Investors interested in software companies have probably come across the term SaaS (Software as a service) when researching a company. What is then SaaS? To explain it in an easy way it can be described as a distribution model where companies provide applications to other businesses or consumers over the internet and charge the user for a subscription instead of a one-off license fee.

 

Due to the different business model, specific key metrics are regularly used to evaluate a software as a service business – for example, annual recurring revenue (ARR), which measures recurring revenues for the coming 12 months assuming no new customers or churn.

 

The SaaS model is a type of pay-as-you-go model and, thus, appealing to customers as it reduces investment costs and adds flexibility. However, according to our experience, the transition to SaaS (for a given software) tends to increase the total cost for the customers. Consequently, SaaS does not seem to be a “Free-ride” for customers. Nevertheless, the benefits seem to outweigh potential disadvantages, as the SaaS adaption is increasing for basically every software and Gartner forecasts a CAGR of ~15% 2019-2022, resulting in worldwide SaaS revenues of BUSD 151 in 2022.

 

From the investor’s perspective, the SaaS business model sacrifices immediate chunks of revenue in favor of continuing revenue streams for several years. Judging by the average valuation of ~10x NTM revenue, investors seem to appreciate recurring streams of revenue. SaaS businesses have also gained attention from “old-school” software companies.

 

To follow-up on last year´s seminar we have invited a few listed and non-listed SaaS companies to give an update of the market potential and the transition progress ahead.