Last year, most of my investments were consumer startups. But in 2022, I’ve done a 180.
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Of the 11 investments I’ve made so far this year, all but 2 are selling software to businesses. So why the about face?
Over the last year, I’ve noticed that many of my best performing investments sell Business to Business Software as a Service (B2B SaaS or just SaaS). Meanwhile, some of my consumer investments have struggled.
Here are some of the unique advantages of SaaS:
1) Less churn.
Consumers are fickle. We try a service for a while, say “meh,” and cancel.
But businesses don’t sign up for new software without thinking it through. And once they start using it, they’re much less likely to cancel.
Changing software tools disrupts their business. So if you’re product is solid, you’ll probably have a customer long term.
A good Enterprise SaaS company might have churn of 1-2% a month. But even a strong consumer company is likely to see 3-5% churn.
If your customers churn at 5% a month, you have to rebuild your company from scratch every 2 years. A SaaS company doesn’t have to do that.
This is a huge advantage.
2) Land and expand. SaaS companies have a unique ability to grow…even without signing new customers!
How the heck do they do that? By doing more business with the customers they have!
Let’s take Density as an example. Density is an awesome startup that sells sensors to measure how people use physical spaces.
Let’s say LinkedIn buys Density to track how its headquarters is used. It’s so helpful that they expand it to their New York office, paying Density even more!
That’s land and expand.
The best SaaS companies can grow at 50% a year without signing a single new customer. And that’s after accounting for their churn.
This rarely happens in consumer. I’m only going to buy one Paramount Plus subscription, no matter how much I love Beavis and Butthead!
3) You can afford a sales team.
I pay $5/month for Paramount Plus. My value as a customer is way too low for Paramount to have a sales team contact me.
They just have to hope I show up.
But SaaS subscriptions cost a lot more. This means they can afford a sales team to go find customers.
That makes bringing in new business a lot easier!
This is especially important now that online ads, the most likely alternative, aren’t working well. Apple’s removal of ad tracking made targeting difficult, drastically reducing their effectiveness.
So does this mean I’m only doing SaaS from here on out? Absolutely not.
But I’m focusing on consumer companies with a clear value proposition. An example would be a marketplace like Gauge, which makes it way easier to sell your car for a great price.
I’m avoiding social media startups. The sector is more hit driven and the value prop for customers is a lot less clear.
Do you prefer SaaS or consumer? And why?
Leave a comment at the bottom and let me know!
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