SaaS companies with enormous SG&A: should people be worried?

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JASON LEMKIN

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:

  • 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.

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Published on May 1, 2016
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