The Promise and Perils of SaaS Startups…the Capital S problem
There are some good thoughts here for SaaS (Software as a Service) ventures - https://www.business2community.com/strategy/saas-market-trends-for-2019-and-how-to-align-your-growth-strategy-02128313.
Entrepreneurs--and investors--love SaaS businesses. After all, they are infinitely scalable, incredibly profitable, and the best model for the next Unicorn, right? Perhaps this is why the SaaS community has grown so rapidly - Check out the Cisco Cloud Index below. But as we discuss in The Titanic Effect, founders make assumptions and set expectations about the growth and staffing needs of their SaaS ventures that can sink even the most promising startup.
First, it is very important to recognize that almost all software companies are software AND service companies—the software does not eliminate the need for any service role. This creates uncertainty in the startup’s strategy and financing needs. The essence of this uncertainty is the balance between Software and Service, and how that changes over time.
We like to call this The Capital S problem. What is the Capital S in most SaaS startups? Founders, particularly those with a technical background, like to think it is the first S—Software (Saas). That is much more scalable and sellable to investors. But even the most intuitive software requires helping clients to understand how it works and support them in adoption, usage, and linkage to outcomes. This is the Service part. For most software businesses, the second S in SaaS, Service, is actually the driver in understanding the customer and the job your product does for them. So instead of a Saas business, early on it is most likely a saaS business—the service piece drives early adoption and understanding, even if not revenue. This has important implications for staffing, growth, and profitability.
Over time, the focus will shift to better balance software and service. Eventually, if the ship stays afloat and navigates the other uncertainties that can sink startups, software may become the primary focus. But uncertainty about the respective roles can significantly alter a startup’s potential if founders don’t understand and track the relative importance.
Is SaaS a promising business model? Absolutely. Recurring revenue, Scalable, Profitable…all good things. But do you need to be strategic about the role of service, particularly early on? You bet your S you do.