Investing in SaaS Ventures (Part 2): Capital Requirements

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A reader, Taliba M., recently told us she wants to invest in a SaaS startup but lacks expertise in this area. We suggested co-investing with an investor friend who has experience in this field, and learning the fundamentals of SaaS companies to make herself easy to teach.

Read Effective Ways to Invest in the Unknown for our complete response and the purpose of this series. (It isn’t investment advice and it’s by no means a comprehensive guide to SaaS.)

Since we’re a gigantic fan of our fans, we decided to write a series to cover the basics of SaaS ventures and learn alongside Taliba (and those who are interested in SaaS).

Investing in SaaS Ventures (Part 1): The Basics covers what is SaaS, why SaaS companies rock, and why they require significant amount of capital. Here, we’ll look at Enterprise vs. Consumer SaaS and their respective capital requirements.

Enterprise  vs. Consumer SaaS

There are 2 major categories of SaaS ventures: Enterprise and Consumer.

Enterprise SaaS companies offer business solutions, such as expense management and customer relations management (CRM). Examples of Enterprise SaaS companies are: Concur Technologies, NetSuite, and Saleforce.com.

Consumer SaaS companies offer services to the general public, such as online personal finance, photo storage and sharing, and file backups and synchronization. Examples of Consumer SaaS companies include: Mint, Flickr, and Dropbox.

SaaS Capital Requirements

Don Dodge, developer advocate at Google, quotes Michael Skok of North Bridge Venture Partners (NBVP) — a VC firm that actively invests in both enterprise and consumer SaaS companies:

• SaaS companies need an average of [US]$35M in VC capital, versus $20M for a similar perpetual license company
• It takes 6 to 7 years to get to a liquidity event (IPO or acquisition)

Moreover, “it takes 70% to 100% more capital to fund [an Enterprise] SaaS company to a liquidity event than a traditional perpetual license company,” Dodge continues. “It also takes 2 to 3 times longer to get there.”

Consumer SaaS companies, on the other hand, requires less capital and can “get to market faster,” adds Dodge. “The feature requirements, integration and customization requirements are also usually less demanding for consumer applications.”

According to Bessemer Venture Partners, “it took [US]$126m [for] NetSuite to go public, $66m for DemandTec, $61m for Salesforce and $45m for SuccessFactors.” These are all Enterprise SaaS companies.

Bessemer notes that although “the best of the second generation SaaS businesses may be more efficient than [their] predecessors [e.g., NetSuite and Salesforce], in almost all cases, significant capital will be required to build a dominant SaaS business.”

Mint, a Consumer SaaS venture, however, “only” raised US$32 million over 3 venture rounds before getting acquired by Intuit for a happy US$170 million.

If you’re like us, you already know what we’re thinking. We prefer companies that require less capital to get to liquidity. So in the context of SaaS, we think most Enterprise SaaS companies are best left to venture capitalists and powerful syndicates.

Next, we’ll look at different categories of SaaS monetization models.