As a knockout year for SaaS industry expansion, 2018 set the stage for 2019 to continue growing at a fast rate. This coming year will be all about the fundamentals of SaaS. While the industry will continue to expand at impressive rates in 2019, our analysis predicts that investors, operators and founders alike should expect a year focused on getting back to basics: integration of acquired teams, a focus on product as an avenue for growth, and no shortage of SaaS IPOs. Here are the four main ways 2019 will continue on the trend of accelerated growth in SaaS.
2019 is projected to generate massive revenue expansions in the SaaS industry. As new products enter the market at an increasing rate and adoption of the model rises, the outlook for B2B and B2C grows increasingly positive. Awareness of new technologies, combined with motivation to stay ahead of the competition, has driven previously slow movers to become fast adopters. Gartner forecasts that by 2021, global cloud service revenues are set to grow from $175.8 billion in 2018 to reach $278.3 billion, off the back of accelerated customer-oriented growth strategies and increased adoption. SaaS is projected to remain the largest segment of the cloud services market, with revenues projected to grow 17.8% in 2019 (from $72.2 billion in 2018) to reach $85.1 billion. SaaS M&A activity is anticipated to continue growing in 2019 off the back of a record year in 2018. As private equity firms look to invest excess funds (due to tax regulation changes and the resulting repatriation of cash in the United States) SaaS remains an attractive investment due to its lean cost structure and high customer lifetime values. Continued macroeconomic growth will also drive an influx of new startups (both online and offline) which will increase demand for SaaS products, as they are more affordable options for
new businesses. The expansion of SaaS to offline channels (i.e. PoS software) is also opening up new and lucrative markets in 2019 and beyond.
Chart courtesy of Spanning Cloud Apps
Increased B2B Adoption
Due to the ability to achieve higher flexibility and efficiency from both a technical and financial standpoint, companies are increasingly adopting SaaS solutions in operations and management. Gartner predicts 90% of organizations utilizing public cloud infrastructure as a Service (IaaS) and Platform as a Service (PaaS) separately will move to working with integrated, full-service providers by 2022. AWS’s recent launch of DocumentDB is one of many examples of companies making it easier to use one service or platform for multiple operations. The cost synergies available in more integration will drive businesses to seek streamlined cloud services in business operations. A customer-centric approach from SaaS providers will lead to higher customer success and ultimately, better retention rates.
Continued Focus on IPO
Stock market conditions in 2019 remain uncertain, and with operators unsure of whether the opportunity to list on public markets will remain attractive in the second half of the year, expect the beginning of 2019 to see a rush to IPO to capitalize on currently favorable conditions, especially given the proven success of 2018’s SaaS IPOs. As OpenView Partners reports: “The basket of IPOs has been successful to boot, collectively representing $38.2B in enterprise value upon IPO (3.5x the figure for all of 2017). This lies in stark contrast with consumer tech, which has seen relatively few IPOs – not to mention poor results for several that have recently gone public (think Blue Apron (NYSE: APRN), Snap (NYSE: SNAP)).” We are already seeing this come to fruition with the likes of Uber, Slack and Palantir, among others, which have all made motions towards 2019 IPOs, and Lyft, which made its market debut in March of this year.
Chart courtesy of Openview Labs
OpenView reports that companies which implement product-led growth strategies grow at faster rates and generate higher gross margins. SaaS businesses will increasingly adopt this strategy in 2019 as the focus on growth shifts towards the quality of the underlying product. Allowing the product to speak for itself has emerged as a trend in high-performing companies. A product-oriented focus will be especially useful for SaaS businesses that offer a free trial, as it will help convert satisfied users into paying customers, as well as generate strong word of mouth referrals.
OpenView found that companies which adopt this strategy facilitate product-led growth best by adhering to the following guidelines:
1. Start with user pain points
2. Deliver value immediately
3. Get rid of the uncritical
4. Make the product stick