SaaS is Having a Moment - Market Findings & Monumental Opportunities
Jos White, General Partner at Notion Capital
Conference: SaaStock 2020
Widespread digital transformation has opened up new opportunities for SaaS businesses in a variety of market segments. With Gartner predicting $116 billion in revenue for SaaS companies this year alone, it's clear that COVID has been a huge accelerator for SaaS adoption. We've witnessed this potential most vividly in the explosive growth of Zoom. But, how can founders find their niche and capitalise on the monumental opportunity ahead of them? :::(Info) (your title goes here)
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In this keynote presentation, Jos White, General Partner at Notion Capital will share why the subscription model has become the market leading form factor, what this means for the industry, and forecast which sub-sectors will succeed - now and in the future.
Jos began this webinar by saying, “Hi everybody. My name is Jos White. I'm a general partner at Notion Capital. Notion is a VC based in London. We invest across Europe at series A and series B stage. We specialize in SaaS and enterprise software.
My background is also as a former SaaS founder. So, hopefully we're well placed to give you insights on the SaaS market. It's been quite a year. I think whatever industry that you're in, in SaaS, the SaaS industry has certainly been impacted by the events of this year. But, there's also a longer term picture, which I think is much more favorable. Much more positive for the SaaS industry, which I'm going to focus the presentation on.
The title, ‘SaaS is having a moment’… I think everybody has been pushed into the cloud either willingly or unwillingly due to the pandemic lockdown. It's been an extraordinary test, I think, for the cloud and for the SaaS delivery model. For the most part, the cloud and SaaS have stood up to it very, very well. And, I think that this will be a real catalyst for even further accelerated adoption of SaaS moving forward.
So, I just wanted to start by giving you some research from Gartner. They produce a piece of research on the software industry every year. They actually updated it based on the pandemic, just to give a more up-to-date view, and to think through the impact from the pandemic. This research was produced in May [of 2020].
It breaks down the software market across all the main segments. The two main segments, as you'd expect, are the gray section (at the bottom of the graph), which is on-premise traditional software. And, the red section, which is the SaaS segment, which you can see starting to really kick in and play a more material part of the overall software industry.
Interestingly, you can see Gartner is expecting the whole industry to have a brief tick downwards following the pandemic and the lockdowns around the world. But, you can see that the expectations are that the industry is going to return to growth. (2030 is at the far right of the chart). Some segments are going to grow faster than they were before. And, some segments are going to grow more slowly.
So, the SaaS market had that brief impact of the pandemic, you can see expectations that the market's actually going to come back even more strongly. I think that suggests the forced adoption to be working in the cloud over the last few months is going to continue. And, it's going to act as that kind of accelerator of the move towards SaaS and moving to the cloud.
So, there's a short term impact, but then you can see SaaS playing an increasingly dominant part in the overall software industry. SaaS is expected to become 50% of the overall industry by 2024. And, that's a date that's been brought forward by the recent events.
Short term, COVID has definitely had an impact on that on the software industry. You can see both the public markets and the SaaS index were impacted by the various lockdowns around the world.
You can see that the SaaS index share price [green] was ticking up quite nicely over the first two or three months of the year . And then, there's a significant drop down following the lockdown. The share price [Nasdaq, in yellow] has started to recover, but it's still not at the levels that we saw earlier in the year.
Similarly, you can see a report into private SaaS companies. That's done by KBCM every year - and they actually did a special COVID edition - they speak to about 500 private SaaS companies every year. These are some of the results that they took from the impact that COVID would play on private SaaS companies…
The first point is that the top quartile of SaaS companies felt that they were going to revise down that growth projection from a hundred percent to 50%. Also, expectations that churn and CAC payback were going to be impacted and the performance levels were not going to be as good as originally expected. So, there was definitely a lot of replanning going on.
Most companies felt that the plan they built at the beginning of the year needed to be revised downwards. We certainly saw that across Notion’s portfolio. Almost every one of our companies produced a revised COVID plan which had a significantly reduced top line target. Most of our companies reduced their cost base and extended the runway with all the uncertainty going on.
I'd say, on average the cost base across our portfolio was reduced by about 25%, which was mainly through layoffs, unfortunately. Having done that, having actually produced revised plans based on what was happening, the more encouraging signs are that almost every one of our companies are outperforming their revised COVID plan. So, you can see that the events have certainly had an impact, but maybe not as great an impact as it was first.
So, these are some of the quotes that we've seen from people in the industry...
