2020 was a wild year for the Saas industry. A perfect storm of global, political, social, medical, and economic events aligned to make this a year of great challenges and explosive growth in the software sector. While other industries suffered, the SaaS industry can look at three global factors as crucial to making 2020 a year to remember.
With the UK voting somewhat contentiously 51.9% in favor of leaving the EU and with a presidential election dominating the US political landscape for much of 2020, political change was a defining characteristic of the past year. With so many shifts in the political headwinds possible, many SaaS companies had to make changes to how they did business.
In the run-up to the end of the Brexit transition period on December 31, these changes included amending existing data processing agreements, privacy policies, and SaaS terms and conditions. Depending on the country in which a SaaS company was located, entering into standard EU contractual clauses and model contract clauses might also have been necessary as would appointing an EU representative as required under GDPR and potentially under regulations that come from a data adequacy decision expected early in 2021.
UK-based SaaS companies must also deal with new restrictions on business travel into the EU, potential reductions in cross-border investments, and restrictions to access to EU-based research-grant programs. Add to these challenges the fact that as of December 24, the UK had only signed off on 29 trade deals to replace the 40 deals that it was automatically partnered to as an EU member state, and the picture only gets more complicated heading into 2021.
In the U.S., late 2020 saw the leaders of major tech firms answering questions in Congress and the House Antitrust Subcommittee moving forward with challenges to big technology companies and, by extension, the technology industry generally. Although most SaaS companies are, for the moment, outside the scope of any antitrust actions, many of the issues being raised both in Congress and in public forums might well impact the SaaS industry: lack of competition in some market sectors, privacy issues, data protection, and vulnerability to data manipulation and misinformation, to name a few.
The impact of the coronavirus pandemic had devastating effects worldwide, with over 80 million cases reported impacting every industry sector and every business, regardless of size and location. Work from home (WFH), while not new, increased dramatically, putting pressure on traditional business cultures and infrastructures everywhere. For some companies, WFH proved an opportunity to reimagine how business can be done and efficiencies gained. “[C]ompanies are going to see that some, maybe many, of the jobs they’ve always thought had to be done onsite could be done just about anywhere and could be done just as well,” explained Mark McGraw of The Institute for Corporate Productivity in mid-July.
As Elisabeth Joyce from research firm Gartner also noted, while business leaders were “evaluating more permanent remote working arrangements as a way to meet employee expectations and to build more resilient business operations,” they were also asking questions about “how to manage a more complex, hybrid workforce. While remote work isn’t new,” Joyce concluded, “the degree of remote work moving forward will change how people work together to get their job done.”
This question really drove the growth of SaaS companies for most of the year as the mass shift to WFH protocols provided an opportunity to showcase the agility and functionality of software firms that had flown under the business radar for years and even decades.
“The pandemic validated cloud’s value proposition,” explained Sid Nag, research vice president at Gartner. “The ability to use on-demand, scalable cloud models to achieve cost efficiency and business continuity is providing the impetus for organizations to rapidly accelerate their digital business transformation plans.” According to Gartner, Inc., worldwide end-user spending on public cloud services is forecast to grow 18.4% in 2021 to total $304.9 billion, up from $257.5 billion in 2020, with SaaS remaining as the largest market segment.
Even further, according to OpenView, Public SaaS is more valuable than ever. In March, SaaS fell 50% from then all-time highs, but SaaS valuations have since led the market rally whereas other industries have faced significant economic pressure.
Few companies benefited more publicly from the sudden shift to WFH culture as Zoom. With the dramatic, global shift away from in-person meetings and conferences, Zoom quickly established itself almost overnight as the new meeting room, wedding chapel, family dinner, and happy hour meeting place. In comparison to the depressed travel market, Zoom’s market cap eclipsed the top seven airlines’ revenue combined as the company reported a remarkable growth curve.
With a solid 169 percent growth in the first quarter of 2020, Zoom boomed in Q2, reporting a 355 percent growth compared to the same period in 2019. According to CNBC, the platform averaged over 148 million monthly active users in Q2, a year-on-year increase of 4,700 percent. Shareholders were projected to see earnings upwards of 90 cents per share as Zoom revenue is projected to top $663 million.
The year of IPOs
2020 was a record-breaking year for SaaS IPOs, with three of the 10 largest tech IPOs for US companies making their market debuts this year. Snowflake entered the market as the largest ever software IPO in the United States and made the biggest opening gains of any IPO since 2008, according to data compiled by Bloomberg. DoorDash and Airbnb, which began trading within one day of each other, also crushed records, with Airbnb shares ending trading their opening day up 112%.
