of software, SaaS is popular: web applications that can scale almost infinitely with a few tweaks, thus recouping an investment many times over in the short term. But what is the reality? What do we see in practice?
What is SaaS?
SaaS stands for Software as a Service. Nowadays, it often is a web application that you use within your browser and that requires internet. Nothing needs to be installed and it can be used anywhere you have a computer, tablet or phone at hand. You register as a user and from then on it is ready to use. With no purchase cost, usually you pay in a subscription form. But this is SaaS for end users, what does SaaS mean for investors?
SaaS for investors
The appeal of SaaS for investors is something different. Of course, ease of use for end users is important. What makes it really interesting is the fact that the potential growth in the number of users is almost infinite. If you are the first to enter a SaaS company with a promising idea, you are in luck.
Unfortunately, reality turns out to be more obstinate. Behind the scenes, there are often several hurdles to overcome, which significantly reduce ROI in the short term. Within software due diligence, we regularly encounter situations that inhibit the desired growth. We discuss some of the common problems we encounter.
Scalability of teams
The teams that have built software are often well equipped for a company's current size, but scaling up product development quickly is not straightforward. With an injection of capital, extra developers can be brought in, but extra capacity does not naturally lead to a proportional increase in productivity. There may be several reasons for this.
Problems we notice include:
- Inadequate documentation, resulting in the risk of knowledge loss and longer training periods for new employees;
- Lack of testing, resulting in an application that, after modifications, regularly contains new errors. Time spent fixing errors can, logically, not be used to create new functionality.
- The lack of quantitative analysis - static code analysis - resulting in no objective insight into source code complexity and consistency. Both have an impact on team productivity.
- The lack of security policies resulting in a lack of insight into internal and external threats to sensitive data and service continuity. If sensitive data ends up on the street after a hack, there are financial and legal consequences. Customer trust also goes down the drain. To prevent this and more, it is important to have governance in place and to analyse the source code with tools (SAST: Static Application Security Testing).
- Insufficient focus on business value and being too busy reinventing the wheel, also known as Not Invented Here (NIH) syndrome. Identity management, payment providers, geolocation; these are all things that are cheaper and better to buy externally than to develop yourself. As a company, focus on adding real value.
- Functional requirements take precedence over technology, with pressure from commerce overshadowing the importance of the underlying implementation. This increases overdue maintenance ('technical debt') in the application, with a negative effect on maintainability and reliability.
A SaaS product does not make a SaaS company
Companies making the switch from on-premises software to SaaS often forget that SaaS is more than just an application on the web. A good SaaS product is developed and managed by a team that is a suitable fit for it, with the right business processes in place. We often notice the following:
- No support team, so developers often have to deal with customers. This again comes at the expense of time that can be used for improvements to the product.
- Long periods between releasing new functionality which increases the risk of errors, customers have to get used to bigger changes, and feedback from the market cannot be responded to as well and as quickly.
- Manual steps in the release process, making it more likely that the web application is temporarily unavailable.
- No, or poor integration with other products in the same industry, making a switch to your SaaS application a difficult one, partly because data migration from other platforms is not possible. If customers lose their data or have to transfer it manually, they are less likely to switch.
Context is key
No company is the same. The treated sample of our experiences is succinctly summarised, with some nuance lost. Context is always an important factor in such findings. In addition, a company's future plans determine what has the greatest impact. We are happy to advise you on your plans and use our expertise to provide insight and interpretation into your challenges and risks.