SaaS Software Company Ugly Birthday

By Jay Valentine

10 Years Old is An Ugly Birthday for SaaS Software Firms

It’s our 10th birthday SaaS software company! We are still in business! We have over 100 employees and we are shooting for $100 million in revenue in the next few years! Yea! Cannot get better.

Well, not so fast says Forbes Magazine with the luminary Shasta Ventures doing the instructing.

To a human, 10 years old is blissful childhood. According to Shasta Ventures in this Forbes article, 10 years old for a venture-backed, SaaS software company may be late middle age — that age when dreams fade into regrets, all hope diminishes and the prospects of great wealth are gone forever.

These SaaS software companies live in the land where they have raised “too much money” and thus their valuations need to be stratospheric to make them financially successful. But there is little or no interest in them because if they haven’t hit that high speed exit trajectory in 10 years, they aren’t likely to do it.

These companies — you know many of them in the DevOps space — have raised between $50 million and $100 million. According to this well sourced article, that is just “too much.”

Too much because at best they are trying to get to $100 million in revenue. Expenses are often so high, particularly sales and marketing, that any prudent buyer sees growth, if there is any, is entirely unsustainable.

Truly Happy Birthday for the 10 year old child whose dreams are just beginning to form.

For the 10 year old hapless SaaS software companies–so many in DevOps, there is no future other than constantly turning over C and D level execs, press releases about how the new person is “executing our strategy,” followed by failure to gain the revenue needed for a successful acquisition.

Then hire your 7th VP of Sales or 3rd CEO. Rinse and repeat.

Why did this happen? Surely these companies, you know them, Chef, Puppet, DevOps testing company 1, 2, 3, N — could have built a profitable, successful business.

They may have a real business if they could keep their costs to a level that did not approach 50% to 70% of revenues. Some of them spend almost 100% of D, E, F, G VC round on revenue growth just to make themselves attractive to that really stupid corporate buyer.

But with CA now gone and HP bailing from its failing testing business, those really stupid buyers are pretty tough to find.

According to this vastly insightful Forbes article and its commentator, Shasta Ventures, these 10 Year Happy Birthday SaaS companies are the “walking dead.”

Another observation is the “staleness” in a market that must set in after 10 years.

DevOps seemed so sexy 7 years ago. Everyone was doing it, or trying to. But, alas, now it is a fragmented market with hundreds of players, its products bought by command prompt twenty-somethings.

The sales force needed to sell these products costs more than the sale itself. A typical rep being compensated to the tune of $250,000 or more selling a product that seldom sells for a tenth of that number a year.

It was unsustainable from the start. Now the ugly part — people are talking about it. Ouch, it hurts!

Endless VC money for DevOps SaaS companies never made sense — except to three constituencies.

It made sense to the founder who felt her/his testing product, config product was going to be used by everyone. It wasn’t. And he or she got fired after the A round anyway.

It made sense to the C-player software exec who wanted to be the CEO, VP of Marketing or VP of Sales for this nonsensical company so they could have a warm place to be for a few years hoping lightning might strike. No lightning, sorry.

And it made sense to the marginal VC who believed all the DevOps hype and needed to cover that bet just in case this thing did turn out to be the next great market. It didn’t.

So now, happy birthday 10 year old SaaS company who has raised a hundred million dollars in VC money, still never making a profit, with over 100 employees in a market that is “stale.”

But for every sad story there can be happy readers. Those readers at Browserstack, a DevOps testing company who was profitable day one are pretty happy with those stock options.

Those who were early investors and employees of Atlassian, Survey Monkey are pretty happy since they never had to deal with the 50% – 70% cost of sales demanded by VC investments. Now very cash flow positive, these firms are doing what companies are meant to do – rewarding investors, employees, customers.

Just how can the 10 year old SaaS software company, with $100 million in VC investments celebrate that wonderful 10th birthday?

They can enjoy the day knowing they will never go public so remove that worry. Nor do they have to worry about finding that really stupid buyer, since the market is turning on them. And they can remove any consideration of their execs being stolen by hot startups — that is pretty much a dead issue. Their execs are not being poached.

So, do the usual. Get the HR kids to blow up balloons, have an internal office party, do a night out for the team and continue to work the one marketing and sales effort that they know best — work their C and D level VCs for one more money round.

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