Why Investors Love Software as a Service (SaaS)

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The world of technology loves an acronym. SaaS is no exception: it stands for ‘Software as a Service’, and refers to a new way of accessing software, as opposed to traditional methods.

Prior to recent technological advancements, anyone wanting to use software had to purchase a physical copy of the software, and upload it onto their device (many people will remember buying CD copies of Microsoft Office for a small fortune, and uploading it to their PC).

Other examples of the old-school software included installing CD anti-virus programmes onto desktops, or purchasing several disks worth of games and having to check if you had enough RAM to install it.

Nowadays, with the internet becoming more powerful than ever, there is no longer the need to do this. Instead, users can subscribe to different pieces of software on a pay monthly basis, and access it through cloud-based hosts via the internet.

The chances are, you use SaaS without even thinking about it. Anyone who’s used Office 365 will know that you can upload files, as well as edit them, without having to install any software. Office 365 offers a free edition, but users can upgrade for a fee, which gives them exclusive features and larger storage space.

Let’s take it to something even simpler. Do you pay monthly for a Netflix account? This is also an example of SaaS. You don’t install the software, it is available through any browser, and gives you instant access to hours of entertainment.

With SaaS becoming second nature, there has been a huge increase of SaaS businesses, which are often hugely attractive to investors for several reasons.

Firstly, the average valuation of SaaS companies is high, often much higher than software product sales companies. Typical exit revenue multiples are also high, making injecting money into a SaaS business potentially very lucrative for investors.

Secondly, investors are drawn to SaaS businesses as it’s been proven that customers want SaaS. In a way, SaaS is an embodiment of everything that the modern world encompasses.

While previously, people were willing to put large amounts of money into purchasing one piece of software that they would own for a long period of time (like putting a mortgage on a house), people in the modern era want things to be flexible, they want to pay less money less frequently, and they want something that they can access instantly but also drop instantly (like renting a property short-term). SaaS is built for the modern era, and people like it. This in turn makes SaaS attractive to investors, as they know there’s a market for it so it is less likely to flop.

Another reason that investors and businesses alike are interested in SaaS is that it truly is ‘living in the future’. While previous software often required users to purchase it and use it for around a year or so, the flexibility that SaaS offers means that updates can be made quickly and on a monthly basis. For example, if Office 365 wanted to add a new range of fonts to their site for customers to use, they could do so easily, and customers would be able to use them without installing any additional software.

Likewise, Netflix are able to upload hundreds of new TV programmes weekly, and make them available to customers at the click of a button – no purchasing additional hardware or downloading new elements of the software. This capability makes SaaS hugely disruptive in the software sector, and to put it simply: investors love disruptive companies.

It is also beneficial for the SaaS businesses themselves, as after the initial hardware is built, they just have to make updates and adjustments, rather than create whole new pieces of software. This is obviously easier, less time consuming, and in turn less costly.

Furthermore, despite SaaS being of lower cost than the outright purchase of software, over time, the customer will generally spend more money on it – if they like the product. This means that despite the cost being lower monthly, over time it will accumulate into a larger value.

Having more money going into the company is great for the business, and great for the investor. In addition to this, now that more and more companies are utilising SaaS, it’s becoming cheaper. This makes it more attractive to a wider range of customers, thus increasing traction. The more people interested in something, the more money it gets: great for businesses and investors alike.

While SaaS may have seemed like magic just 10 years ago – when installing multiple disks worth of software was the norm – nowadays it is so integrated into our lives that we don’t even consider we are using it.

By the time today’s children are adults, SaaS will likely dominate the market – if an even newer, even more disruptive solution hasn’t displaced it.

It is a hugely lucrative sector for both businesses and investors alike, as it is disruptive whilst simultaneously making everyone’s lives easier. Given the high exit revenue on SaaS, it seems their success will likely continue into the future.

 

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