SaaS is great – but it’s not for everyone

Tolman Geffs, CEO of BrightTower, will speak at Programmatic I/O, taking place in New York City October 17-18. Click here to join.

Major acquirers love software-as-a-service (SaaS) companies. The recurring and predictable income makes them prick up their ears.

“SaaS companies typically work on annual contracts with high renewal rates, which means their net revenue retention (NRR) is over 100%,” said Tolman Geffs, managing director at investment bank BrightTower. . “You can grow cash flow much faster because you start each year in January knowing you already have last year’s revenue in the bag.”

Attracting a corporate client can be a long and expensive process. (You have to pay your salespeople, after all.) But once that revenue is factored in, “the incremental cost to realize is modest,” Geffs said.

“There are obviously costs associated with deploying, training and staffing a support team, but that’s maybe 20% of revenue,” he said. “The cost of actual software provisioning is pennies, which means most new revenue goes down to the bottom line.”

So why isn’t every company, ad tech or otherwise, going the SaaS route?

Because moving to a SaaS-based business model “would spell disaster” for some companies, Geffs said.

“You don’t have to hammer every square app into a round, SaaS-shaped hole,” he said. “Not every problem and use case is a good fit for SaaS. Many are best served by a hybrid model with services.

AdExchanger: Is ad tech a good candidate for SaaS?

TOLMAN GEFFS: SaaS is a good category for any business that uses technology to gain leverage in its operations to make people smarter, improve performance, and improve margins.

The goal is to run a business your customers love so they renew and grow with you year after year. Whether it’s pure SaaS or services with a good degree of technology under the hood depends on the use case and the problem the customer is trying to solve.

So there is no magic SaaS button then.

Many service companies are talking about moving to SaaS. A minority actually try, and a minority of them – a small subset – actually succeed.

We recently sold a company called Integrate, which was one of the successful ones, but even they ended up with a mix of pure SaaS and services.

So it can be done, but it’s difficult and you have to be realistic.

I just spoke to the CEO of a company that I can’t name that is going through this right now. It is a service company with approximately $70 million in revenue, of which less than 2% is software license revenue. Its goal is to reach 30% SaaS in two years, which is a reasonable goal. He’s a veteran software CEO, so he has an above-average chance of succeeding, but even then, it’s going to be tough.

Looking back, there was, like, a hot minute last year when Wall Street seemed to be in love with ad tech again. Is this love story over?

I wouldn’t say that, no. The reality is that there has been a growth in digital advertising and the data flowing through it. This creates a huge amount of exhausted data and this needs to be managed well. I’m amazed at how many companies I meet that have created sustainable, profitable, recurring businesses in ad tech that, to be honest, I didn’t know existed until someone told me. present.

There’s plenty of room for big business, and we’ll continue to see aggressive investment from smart, strategic investors in the space.

Likewise, many ad tech companies that have gone public in the past couple of years — AppLovin, Magnite, Innovid, Taboola, Outbrain, and Zeta, to name a few — have seen their values ​​fall well below IPO prices. Why is that?

It’s about the fact that many of these IPOs were mispriced rather than saying that all of these IPOs were bad companies. Most of the ones you just mentioned are fundamentally good companies and play an important role in the value chain.

Wall Street goes through cycles, and this was yet another time when these things were overpriced. I mean, we sold Connexity to Taboola for $800 million cash, thank you very much, right after Taboola went public. Taboola is now trading under a total market value of $800 million, but Taboola still has excellent activity. It’s an ATM, and it’s not a bad place at all.

What can an ad tech company do to maintain a good valuation when the economy is shaky?

When you’re sitting around your board table and your VCs are debating size, growth, and profitability, that’s when you steer the discussion toward what you can do. to optimize net revenue retention.

Ask: What is our NRR goal and how do we get there? Through the process of determining this, you can answer the age-old question of chicken-and-egg growth versus profitability.

This interview has been edited and condensed.

About Robert Wright

Check Also

Evoland Legendary Edition and Fallout 3: GotY Edition free on Epic Games Store, Saturnalia and Warhammer 40k: Mechanicus next week

Evoland Legendary Edition Evoland Legendary Edition is a bundle containing Evoland: A Short Story of …