Unlocking IP-Driven SaaS

Software-as-a-Service, or SaaS, is a cloud-based delivery model where software applications are accessible on demand from centrally hosted servers. It has become a go-to model for many business applications, including file sharing, messaging, customer relationship management and enterprise resource planning. Its scalability, ease of integration and use, cost-effectiveness and low-risk pricing structure led applications employing the SaaS model to be widely adopted by startups to mature enterprises alike – the cumulative market for such technologies has seen upwards of $500B in annual global user spending from 2020 onwards, with close to $750B expected for 2023.

SaaS has become an important category for technology funds for years, more so on occasion than going by industry. The immediate value proposition for almost any startup in this category involves low overhead costs and product complexity, the potential for fast sales growth after launch, and the ability for investors to measure performance through long-established, rapidly growing KPIs. The assumption is that high returns can be realized quickly, which is reinforced by the success of pure-play SaaS unicorns like Adobe, Airtable, Intuit, Salesforce, Shopify, and Zoom. Today, these lofty performance expectations face a challenge. The ongoing downturn in the technology markets is a threat to the ‘growth-first’ approach used by many SaaS startups to establish a presence in the market, which often precedes the focus on creating a solution with lasting differentiation. In such, we as early-stage investors support the search of specialization, namely IP-Driven SaaS.

What is IP-Driven SaaS?

To get a sense of what constitutes IP-Driven SaaS, realize that at least a few definitions exist. A summary of the most common examples is as follows.

1. Uniqueness

The first example is the most agreed upon, where a SaaS application is unique or difficult to properly imitate. Though not readily available today, quantum computing solutions packaged on a subscription basis satisfy all ‘IP-Driven’ criteria. It requires a sophisticated level of talent and experience from founders and early hires, a large amount of capital upfront to fund operations, and many years of research and development prior to commercialization.

2. New Markets

Next, ‘IP-Driven SaaS’ appears when an existing technology is applied to a new use case. For example, a company enters into digital advertising, a market full of immediate competitors, intent on offering a data-management platform to help with decisioning, a technique that interprets available data and uses predictive analytics to suggest how and where to best reach customers with ads. To differentiate itself, it uses edge computing to process all data closer to its source, resulting in much faster processing speeds which augment the ability to personalize ads to customers. The IP exists in two forms, first through the use of advanced technology like edge computing, but also by reinvigorating a technique applicable to advertising, and decisioning, which creates the potential for a new market standard in the future.

3. Low-Tech Industries

And finally, though SaaS is ubiquitous, its customers are often other highly software-enabled businesses, which has resulted in an oversaturation of supply across the markets for sales software, marketing platforms, and payments processing among others. It has yet to permeate large, hardware-first industries that grow more gradually, like construction for example. In 2022, the global construction market approached a value of $12T, while the market for construction software was held to $2B. The introduction of SaaS to such an industry can eliminate tedious manual processes and optimize the use of existing equipment. For a software solution to be successful in the long-term, the burden rests largely on the founder's firsthand experience of the problems it aims to address, and only then can it be considered ‘IP-Driven’. A general project management SaaS platform is of little use to a construction firm, but one that can cater to industry specifics – request for information forms, contractor submittals, and architectural requirements – is useful and differentiable.

Opportunities in IP-Driven SaaS

There are some who claim that most SaaS companies don’t use or require any extensive IP to succeed, and others suggest that IP is best established later in a startup's growth trajectory. Each approach has merit, but as the markets continue to favor fundamentals in place of growth, startups that can be truly differentiable early on can better secure their market position in the long term. The advantages of IP-Driven SaaS are as follows.

Quality Oriented

Today, more investors are fueled by the less-than-stellar markets to find startups that present lasting value. Too many rounds raised within the last few years saw companies with overinflated valuations and hefty expectations for growth, which resulted in acquiring unfit customers, selling unfinished products, and entering into wrong markets, all while burning through cash to stay ahead of competing startups in a battle for superior market absorption. The focus is now on quality, which includes measuring the technology itself along with its delivery to customers.

Evolutionary

If executed well, an IP-Driven SaaS startup selling to enterprises is likely to see high retention rates. It enters a relationship with a customer by offering something with instant value, then quickly integrates its IP to provide the customer with added benefits that are difficult to ignore. For example, a startup selling an SEO platform helps its customers instantly by routing more web traffic to their sites, but if it integrates generative AI, additional benefits, like the automation of copy, content, and scheduling, start to appear. The company goes beyond providing one or two features that are easily replicable, instead morphing into an increasingly robust platform that adds incremental and lasting value as it scales with the business.

The prospect of investing in IP-Driven SaaS continues to attract savvy investors, as it combines the existing strengths of the SaaS delivery model with IP that helps to create lasting defensibility. More founders are choosing to apply this ‘as-a-Service’ model to solutions outside of software, contributing to the relatively new Everything-as-a-Service, or XaaS, market category that shrinks large capital expenses, like machinery procurement, down to a subscription model. In the coming months, we aim to focus on the emergence of XaaS as it creates opportunities for new business models sure to disrupt markets going forward.