Elevating EBITDA in the White-Hot SaaS Market
Knowing Where to Look: 6 Core Opportunities for SaaS EBITDA Enhancement
Here are some things we know about the SaaS industry.
First, the industry is booming. Projections for continued growth and expansion are glowing as enterprises large and small across a wide range of industry sectors continue to turn to SaaS solutions for flexibility, agility, versatility, and cost savings. According to Bloomberg, public cloud platforms, business services, and SaaS applications will all grow at a 9 percent CAGR and reach a total worth $60.36 billion by 2023.
We also know that due in large part to its scalable, recurring revenue business models and high growth potential, Private Equity investors love SaaS companies. According to Baird Research, PE deal activity in the SaaS software sector hit new records in 2021, with further acceleration expected in 2022.
Finally, we know that SaaS companies spend money – and lots of it. Developing and maintaining a high-quality product while servicing existing customers and marketing to new ones requires copious amounts of resources, time, and capital. SaaS companies tend to rip through funding rounds and burn though cash with speed. Inefficiencies are commonly found in the areas of sales, marketing, and product development.
Building value in SaaS investments and driving EBITDA to greater heights means finding innovative ways to implement operational and financial improvements across the business. This is particularly the case for companies at earlier stages of their respective lifecycles. Through our work with deal teams, we’ve found that best-in-class SaaS assets can generate a lift of anywhere from 16-to-20 times MOIC (Multiple of Invested Capital) from EBITDA growth.
Executing a successful SaaS EBITDA enhancement exercise means first knowing where to look. With that in mind, there are 6 core business functions inherently unique to SaaS companies where opportunities for intervention, improvement, and EBITDA growth typically lie:
1. RevOps Function:
Mature, leading software companies have a RevOps function centralizing revenue specific processes across finance, marketing, sales, and customer success functions. RevOps provides SaaS companies with the tools and data-informed analytics required to optimize revenue, minimize leakage, and drive topline growth and valuation. However, fewer than 10 percent of today’s SaaS companies have a formalized RevOps function of any kind in place. These companies can recover substantial pockets of hidden value and realize greater EBITDA by establishing an advanced RevOps function.
2. SaaS Product to Platform Transformation:
Most sponsor investments in SaaS companies are based on the promise of a platform model thesis, where customers can acquire new services, modules, and functionality directly on the platform without having to engage a sales representative or endure an odious onboarding process. However, too many SaaS companies remain stuck in product model and fail to evolve to platform model, thereby inhibiting growth. Initiating a pivot to the platform model and adoption of platform-based pricing creates a deeper ongoing revenue relationship with the customer while also enabling SaaS portfolio companies to integrate acquisitions, elevate the overall brand, and accelerate growth more rapidly.
3. Strategic Pricing:
Strategic and creative pricing approaches can drive value and EBITDA growth. Too many SaaS companies leave money on the table by failing to increase their price at the end of a year or contract period. Others leave money on the table by offering discounted packages at the outset of a multi-year licensing engagement. Successful SaaS companies drive EBITDA growth by leveraging various strategic pricing strategies, including platform-based and value-based pricing. Automatic bundling of price increases into customer contracts and tying price to a percentage of customer revenue, where possible, can further drive exponential revenue growth even as usage remains relatively unchanged.
4. Customer Onboarding and Ongoing Support:
Winning a new customer should be cause for celebration. But, without an efficient onboarding process, getting that customer happily up and running with your product or platform can be time-consuming and a drain of resources. The investment required to indoctrinate a new customer can further elongate the time it takes to service that customer profitably. Smaller SaaS companies can reduce onboarding costs, in turn elevating EBITDA, by creating consistent, efficient, and where possible, automated processes that can be memorialized in shared playbooks.
5. Defining Broader Product Roadmap:
Smaller SaaS companies typically do not have a defined roadmap for future product development and functionality. In many cases, product evolutions, modifications, and variations often come about as a response to the unique requirements of a customer. Sales teams, eager to close a deal, assure the customer their needs can be met and then turn to product development teams who, in turn, divert significant resources to fulfill the customer need, ultimately enabling the company to be paid. This is a costly and highly inefficient paradigm. Not to mention, putting all eggs in one basket by tying R&D to a small number of clients – or one – is a risky proposition. High-performing SaaS companies need a defined product roadmap that is scalable and can be sold to many customers across a broader marketplace.
6. High-Performance Go-to-Market Function:
For the typical SaaS business, Go-to-Market costs can weigh heavily on EBITDA , particularly when there is a lack of cohesion and alignment between sales and marketing teams. We’ve seen GTM costs at SaaS companies outpace Research and Development costs by anywhere from 28 to 128 percent. Companies hemorrhaging dollars on GTM costs are often well behind their industry counterparts in revenue growth. EBITDA lift can be achieved by building a high- performing GTM function defined by tight alignment between marketing and sales, a powerful lead generation engine, focused customer targeting and positioning, emphasis on selling value as opposed to features and functionality and establishing a structured approach for deal qualification to improve close rate.
All signs point to SaaS and technology companies – and their spend happy tendencies – continuing to draw investment from PE. Identifying opportunities for improvement and smartly implementing operational and financial enhancements within these 6 business areas will enable sponsors to elevate EBITDA and ultimately extract maximum value from their burgeoning SaaS portfolios.