Fake Natty SaaS?
Yes, you got it right. I already have my verdict.
In June 2023, the term "Fake Natty" was coined by Brazilian nutritionist and digital influencer Rodrigo Góes, to spotlight individuals in the bodybuilding community who use steroids to mimic a naturally fit appearance. Drawing a parallel to the SaaS world, we often encounter what we term "Fake Natty" SaaS companies — businesses that use the SaaS label to allure investors and customers when in reality the only thing they share in common is the recurrent nature of their revenues.
In the early days of a startup, it’s natural that you start doing things that don’t scale. Having said that, often times SaaS businesses start out there with a fair amount of professional services before transitioning to a turnkey product. But remember that any true diligent investor knows that “not all revenue is created equal”, and for that reason, only pure SaaS companies will be priced at juicy multiples of their annual recurring revenue.
So, what does it mean to be a Natty SaaS?
Revenue Mix
First up, follow the money. If a company's revenue is heavily skewed toward one-time licensing fees instead of recurrent subscriptions, you're likely not dealing with a pure SaaS. True SaaS companies rely on a consistent stream of subscription revenue.
For instance, although in fiscal 2023 Snowflake generated approximately 6% of its total revenue from professional services (typically one-time contracts), the remaining $1.93 billion coming from pure software is not a joke. No wonder, at the moment I publish this article, SNOW 0.00%↑ is leading the rank of the top 15 companies with the highest Forward Revenue Multiple on the Bessemer Index, trading at 13.2x.
Delivery Model
Cloud-based solutions are the bread and butter of SaaS. Any venture offering primarily on-premises solutions? Sorry, but that's not a pure SaaS company.
So if you’re a SaaS nerd, you might have noticed that both Oracle and SAP, two of the largest and most well-established software companies globally, are not included in the Bessemer Index listing. This can partly be explained by their long history of legacy on-premise products. Respect these giants, but FAKE NATTY SAAS!
Customization
SaaS solutions aim for scalability and standardization. If you notice that a company focuses on offering heavy customization for each client, that's a deviation from the SaaS blueprint.
Maintenance and Updates
A hallmark of SaaS is the automatic, cloud-based updates that free customers from the headache of manual maintenance. If a company leaves that responsibility to the client, it's not sticking to the SaaS script.
Contracts and Payment
Flexibility is the name of the game in the SaaS world. Monthly or annual subscriptions are the norms. If a company locks customers into multi-year contracts, it's likely veering off the SaaS course.
CapEx vs. OpEx
Here's the deal: pure SaaS should be an operating expense (OpEx), not a capital expenditure (CapEx). If you encounter the latter, proceed with caution.
Accessibility
The convenience of SaaS is its anywhere, anytime accessibility via the internet. Limited accessibility is a pretty clear red flag that you're not dealing with a pure SaaS offering.
Data Storage
Last but not least, let's talk data. In a SaaS model, data should be stored in the cloud. Any company sticking to local data storage is likely straying from the SaaS path.
Data-Driven Evaluation
Always consider scrutinizing a company's revenue breakdown, customer churn rates, and the ratio of CapEx to OpEx for a quantitative assessment of its SaaS purity.
The beauty of investing in SaaS companies relies on the fact that you have numerous metrics to compare the business with industry medians. I’ve compiled a concise list of 100 SaaS metrics that you can access via this link.
And there you have it—the roadmap for distinguishing the SaaS purists from the posers. Keep these points in mind, and you'll be ready to identify the fake 'Natty SaaS' out there!