The rapid advancements in bandwidth and cloud infrastructure over the past two decades enabled a new wave of cloud-native software firms to provide powerful software solutions directly via the internet. This cloud-based business model has since been dubbed as software-as-a-service (SaaS) and has seen massive adoption by upstart companies looking to disrupt the legacy, on-premise software providers and incumbents adding a cloud-based offering. Because of the limitations of traditional analysis techniques and our familiarity with SaaS businesses, we created a framework to provide a comprehensive lens through which to view these companies. This piece is meant to serve as a starting point for company analysis and as a guide to some of the most important data points of SaaS businesses.
Analyzing SaaS companies requires unique metrics and a differentiated point of view. This framework seeks to provide a comprehensive lens through which to view these companies. • The framework assesses businesses across five categories: the company’s solution, sales and marketing, revenue, path to profitability and balance sheet. Investigating product market fit, total addressable market, customer acquisition costs and the company’s financing history serves as a starting point for complete company analysis. • SaaS business models are well-positioned for future growth. The proliferation of SaaS businesses was driven by the business model’s asset-light nature and ability to generate recurring revenue, and the influx has only been perpetuated by a number of large VC exits in the space over the past few months, paving the way for more investment activity.
Note: This analyst note was updated on July 5, 2018, to insert an additional useful formula as well as clarify customer lifetime value calculations.