The SAAS Conglomerates are Coming
Since its 2020, a prediction for the next decade [pt 1]
A few weeks ago, I was at Northstar sharing a lift up with a couple who had lived near the resort, and had been coming to Northstar for many years. They were complaining about how, ever since Northstar was purchased by Vail Resorts in 2012 and added to the Epic Pass, both the prices and the crowds had consistently risen. I suppose that in any industry, the march of consolidation is inevitable.
Currently, I believe there is an incredible opportunity out there right now in incubating and consolidating B2B software businesses, and I think that this process is inevitably going to pick up over the next decade.
An illustration: Startup Software Corp
I’ll probably write about this on more detail in the future, but let me first illustrate what I’m talking about with an example. Imagine that a single company, lets call it Startup Software Corporation (SSC from now on), is formed by a competent group of leaders with experience scaling and managing B2B SAAS companies.
Though SSC initially has no product, it sets out to acquire (or at least take a large stake) in each of the following companies, which are relatively early but have achieved product market fit and are ready to scale (i.e. Series A/B):
Pilot (an accounting service for startups)
Notion (internal document tool for information management for startups)
Etc - you get the point - basically any company HERE that serves the same customers Slack does (i.e. helps Silicon Valley ‘venture-backed’ startups to start up)
Note that the target customers for these companies (and thus the needs of these customers) are the same. Let’s also assume that, upon acquiring these companies, SSC made sure to retain the existing company leadership.
I contend that SSC should easily be able to grow the earnings of its portfolio companies, and start seeing a large return on their investment without taking on much risk. Here are 3 reasons why:
Increase in growth attributed to faster and more efficient scaling, thanks to new leadership and support from “experienced scalers”:
History has made it pretty clear that the skillset required to get a software company off the ground is different (to quote Peter Thiel, take it from “0 to 1”) than that required bring it to maturity (“from 1 to N”).
I think many great founders out there are better at, and prefer, the challenge of finding product-market fit over the subsequent challenge of scaling and growing a sustainable organization.
Going back to SSC, with the additional leadership from ‘seasoned’ executives that have experience scaling B2B software businesses, SSC portfolio companies should be able to grow faster and move through the steep part of the growth “S-curve” with a higher percentage of success than they would have without joining SSC.
Concretely, for B2B companies these operational improvements might include things like redesigning the website, implementing sales and marketing best practices to drive growth, implementing “agile” methodologies to improve product org execution ability, SEO optimization, or optimizing pricing.
It’s no secret that scaling B2B software businesses is itself a distinct skill that is learnable over time for people who do it enough times. Whereas a first-time founder might never have done it before, for SSC it’s a “muscle” that’s been built from going through the process multiple times. Case in point, Vista Equity has a playbook full of organizational and operational best practices that they repeatedly deploy upon each company they acquire.
Revenue growth attributed to bundling/upselling solutions to the customer pool
Since the target customers for each of SSC’s portfolio companies are the same, SSC can sell cross-sell to any customer of one of its portfolio companies, the products of any of the other portfolio companies. It could offer progressive discounts to a customer for subscribing to multiple SSC solutions. Ie 5% off all subscriptions if you subscribe to 2 solutions, 10% off if you subscribe to 4 solutions, etc. Such bundling could dramatically lower customer acquisition cost and reduce customer churn per company/product.
Reduction of costs that are enabled by joining a larger “portfolio” organization
SSC could consolidate Sales/Marketing, as well as other back-office departments (i.e. customer service, legal) and benefit from the synergies of bringing these organizations under one roof. It’s well known that it’s the costliness of building a sales org/marketing org/customer success org/etc to acquire and retain customers that makes taking a SAAS business from product-market fit to profitability a non-trivial task. Each portfolio company would likely be able to reduce it’s monthly costs for all kinds of things since SSC, a larger organization, has more negotiating power . This could be anything, from cheaper software subscriptions to lower health insurance costs.
Where are the opportunities?
This isn’t a new idea, and to a certain degree we are seeing some consolidation of B2B businesses already. Several big tech companies have a focused portfolio of business software offerings (Microsoft’s Office+Azure, Amazon’s AWS, Oracle). There are also a few private equity funds out there (i.e. Vista Equity, Alpine Investors) that have figured this out and are acting more like diversified software companies than investment firms.
However, I think there is significantly more unrealized potential in this general space. I predict that we are going to see more and more money going into firms that are making these kinds of plays, whether they’re in the form of tech private equity firms, venture studios, new SPACs (special purpose acquisition companies), or existing technology companies making more strategic acquisition plays.
In another post, I’ll try to touch on why I think the incentives are aligned for all parties to participate in this kind consolidation, and what kinds of specific consolidation opportunities/ideas are particularly promising.
