The 4 phases: Birth, Adulthood, Old-age, and Decay
Where do we currently sit in the SaaS cycle?
There are 2 kinds of successful people: the autistic innovators, and over-paranoid operators. The aim of the article is to help guide the latter get an overview of where we sit with the macro trends in technology and how we can use history to have a rough idea of what the future might look like.
Motivation:
If we look at history, most things go through cycles just like human life. Having been to a ton of conferences this year, and speaking to a lot of new vendors - I started to feel very pessimistic about the industry given most of the innovation coming out was basically adding 0 delta to the enterprise workflow.
...If you lose sight of competitive reality and focus on trivial differentiating factors--maybe you think your naan is superior because of your great-grandmother's recipe--your business is unlikely to survive.
— Peter Thiel
This prompted me to dig a little deeper into the public markets to see what is the view from the top. Are we seeing better growth in some sectors as compared to others? Has Alpha shifted from Horizontal Application plays to hyper specialised verticals? The next few passages will try to uncover these answers.
Methodology:
All roads lead to $EMCLOUD!
However, given there is already a ton of very good literature on L1 Metrics (s/o
), I wanted to go a little deeper. I added 2 extra dimensions in the data:
Industry: HRMS, Customer Experience, Developer Productivity, etc.
Type:
Application: pre-built features
Infrastructure: letting others build on top
Vertical application: pre-built set of features but going extremely deep with one industry
Industry specific insights:
Let’s start off by talking about revenue growth rates
Key pointers:
#1: IOT stands out by and far - 37% growth rate!
#2: MarketingOps still growing at 23% which is pretty impressive as I thought the market was saturated here. With this being said, I am still not super confident about the revenue quality here, which I am assuming the market has already priced in given the super low multiple despite the 4th highest growth rate
#3: Communication growing at 9%, with a multiple of 3x. As discussed in our last article, communication infrastructure is going to become a utilities play. The market has been canvassed, now it’s going to be all about driving efficiencies.
Now, what does Wall Street have to say? Let’s look at the revenue multiples.
Key insight:
One trend that emerges from the chart above is how markets are rewarding vertical specific applications over horizontal. Customer Experience is the only exception with multiples above 10x that is either not a vertical application or a deeply embedded system which makes sense for all the companies in the space have been continuously expanding into adjacent markets, increasing revenue stickiness and TAMs.
So far, we’ve established a couple of things:
Sophisticated investors (not VCs) look beyond just growth numbers as is seen in the case of MarketingOps
The companies enjoying the highest growth rates are ones that seem to be more specialised in a particular industry rather than horizontal
Finally, lets validate if we are going in the right direction by slicing the date across “Type” dimension
Looking at this we can clearly deduce the biggest boom is happening in the vertical software space with companies recording 20% growth and demanding the highest valuation multiples.
Closing notes:
Going back to the point I made at the beginning of the essay, nature tells us everything has to go through all 4 phases of life, and looking at the data, I feel we can say that horizontal SaaS is now approaching old age, and Vertical SaaS is just entering prime adulthood. If you want to make alpha, I would move away from horizontal and go all in on vertical players.