Enterprise SaaS has seen tremendous growth over the past decade and created many, many large stand-alone companies. Given the current public struggle of tech-enabled services, marketplaces, hardware and DTC companies, enterprise SaaS also feels like VC’s most favourite investment category right now.
The amount of money that has poured into this space has made enterprise SaaS highly competitive. We often see one category filled with dozens of start-ups competing with a similar product for the same customers. Yet even so, there still seems to be quite a runway in this space due to three mega trends:
- Every company is discovering that they need to use technology to streamline their business and improve their competitive position. Of course, they don’t have the engineering team to build the technology on their own – and this means that the number of enterprise software customers keeps growing.
- Buying cloud applications has become the norm. With the exception of some regulated industries that still require on-premise solutions, the SaaS model is now widely accepted.
- AI / ML is creating much better enterprise applications, first through an automation-first approach and secondly by creating much better insights.
So what are the concrete opportunities right now in enterprise SaaS?
- Go after SaaS 1.0 incumbents
There are a bunch of SaaS incumbents that are now a few decades old. Salesforce, the original SaaS company, started over 20 years ago! And with “age” often come sub-optimal products, tech debt, inflexible business models, etc. Yes, most of the SaaS incumbents still have very strong market positions and important lock-in effects, but there is an opportunity for start-ups to find wedges into their market that don’t look important enough for those incumbents initially (but become a large opportunity over time). The other attack vector is a mobile-first approach as the mobile solutions for most of the SaaS 1.0 companies are not great.
- Automation / AI first companies
AI becomes truly powerful when software is built with an automation-first approach. This has been the key success factor for our portfolio company Ada who builds automation-first chat bots that are now used by companies like Telus, Coinbase, Upwork and AirAsia. Another example for an AI-first approach is our portfolio company Outreach that uses ML to create a much more sophisticated approach to sales engagement. As with any AI company, the biggest challenge is how to bootstrap the initial data so that the AI / ML model can actually work.
- Vertical SaaS
We have been long-term investors in vertical SaaS companies like Jobber (home services), Clio (legal) and Zenput (C-stores and restaurants). And while many verticals now have a lot of SaaS providers fighting for market share, there is still some potential left in verticals that are heavily regulated (which in turn means that they often cannot use any horizontal products). The other opportunity in vertical SaaS might be around the Shopify ecosystem. Shopify has reached such a scale and the needs of e-commerce owners are not always fully addressed by horizontal products, so there are still very large opportunities to build a large SaaS company on top of Shopify (and potentially other e-commerce platforms down the road).
- Meta-SaaS
This tweet below perfectly sums up the opportunity for Meta-SaaS apps. As we are starting to use more and more SaaS apps, there is a need for bundling. The question remains if that bundling happens around some of the incumbents (especially in the communications stack, like Slack) or through stand-alone apps that address this pain point.
Here at Version One we are excited about all of these opportunities. If you’re working on any of these areas to build the next great enterprise SaaS company, we’d love to hear from you!