This is, of course, just a thin-slice of the SaaS companies that “popped” in their IPOs in the past year and if projections heading into 2021 prove accurate, this overview section will be equally impressive 12 months from now.
As noted previously, the global pandemic proved to be jet fuel for the SaaS industry as 88 percent of organizations worldwide either made WFH mandatory or highly-recommended after COVID-19 was declared a pandemic. This WFH trend was not new, of course. The demand for work flexibility has been building for years, with research consistently showing that as many as 33 percent of traditional in-office employees would take a pay decrease in exchange for more WFH opportunities. The pandemic did not create the WFH genie, but it certainly kicked the top of the bottle in dramatic and unforeseen ways.
The immediate impact on the SaaS industry was very apparent, as such companies as Zoom, Slack, Quizlet, and Netflix were at the forefront of both horizontal and vertical growth as well as part of a global cultural shift in how work (and play) can be imagined and managed.
The longer-term impact of the pandemic also supported SaaS growth. Companies began to look seriously at WFH as part of a more cost-effective business model. Engaging SaaS companies often meant that companies could do business with less real estate, less travel, and gained efficiencies. As Kate Lister, President of Global Workplace Analytics noted, businesses started to learn that “while virtual meetings may not have all the same benefits of being face-to-face, the savings may outweigh the costs much of the time.” She went on to estimate that “work-from-home initiatives will save U.S. employers over $30 Billion dollars a day during the Covid-19 crisis. This may be the tipping point for remote work.” In retrospect, the SaaS industry might look back on 2020 as an important tipping point as well.
In addition to the WFH boost, the pandemic also accentuated the differences in market share, earnings, and wealth. According to Visual Capitalist, “for one, Big Tech’s market cap share of the S&P 500 soared. In the seven years preceding July, the market cap of the six stocks—Facebook, Apple, Amazon, Netflix, Alphabet, and Microsoft—grew over 500 percent. By contrast, the S&P 500 rose just 110 percent.” One could argue, given the strong market performance, that SaaS and Big Tech continue to be recession-proof. In 2020, the SaaS model has been particularly resilient to economic downturns.
Mergers & Acquisitions
If 2020 was the year of IPOs for the SaaS industry, it was also the year of mergers and acquisitions as several seismic deals rocked the industry geography with record SaaS valuations. One of the biggest deals occurred in early December when Salesforce announced its plans to acquire Slack in a $27.7 billion megadeal. True, Slack has been floundering for most of the year following an uninspiring public valuation and substantive losses reported in Q1 and Q2, but the size of the price of the deal coupled with the fact that it signaled a strong move by Salesforce into enterprise social definitely caught the attention of industry watchers worldwide.
Salesforce had started the year with a late February acquisition of Vlocity in a $1.33 billion all-cash deal. The announcement was not a huge surprise given that Vlocity had risen to prominence based on six industry-specific CRMs it built on top of Salesforce, making it a natural acquisition target.
But Salesforce was definitely not the only buyer in 2020. Other deals of note include:
- January was a busy month with acquiring Plaid for $5.3 billion, Chicago-based R1 RCM purchase Seattle-based SCI Solutions for $190 million in cash, and Apple acquired Xnor.ai for $200 million
- February saw DocuSign announce its acquisition of Seal Software ($188 million) continued the company’s move into AI analytics infrastructure that had its genesis in the 2017 purchase of Appuri
- Sinch’s purchase of Wavy Global ($60.6 million) in March was followed quickly by the Swedish company’s May purchase of the SAP Digital Interconnect group for $250 million
- Also in May, quote-to-cash vendor Apttus merged with Conga in a deal valued at $715 million and Intel’s acquisition of Moovit for a reported $900 million
- October saw Twilio pay $3.2 billion in an all-stock deal to purchase startup Segment, Apptio purchased SaaSLicense for an undisclosed amount, and Veeam complete purchase of Kasten for $150 million.
- ScraperAPI was acquired by SaaS.group in their fifth SaaS acquisition since startup
This is, of course, only a snapshot of the multitude of M&A deals that made 2020 an especially lucrative year for SaaS companies and founders.
SaaS trends and foci in 2020
Looking back, 2020 highlighted a number of important trends and foci across the SaaS industry. Here is a bite-size overview of four of the most important trends that are very likely to continue to grow well into 2021 and beyond.
