There’s an almost existential bet you are making if you are a shareholder in this cohort of public SaaS companies: that they are like Amazon.
- That the customers themselves, with net negative revenue churn, are almost like annuities
- That aggressively investing in these annuities aggressively is the best way to build billion+ revenue businesses (not market cap, but businesses). Box, Marketo, Zendesk, Hubspot, etc. will all clearly cross $1b in recurring revenues in the coming years.
- That at some sort of point, they so dominate their market segment, that SG&A (especially, sales & marketing) expenses come down as the competition fades and the brands are established even with the latest adopters. [In my opinion, this is the riskiest element of this bet, but it should still happen. Still, many public SaaS companies haven’t killed the competition yet.]
- Then, given the inherent high gross margins of SaaS, be it at $1b in ARR, $2b, or even $10b, somewhere … these businesses should mint cash.
Salesforce is sort of proving this out a bit now in free cash flow, if not in GAAP earnings. Amazon took a long, long time to prove this out.
So that’s the bet.