***These can be more clearly read below
I think once you are able to manage through the short term impact and sort of stick your head above the parapet, I think there's a lot of optimism. There's a lot of belief that the lockdown will be a real tipping point for the SaaS market. A real catalyst that accelerates the market further forward and it's much faster than what was originally expected.
You can see (in the image above) that Satya Nadella says he thinks within Microsoft, that ‘We've seen two years transformation in digital in two months.’ And some similar quotes from other other sources…
[ZDNet said, ‘COVID -19 may be the mega-event that pushes everyone toward digital transformation.’ Flexera said, ‘57% of businesses are either slightly or significantly increasing their cloud spend following COVID-19.’ And, McKinsey said, ‘The “next-normal” established during the COVID-19 pandemic will accelerate the footprint of SaaS, given the growth of remote working, the rapid deployment of digital solutions, and the lower up-front costs.’]
So, when you look further out, it's definitely an important moment for the cloud; a defining moment for the cloud. And, I think it is going to really accelerate levels of adoption moving forward.
This is a graph (above) taken from Crossing the Chasm. It’s a famous analysis of the way that new technology markets get adopted. The left-hand growth curve is the sort of traditional Crossing the Chasm model. And the right-hand growth curve is typically what happens when there's a significant event or a significant crisis.
What happens is that the level of adoption, and then that tipping point into the mainstream market, is normally accelerated. Within the SaaS market, people are often surprised that we're not further ahead than we are, but maybe that's because we're in the technology industry. We are at the top of the industry, but right now SaaS [is only] about 20% of the of the overall software industry. We're just somewhere in the middle of the early majority.
But, I think with the lockdown is the catalyst that's going to provide the tipping point to move SaaS into the mainstream market. SaaS is now the dominant factor and it is now seen as the market leader. I think that that's going to grow exponentially as the market breaks further and further into the mainstream market.
This is just evidence within the public market. This is just taking the SaaS index (in green, above) of public SaaS companies further out. Earlier, I showed you the way that their share price was impacted downwards short term, based on the lockdown. Now you can see the way that it's bounced back and well beyond previous levels. So, SaaS share prices are at record highs.
We're hearing stories about Zoom, Snowflake, and others. Almost every day now, multiples are at record highs as well. So, certainly the public SaaS companies, and the people that invest in them, believe that the future is very, very bright for the SaaS market. This is really where the software industry is heading. Now it's going to be heading there even faster than was the case previously.
Just trying to step back and put that in context, this is a graphic (above) that we've developed within Notion over the last few years. It tries to break out the evolution of the SaaS market since its beginning around about 2000 (far left).
The first phase of SaaS was really web based SaaS. It was taking software that you were hosting on premise and moving it into the cloud. It was accessed and used in a web-based way through a browser.
The second phase was really kicked off by mobile devices - particularly the smartphone around about 2007, 2008 - where SaaS started to get rebuilt and redesigned so that it was optimized for mobile devices. [That way] it could actually start to capture much more of the market and start to be used with a much wider selection of devices.
The third phase is when SaaS became much more intelligent software. When SaaS is combined with the vast volumes of data that's out there - with increasingly sophisticated AI and machine learning tools - to actually create more intelligent software, that can only boost productivity and increase communications. Which is what traditional software does, but SaaS starts to increase the size of the overall market by augmenting and replacing manual processes. So, that was a big change that happened somewhere around about 2015.
We think that COVID-19 and the pandemic of this year is actually going to kick off a fourth phase of SaaS, which we're calling SaaS Everywhere. By that, I mean SaaS - which is really interchangeable with software - SaaS as a dominant force factor as the market leader. And, we no longer question SaaS as an emerging growth and segment, but we really recognize it as the market leader because of all the benefits that it brings.
This is generally very good news for the SaaS market, but there are also implications… or things to think about now that SaaS has moved into this new phase of market leadership. So, that's what I want to talk about now… What are some of the things to think about now that SaaS is moving into this fourth phase?
The first one, which is a pretty obvious one, is that we need to really reiterate the original benefits of SaaS. I think having been through what we've been through over the last few months, the benefits are even more relevant now. And, I think they will resonate even more with the mainstream market than they did before.
SaaS is available from any device and location.
It's always on.
It's always updated.
There's only one version of software.
There's no upfront costs.
It's very easy to get up to speed and easy to install.
And, crucial over the lockdown, it can get scale with your needs.
So, as your demand increases or decreases, the SaaS model has the flexibility to move with you.
