What Type Of SaaS Business Should I Buy?
Jun 15, 2016
We mentioned in a previous post that when someone buys a SaaS business, they’re buying a toehold into an industry niche.
Buyers do this because building a new SaaS business from scratch is difficult.
Whether you’re an investor building a portfolio of SaaS businesses or someone who just thinks they can take a product and make it better, it usually makes more sense to buy and build upon a business that already exists these days than it does to start from zero.
But there are tens—if not hundreds—of thousands of SaaS businesses. According to SaaS mag, there are 7,000 of them in the marketing space alone, most of which you can find in this breathtaking infographic:
How exactly are you supposed to pick an industry—much less an industry niche—when you’re overwhelmed with so many choices?
Here are some questions you can ask about an industry, niche or potential acquisition to help you answer the question – what type of SaaS business should I buy?.
Do you have past experience in a specific industry?
Stick to what you know. That’s what venture capitalist Paul Graham argues in his famous essay about picking problems to solve as a SaaS founder.
“It sounds obvious to say you should only work on problems that exist. And yet by far the most common mistake startups make is to solve problems no one has,” he writes.
It doesn’t matter whether you’re a SaaS founder or investor: it’s difficult to see gaps or opportunities in a market or to be sure you’re working on a problem worth solving if you aren’t already deeply familiar with it.
If you’ve already put a lot of legwork and time into a specific problem or niche—as a founder at a startup, an employee at a large company, or even a student in a PhD program—it’s probably worth your time as an investor too.
That’s not to say you need deep experience in every industry niche you look at. It just means you need to do your homework.
“It doesn’t work well simply to try to think of ideas,” emphasizes Graham. Dive deep and learn more about an industry, however, and good investment ideas will pop out and seem obvious to you.
Are you passionate about a specific problem?
Instead of looking for that one brilliant business idea or market, maybe you’re better off following what you’re passionate about instead.
“People typically reduce products to a single idea,” observes Pixar co-founder Ed Catmull for the Harvard Business Review. But as Catmull points out, finished movies contain “literally tens of thousands of ideas.”
Successful businesses are exactly the same: you’ll need hundreds of good ideas to make them work. Scaling a SaaS business is hard work, and you’re almost certainly better off picking an industry you can devote a few years of your life to than something that just looks good on paper.
Are you building a portfolio of SaaS businesses?
You might start your search by thinking about what other SaaS businesses might complement any existing SaaS businesses you own. In big business they call this integration.
Vertical integration is what you get when you buy a business further up or down your supply chain—i.e. your suppliers, or your customers. In SaaS, that might mean buying both an online store and the payment gateway that the store runs on.
Horizontal integration involves owning multiple businesses at the same place in the supply chain—owning two payment gateways, two SaaS finance analytics tools, two chatbot companies, two or more of whatever. Usually it involves buying a competitor and turning them into an asset.
Supply chain thinking has its limits in SaaS, but if you’re strapped for ideas about where to look for acquire-able businesses next, try to think about how they might integrate with any existing businesses you own.
Think about any SaaS tools any of your existing businesses already depend on, and whether it might benefit from owning one outright.
Same goes for any competitors you currently share a niche with. Instead of competing with them, could you afford to buy them (and their customers) out instead?
What do you want?
Buyers will often make a choice between scalability and sustainability when acquiring a SaaS business based on what their goals are as an investor. But those factors can guide you when exploring entire industries, too.
If you’re risk-seeking and looking for a business with solid growth prospects, you’ll probably find it in a growing industry or niche—i.e. a relatively new market segment where:
Demand is growing
Companies are young
There is no clear winner and competition is fragmented
Revenues are more important than profits
Buying into a growing industry usually also means buying into an idea and having some amount of passion for the industry.
Are your skills and experience valuable to a SaaS company that needs help growing? Then you’re better off looking for scalable companies in a growing market.
If you’re risk-averse and less interested in growth than you are in buying a SaaS business that can generate you a steady cash flow, you might find it in a mature industry or niche where:
Demand has tapered off
Sustainability and efficiency are more important than scalability
Buying into a busy, consolidating, mature industry is a financial transaction as much as it is an entrepreneurial one. Your money is just as important as your skills, experience and passion.
What does your network think?
Good SaaS companies are built, grown, invested in and purchased by people who know what they’re doing. It might help to talk to some of them before you start your search.
Use your network and ask people who already buy companies out for a coffee. People cover a lot of ground when they do an off-market search—if someone’s done it before you, they’ll probably be brimming with stories and advice.
Talk to SaaS entrepreneurs and ask them about what they’re excited about these days. Founders are passionate people who have to keep constant track of competitors, industry trends, customer sentiment, other founders, and a million other variables. If there’s any undiscovered value in an industry, a good founder might know about it.
It might be an industry cliché at this point, but talking to your customers is still the best way to find out what a market wants and whether or not you’re solving a real problem. If you have an existing SaaS business, ask your customers what other SaaS tools they use and whether they’re happy with them.
One last thought
If this is your first purchase, you should consider picking something that you’re passionate about. Anything worth doing comes with adversity and having something you are passionate about can be the difference between giving up and pushing through.