Most VC investors and software entrepreneurs were skeptical of the new SaaS recurring revenue model during 2005-2010.
Why would you invest so much upfront and only take a little slice of the revenue each month?
Before that, software companies sold one-time licenses with some “maintenance” annual fees or an occasional upgrade for new versions.
If you sell a software license for $1 million to a big company and get most of all your money upfront, it’s an entirely different business and product DNA to sell it for $10,000 a month with an option to leave when they want.
Investors were confused about all the upfront marketing and sales costs that had to be invested before you got paid back in a year or two for just your customer acquisition investment.
The recurring revenue model and web-based software have taken over the industry since then. It has been a great thing for founders and investors.
SaaS has been even better for customers, who get better products and better services forever, not just in the months after they bought it.
The biggest difference between the old license upfront model and the modern SaaS model is obvious now, but most smart people didn’t see it when it was new.
It’s the simple power of COMPOUNDING.
Warren Buffet calls compound interest the “8th wonder of the world.”
Compounding growth is the superpower of SaaS businesses.
If you sell more new customers every month than you lose, your business will grow forever.
- It’s why software valuation multiples went from an average of 3X revenues to 10X revenues.
- It’s why practical founders who grow their businesses slower and take LONGER can create large and very valuable software companies.
- It’s why most SaaS investors wait for revenue “traction” to see an early flywheel that has momentum.
- It’s why it’s hard to kill an up-and-running SaaS company. Software companies are much more stable and sustainable now.
- It’s why customer churn and net revenue retention (aka negative or positive revenue churn) became so ABSOLUTELY important, especially for bigger companies over $5 million ARR.
- SaaS math and SaaS metrics created 10X more visibility about this compounding function than old software businesses had. SaaS metrics show what actually drives this compounding growth.
Forever growth turns million $ companies into billion $ companies.
Most older software founders remember the time they really understood the power of compounding in SaaS. We saw it in the depths of our new Excel financial models and our monthly financial reports. Wow!
At the time, we could tell who really got SaaS and who didn’t. Not everyone got it right away, but eventually, everyone did.
If you just improve the value to your customers, grow net MRR every month, and do it much longer than anyone expects, you will win big every time.
I guarantee it.
What’s the best part about SaaS compounding in your software business?
#practicalfounders.