It's kind of like the phrase: With more power comes more responsibility. I think that SaaS vendors are going to be put under more scrutiny and expectations as we move into this kind of market leadership phase.
When SaaS was more of the scrappy underdog, in the growth segment within the industry, buyers made allowances for some of the shortcomings… or that the [SaaS] company was maybe smaller than they were used to dealing with.
But, now that SaaS is becoming the dominant form factor, I think that there will be greater expectations. What I mean by that is, things like: More focus on security, more focus on your accreditation on ISO, [additional] accreditation and things like that.
Looking more closely at data privacy, at the internal policies that you have for how you handle and secure that data of your customers. More focused on service level agreements; that you really are enterprise strength. And, the way that you go about your business and support your customers.
Also, having a strong and sustainable business. Enterprise customers want to know that you're going to be around. They want to know that you're building a healthy business that they can rely on, not just in the short-term, but in the long term.
So, I think we're all going to have to step up the proposition that we have in the market to appeal to an increasingly wider and wider share of that market as you move into the mainstream.
We've heard so much about AI over the last few years. I don't really want to labor the point, but what I do want to say is I think that AI - a bit like being optimized for mobile - is so important. You needed to be optimized for mobile devices by about 2010.
In 2020, if you're not leveraging AI, if you're not delivering a more intelligent form of software - where your product is increasingly able to augment and replace manual processes, not just boost productivity or communications - you're going to become increasingly uncompetitive in the market. I think it's so important to leverage AI, it's going to become a kind of standard.
It's going to become expected of every SaaS company to do that. In doing so, you're actually increasing the size of the overall market, rather than just replacing on-premise software. So, I think that will be a continually important factor.
Beware of the larger tech companies. As SaaS now grows even more rapidly than was the case pre-pandemic, I think the big companies are going to invest even more into their SaaS strategies. I think you're going to see the large companies getting more aggressive on pricing, and on bundling, to try to win market share.
We're already seeing that with Microsoft's battle with Slack. And, I think there will be more M&A activity as well, which can be a good thing because it can slow companies down. Be aware that there will be more muscle, more money, and more investment paid by the big tech players over the next few years.
On the go-to-market side… I think SaaS has often been acquired by a smaller group or department within an organization. As it becomes more mainstream, the buying process will become more and more centralized. That will mean you're following a more defined process. That will probably mean refining your process with refining yourself sales enablement tools to support that.
I think customers will have higher expectations in terms of the ROI that we're able to deliver. I think it's an opportunity to rethink pricing strategies. Think more about value-based pricing strategies. The most successful SaaS companies revise their pricing strategy every year.
Some industries have been much more impacted by COVID-19 than others. So, I think it's an opportunity to refresh your target markets. And, to really think about what markets to target given the events of the last few months.
The last point… I think enabling tech is going to become more and more important as the SaaS market is built out. What I mean by enabling tech, is the layer just underneath the application, which is typically developer led. It's often open source or partly open source where the developer in the company is looking to increase the functionality, increase the speed, increase security, the data management… overall increase the kind of the value that they're able to deliver to the customer.
I think this is going to be a big growing market over the next few years and something that is kind of an adjacent market that I think everyone in SaaS needs to understand. Also the SaaS market can be quite fragmented, so enabling tech can help to stitch together SaaS applications and deliver more of a joined up customer experience. In doing so, they can actually support more of an end to end workflow rather than a specific process.
I think you're going to see a lot of emphasis and a lot of investment into this next layer down… enabling tech. Moving into a kind of entirely cloud-native form factor over the coming years.
That brings me to the end of my presentation… The story really is one of short-term impacts following the pandemic. I don't want to downplay the events of this year; they have been very significant. A lot of us are still experiencing challenges, experiencing headwinds.
It's going to take time to return to normal in the wider economy. But, I do think that medium to long term, it's actually a very encouraging picture for SaaS. SaaS will take its place now as a market leader, and that has implications for everyone in the industry. I think that we need to think about implications even more, given the way the acceleration of the market has moved forward so quickly over the past few months.”
Notion Capital is a venture capital firm based in London, England, investing exclusively in early stage business-to-business (B2B), software as a service (SaaS) businesses. Notion Capital was founded in 2008 by the brothers Ben and Jos White, founders of MessageLabs, along with business partners Stephen Chandler, Chris Tottman, and Ian Milbourn. It has invested in companies such as Shutl. As of August 2015, its three funds have raised around $290 million.