Enterprise SaaS has experienced steady growth over the last few years. This growth has been driven by a need for better, faster, and cheaper software solutions to manage internal enterprise challenges. VC firms take a keen interest in SaaS startups that focus on leveraging one or more of these needs and trends. In this article, I’m going to share my thoughts on how founders can build a fast-scaling SaaS solution that ticks all the right boxes and paves the way towards a higher valuation.
The trends and pressures in question fall into three buckets:
Let’s look at each of these in turn.
The average enterprise today faces several problems related to software management. The first of these is app proliferation. Reports indicate that enterprises now use anywhere from 129 to 1,071 apps and cloud services per company, with 30-60% of SaaS companies reporting increased churn rates over the past year. Due to growing decentralization within the workplace, enterprise managers have limited oversight over who is using what, where, and how. This app bloat slows down processes, leads to ballooning costs, and limits integration across the board. A naturally following problem is security, with 9 out of 10 enterprise managers prioritizing that when considering new SaaS purchases.
Figure 1: Biggest cloud security concerns among cybersecurity professionals (Source: FinancesOnline)
How to leverage this: Enterprise SaaS founders should aim to streamline the management of data flows and user seats, provide greater security over sensitive data, and boost speed and productivity. The rise of micro-SaaS also offers startups the opportunity to build on top of existing systems and deliver greater productivity and efficiency to their clients. Finally, pricing is always an issue; and while the traditional subscription model remains effective, a pay-per-use model offers greater flexibility for enterprise clients and provides increased cash-flow for startups entering their growth-phase, all while reducing churn.
The enterprise SaaS market passed $100bn in revenue in 2019 and is expected to reach $113bn by 2021—foreshadowing an increase in competition, customer acquisition costs, and pressure on bootstrapped startups trying to break into a crowded market.
The prognosis doesn’t look great, either: 92% of SaaS startups flame out within the first three years despite funding and growth. Throw in weak product branding or non-existent content marketing and you have a compounding problem—as less visibility requires more marketing spend, which drives up CAC.
Figure 2: The competition—largest SaaS companies in USD billions per market cap (Source: BMC)
How to leverage this: There has never been a better time to launch a B2B SaaS startup: more startups are now reaching a $50m valuation faster than ever, which is creating a growing pool of keen venture capital. Furthermore, 93% of CIOs are adopting or planning to adopt cloud SaaS solutions soon, with 70% of them citing a greater need for scalability and agility as driving forces. They are also spending an average of $2,884 per employee, indicating a willingness to invest in their workforce productivity and data security.
These factors mean that raising capital should be easier for a B2B SaaS startup that has positioned itself to solve a specific set of problems. Niche enterprise SaaS startups cut through the noise and close deals faster and cheaper, leaving more spend available for product improvement and better client support. Vertical integration also deepens client relationships and widens the moat, helping startups to carve out, grow, and defend market share.
Speed (71%), flexibility (63%), and business continuity (58%) remain three of the top concerns for enterprise managers when it comes to acquiring new software. Clients expect to be able to access their data and execute transactions quickly, cheaply, and on-demand. Traditionally centralized data centers hamper speed and flexibility, while manual enterprise processes result in costly human error and eat up time and precious human resources.
How to leverage this: The current tech landscape indicates exciting new trends that promise “better, faster, and cheaper,” and enterprise SaaS startups can leverage these trends to unlock more value and revenue. Let’s look at a few of these in turn.
The cloud services industry will see exponential growth through 2022, with estimates of $143.7bn in expected revenue as cloud migration and storage remains a growing need for enterprise IT managers. Cloud services are growing more popular due to increased convenience, data storage, and lower costs, and enterprise managers are now shifting to a cloud-first strategy and optimizing existing cloud solutions.
AI is another arena that promises greater efficiency in SaaS applications through automation and cheaper resourcing. The global chatbot market was valued at $494m in 2019 and is projected to reach $3.3bn by 2027—a CAGR of 27.3% from 2020 to 2027. It’s not hard to see why: chatbots work 24/7, can handle multiple customers simultaneously, can be programmed to follow complex logic, and can personalize customer experiences to increase the likelihood of conversions. Chatbots can also be integrated across different channels from websites to social media and CRMs.
Beyond chatbots, AI allows enterprise users to get faster query results, perform better pattern recognition, and identify looming threats. Think online brand monitoring to flag issues before they go viral, or security checks based on heuristics to identify data leaks or other issues that could compromise business continuity.
Another trend towards “more speed” is edge computing, which involves placing servers closer to the user to reduce latency. At its core, edge computing leverages the laws of physics and economics to optimize costs and increase the speed at which queries are carried out. The market for edge computing and its parent technology, fog computing, stood at $3.7bn in 2019 and is expected to grow to $18.2bn by 2022, a phenomenal growth rate that bodes well for startups looking to tap into the rise of IoT.
PWAs (Progressive Web Apps) are lightweight applications that run in your browser. They need no complicated installation or expensive hardware to run, can work offline, provide up to 25 times the storage savings of traditional apps, and consume less data. PWAs can also be optimized for mobile usage and provide greater efficiency over on-device software. These benefits and more all speak to the overall trend towards increased optimization, speed, and flexibility for enterprise users.
Figure 3: A comparison of PWAs vs native apps (Source: DashBouquet via FinancesOnline)
APIs are one way to meet the increasing need for enterprise flexibility. Industry insiders perceive APIs as offering better integration, performance, and security. Providing these benefits within the same SaaS solution negates the need for third-party integrations and reduces the cost of doing business, two factors which ultimately increase customer switching costs and drive up lifetime customer value. Offering API access keeps enterprises lean and plays into the growing trend of unbundling SaaS apps. Therefore, SaaS startups should carefully consider the evolution of their software and build API access into their platform right from the beginning—especially with good documentation, which remains a persistent pain point among enterprise users. Apart from standard subscription pricing models, B2B SaaS startups can offer API access on a pay-per-use model and also license it out to other startups.
Figure 4: Top API challenges to work towards solving (Source: FinancesOnline)
Estimates put the market size for SaaS blockchain solutions at $6.92bn by 2021, and 53% of business managers indicated blockchain as one of their top priorities for the year. Blockchain technology promises greater transparency and security, leading to reduced risks of unauthorized data access, data leaks, and other system threats. SaaS startups that successfully leverage these features will tap into a core enterprise need for better data governance that complies with local and international laws.
SaaS is changing, and the startups of tomorrow hoping to raise substantial capital at mouth-watering valuations will need to consider several enterprise, market, and tech-related trends and pressures when developing their solutions. VC firms are always looking out for problem-focused SaaS startups that seek to solve a specific set of problems for a defined niche, or whose solutions provide 10x enterprise value at scale.
Essential questions to ask yourself as a founding team include: “Does our app fundamentally speed up enterprise processes?” “Does it shave costs through its performance or pricing?” “Will it provide future API access?” Baking these core benefits into your SaaS solution from day one sets you up for easier customer acquisition, more revenue, a higher CLTV, an easier time raising capital, and a deeper moat.
Mohammed Shehu writes on marketing, content, and tech for B2B clients in the US and EMEA regions. You can find him online @shehuphd everywhere.