Most of us are aware of consumer apps and products like Netflix, Spotify, etc. which charge a monthly / annual subscription fees for availing their services. These are typical consumer SaaS companies that have been around for over a couple of decade now.

Enterprise SaaS, or e-SaaS as we call it, are a breed of new-age companies that leverage similar business model to provide enterprise grade software product over a cloud-based subscription.

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Enterprise SaaS vs other SaaS companies

Over the past few years, Enterprise SaaS companies have been getting much higher valuation multiples compared to other SaaS companies - on an average, Enterprise SaaS companies are valued at ~20-22x their ARR, while the similar multiple for Consumer SaaS companies has fallen to ~10-15x

As Venture Capital investors, we love e-SaaS companies primarily for the following characteristics:

1. Scalability - In addition to the typical technology & business model scalability that any SaaS company offers, Enterprise SaaS business have a very high sales scalability - which means that adding one new enterprise customer brings 1000s of new users in one go !
2. Resilience - Enterprise products are built to solve a particular business problem -, the value of which can be measured in terms of higher revenue or lower cost (in most cases). Due to this tangible value-add of enterprise products, it is very difficult for a customer to switch-out of the product once they start using it. The product eventually becomes a part of the regular business operations and starts to drive significant value-add with scale
3. Capital Efficiency - Over a long period, Enterprise SaaS products have excellent capital efficiency, primarily due to the recurring nature of revenue, forward revenue visibility, higher gross margins (low cost of delivery) and significantly lower sales & marketing cost compared to other business models. For every $1 in revenue, e-SaaS companies end up spending $0.8 and every $1 spent on sales & marketing typically yields $1 in ARR
4. Multi-player Markets - Unlike most consumer markets where the “winner-takes-all”, enterprise markets are more accommodative for multiple players to thrive & grow together. e-SaaS companies eventually find their niche to differentiate and survive, because a “one-size fits all” solution rarely works in the enterprise world.

Thus, as investors, we see better risk-adjusted returns from e-SaaS, given the returns are similar or better than any other SaaS companies, while the risk is significantly reduced due to the higher resilience and capital efficiency explained above.

~ Vatsal Bavishi

Learn more about: CSVP Fund | CGES Index | Enterprise SaaS

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