6^th May 2020

Santosh Kathira – Merisis Advisors

We’re now almost 2 months into the global pandemic and it’s still anyone’s guess how the world is going to look like going forward. We’re throwing our hat into the ring with our 2 cents on the enterprise Saas (software-as-a-service) market. Here’s our 4-pronged perspective :

a) Sector : Barring travel [Amadeus : -43% *; PROS : -34% *], the offline retail ecosystem has suffered the most as of today and it is expected to take some time before it recovers to pre-COVID levels. Retail dependent Saas companies catering to everything from brand management [Yext -26% since 19 Feb] to payment solutions [Square : -26% *] will be affected. Main street has been hurting for some time already in the United States before COVID and now they are facing an existential crisis. Restaurants & grocery stores in the US aren’t built for food & grocery deliveries and change is rather slow due to various reasons. While those focused on the online retail business may be doing comparatively better, they are subject to supply chain pressures [SPS commerce : -12% *] but may come out of this better. With projected lower disposable income and consequently, a lower demand, may leave none unaffected.

b) Client type : No prizes for guessing — entities with stronger enterprise focus will be better equipped compared to SMB & startup focused Saas businesses, where customer shutdown/restructuring rate is pretty high at the moment [Wix : -24% *] [Zuora : — 37.5% *] [Zendesk : -19% *] [Appfolio : -28% *] [Hubspot : -20% *] [Xero : -11% *]. So, unless you’re Shopify [ + 17.5% *] and continue to generate significant growth, you have your work cut out.

c) Vertical : HR based firms can face some amount of pressure due to lowered employee headcounts [Cornerstone on demand : -44% *], [Paylocity : -27% * ] [Paycom : -24% * ] and given greater focus on increasing existing wallet share than new clients can also impact new customer-engagement saas companies [Medalia : -33% * ] [Survey Monkey : -28% *].

d) Technology : We have clearly seen collaboration as a clear winner [Atlassian : + 7% *] [Docusign : + 15% *] [Zoom : + 28% *] [Smartsheet : + 7% *] [Logmein : + 0% *] [Citrix : + 20% *] . But we have also seen an uptick in cloud infrastructure usage as well as VPNs. So, communication pipes are super important — shovels over gold !

What now — how will COVID impact operations?

Obvious Impact: Well — higher revenue churn [maybe not as high as logo churn if the product is a must-have], longer sales cycles [lower growth], remote sales [not sure how that will pan out for larger accounts — no choice but to adapt] focus on retention rather than hunt etc.

Even more Obvious Counter-measures: The remedy seems to be in the form of changing models taking into account social distancing measures, flexibility on billing / demo cycles and unpleasant employee lay-offs & furloughs.

It isn’t all gloom & doom though !

Despite fears, sentiment around enterprise tech is still going alright [BVP Nasdaq Emerging Cloud index is still only 10% discount from pre-COVID levels; Dow is down 20% during the same period*]. While VCs aren’t investing much [there is a lag in reporting deals giving a false impression], in enterprise Saas, we can still expect activity. While valuations & round sizes will be lower, it is still a good outcome if the round helps you stay afloat. A lot of dry powder in the market is yet to be deployed — while a significant chunk will go into supporting existing portfolio, there is still plenty of scope for new investments scenario to improve post-crisis.

Saas will be under pressure during this crisis, albeit far less than other sectors. This, along with continuing investor interest is a definite silver lining. All fortune-telling based on COVID is short-term and it is quite likely that demand will bounce back to normal levels in a few months. Hoping for the best !

*Time period for market observations : EOD data 18 Feb 2020–1 May 2020

– An abridged version is on Merisis Advisors Linkedin Page

Source : Techcrunch, Venturebeat, Bessemer Venture Partners & public sources

https://merisisadvisors.com/