As an investor, I have come across the situation many times where a company is trying to evolve into a SaaS business.
Typically their existing business is some kind of ‘time and materials’ business such as a consulting firm, a marketing agency or a bespoke software developer. The business recognizes a recurring need in the market and this, combined with the megatrend in the tech industry towards the cloud, encourages them to formulate a new strategy to build repeatable SaaS products.
There’s nothing wrong with time and materials businesses. But they are generally not attractive to VC’s and other institutional investors. That’s because they are generally people based and difficult to scale.
So it’s hardly surprising that many of these companies try to move into the more scalable and high potential SaaS market. They are well positioned to understand customer pain points and how to address them. They will also often have some decent cash flow and a good client list with which to build a new business – two things that a start-up usually struggles with in the early stages.
As a result of this there are many of these hybrid companies out there who are moving through this transition with varying degrees of success. I’m sure you all know of a few.
What I’m interested in is whether hatching a SaaS strategy within a broader business actually helps or hinders it.
Clearly in the early stages it is a big help. The more mature business provides facilities, people, cash and customers that help the new business to hit the ground running.
But my increasing sense is that the more mature business actually holds the new one back after these first few months. The main reasons for this are that there are conflicts over priorities and use of resources, there is less focus within the company and the two businesses are fundamentally different and require different strategies, people and cultures.
I think businesses hang on to this state for far two long and have a choice to make that should generally be taken earlier than it is. You either separate the businesses entirely and hope that they can both continue to prosper in their own way. This can be complicated in terms of who goes where and gets what but it can be done.
Or you can scale down the older part of the business so it exists only to make the emerging SaaS business more successful. It becomes the professional services group within the SaaS business helping to showcase the technology, supporting sales efforts, ensuring the service is optimized and strengthening relationships with larger clients. The more mature business is no longer trying to grow as an independent entity but is simply there to help the SaaS business to grow. You will no longer be fulfilling the potential of the older business but have to believe that the combined value will be greater in the long run.
Having come across this situation many times now this is the conclusion I have reached to optimize value but it can be easier said than done with all the time and money we have invested in the legacy business.