Cisco. Microsoft. Salesforce. Google. Some of the biggest names we know in technology in 2021 are, in fact, companies which operate an SaaS model (software as a service). Yet how big is SaaS today, and where is the sector going? Who are the new players entering the market who are trying to disrupt the status quo with their innovations? What kind of opportunities for investors exist within this landscape? In our latest industry report, our investment team here at Bure Valley Group addresses these questions for our investor readers.
What is SaaS?
At the most simple level, SaaS involves using an internet browser to run and use an application – rather than downloading software, running and updating it on your laptop or PC. This could be anything from office software (e.g. Google Docs) to high-grade business applications. Over the last 10 years, SaaS has exploded as a global industry. In 2015, end-user spending on SaaS services was $31.4bn. Today in 2021 it stands at $171.9bn and suggests a CAGR (compound annual growth rate) of 10% until 2023.
SaaS has evolved significantly in that time, and now crosses over with a range of other online solutions which can blur the distinctions. IaaS, for instance, stands for infrastructure as a service and refers to cloud-based services primarily targeted at businesses such as storage, networking and virtualisation (e.g. AWS EC2). Yet many of the big players described as SaaS companies like Google and Microsoft also offer IaaS services. This is crucial to grasp as investors discern the lay of the land when conducting their due diligence on an SaaS opportunity.
COVID 19 Impact
The pandemic and subsequent lockdowns undeniably affected the UK economy in early 2020 and in the 18 months that followed. Yet SaaS, as a whole, fared better than industries such as aviation and hospitality (which rely on customers coming on-premises). Millions more people started working from home – increasing demand for digital services. Sales teams suddenly no longer could do face-to-face meetings and so turned to the likes of Google Hangouts, Skype, Microsoft Teams and Zoom to conduct these online over video calls, instead. SaaS stocks, as a result, skyrocketed even as industries such as automotive and travel plummeted.
The question now, of course, is whether this trend will continue. At the time of writing, the UK has been out of lockdown since the 19th July 2021. With more people returning to the office and socialising in-person, might the need for SaaS services decline? Overall, the sector remains very resilient. Part of this lies in the flexible nature of most SaaS subscription models. Should a customer base demand lower costs for a particular SaaS service due to lower need, many companies accommodate this. Amazon, for instance, has been known to offer customers a heavily discounted Audible subscription when they attempt to cancel their membership after citing cost reasons.
Moreover, the COVID-19 lockdowns have almost certainly started a new revolution of remote working. Increasing numbers of workers want to continue working from home so they can be around family and comfortable surroundings. Employers, moreover, are also recognising that remote working can offer some cost-savings. Finally, there is always the chance that lockdown needs to return – in some form – in the coming months or years (e.g. to counter a new variant of COVID-19). As such, populations and búinesses need to have SaaS contingency plans ready.
Promising new players
The global cloud computing market is still heavily dominated by US-based tech giants including Amazon (32% in Q1 of 2021), Microsoft Azure (20%) and Google (9%). Yet there is still a wider range of growing companies who are disrupting the space – offering new solutions to customers where the current giants are, often, too cumbersome to “pivot” and compete in the same niche.
Flow XO, for instance, is a promising SaaS startup based in Padiham, England. Founded by CEO John Jackson in 2007, the business offers online chatbot software using an AI-based automation platform. This allows their B2B users to integrate this feature on their website and other applications easily without needing a lot of technical know-how. It also integrates easily with 100 other commonly-used apps including Facebook Messenger. One report suggests that consumer retail spending using chatbots is expected to reach $142bn by 2024 – up from just $3bn in 2019 – so this is an exciting area for investors to watch!
Canva is another remarkable SaaS story. Founded by 32-year-old Melanie Perkins (the world’s youngest female tech unicorn founder), this Australian-born company has grown from a startup in 2012 to a $3.2bn business following a recent $85m funding round. This company lets people engage in graphic design software for free – without requiring expensive software like Adobe Cloud or extensive coding/design experience. During the pandemic, Canva’s user base grew by 50% and is currently on-track to increase turnover by 130% this year ($500m). In June 2020, the company caught considerable investor attention after it announced that Canva had nearly doubled in value. With over 55m active users worldwide and plenty of market share to play for, Canva will be an interesting option for many portfolio watchlists in the months ahead.
Conclusion
If you are interested in expanding your portfolio into these kinds of exciting spheres of investing, then we invite you to get in touch with us here at Bure Valley and to consider joining our exclusive investor network:
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