Product-led growth (PLG) was a huge trend in 2020 and promised to remain very much on the trend radar in 2021. A business model and growth strategy that recognizes product experiences have become an essential part of the buying or subscribing process (think Netflix and Grammarly as two examples), PLG ensures that all onboarding and upgrades are handled directly by the product, creating a SaaS culture focused wholly on providing a compelling user experience. As Allan Wille, Co-Founder & CEO, Klipfolio puts it:
“Product-Led Growth means that every team in your business influences the product. Your marketing team will ask, “how can our product generate a demand flywheel.” Your sales team will ask, “how can we use the product to qualify our prospects for us?.” Your customer success team asks, “how can we create a product that helps customers become successful beyond our dreams?.” By having every team focused on the product, you create a culture that is built around enduring customer value.”
PLG companies often benefit from shorter sales cycles, lower Customer Acquisition Costs (CAC), and a generally higher Revenue Per Employee (RPE). The traditional sales funnel is transformed as potential customers self-select and self-register for the product, effectively declaring themselves Product Qualified Leads (PQLs). Rather than pushing out information, the SaaS sales team flows into a consultative role to ensure that customers clear any hurdles and understand fully the value of opting into the upgrades available.
PLG is likely to continue trending strongly into 2021 for several reasons:
- Customers want it. As Forrester reports: “B2B buyers now prefer do-it-yourself options for researching products and services prior to purchase. And it’s not even a close call! The survey conducted for the Death of a Salesman report showed that by a factor of three to one, B2B buyers want to self-educate rather than talk to sales representatives to learn about products and services.”
- CAC has been on the rise for the past 5 years and shows no signs of slowing down, especially where small- and medium-sized SaaS companies are involved. PLG can impact the total cost of sales and marketing significantly, having a positive impact on CAC and, in turn, profitability.
- PLC has an impressive track record. As OpenView noted in its 2020 Expansion SaaS Benchmarks: “Product-led companies are always ‘open for business,’ and their lower entry prices are less susceptible to budget cuts… proving that product-led revenue is more valuable” than ever.
Increase in APIs
TechCrunch’s Daniel Levine stated the fact without equivocation in 2019: “For fast-moving developers building on a global-scale, APIs are no longer a stop-gap to the future—they’re a critical part of their strategy.” Trends in 2020 support this conclusion, with investments in the API industry remaining strong despite the challenges of the pandemic, with projections indicating that this level will remain strong or increase moving into 2021. Looking forward, industry leaders are most excited about microservices (48.7 percent), Kubernetes (43.6 percent), containers (42.2 percent), and serverless architecture (39 percent).
SaaS companies clearly recognize that APIs are critical to their ability to respond to the rapidly changing WFH environment as well as any regulatory or government initiatives that come into play.
As Abhinav Asthana, Co-founder and CEO of Postman, noted in Developer in September: “Our annual survey reveals that the API ecosystem is expanding, investments are flowing, and momentum for an API-first philosophy is being embraced more and more. The data also shows us the importance of APIs and their role in responding to sudden and tectonic shifts in the way businesses, governments, and nonprofits operate, including pandemics.”
This is not to say that the API road was smooth in 2020. Developers self-report that the pressure to develop quickly and without adequate testing, debugging, or documentation remains a struggle. That said, APIs are seen as reliable and stable whether developed internally (55.8 percent), externally (60.4 percent), or through a development partnership (61.2 percent).
To many industry watchers, vertical SaaS is the next logical evolution of SaaS, providing business-specific solutions designed for one particular domain. With a relatively high chance of conversion given its niche application and extensive customization, vertical SaaS delivered some impressive performances in 2020, fueled by a list that includes but is certainly not limited to such names as:
- Veeva (life sciences)
- ClearCare (healthcare)
- Madwire (marketing)
- Quizlet (education)
- Applied Epic (insurance agency management)
- Textura (architecture and design)
- Ycharts (investment and personal finance)
- Thapos (sports management)
- HotSchedules (restaurant management)
- Procore (construction)
And though horizontal SaaS companies performed exceptionally well in 2020, vertical SaaS gained substantial ground and is well-positioned for significant growth in coming years thanks to several key differentiators:
- Capabilities that address industry-specific needs creates great opportunities for partnerships with established horizontal SaaS companies (Salesforce’s partnership with Veeva as a case in point)
- More comprehensive integration of industry- and country-specific compliance issues allow vertical SaaS to better manage data governance and GDPR, transparency protocols, and reporting
- Integration with existing industry workflows and existing systems
- Optimized customization based on customer and industry feedback as well as from internal expert insight when hiring from within the industry vertical.
Notable industries that are projected to power vertical SaaS include cannabis, transport and logistics, and manufacturing while such past stalwarts as insurance, education, agriculture, and energy and utilities are projected to slow down as saturation pressures market growth potential.
Cybersecurity and Artificial Intelligence
With GDPR compliance and cybersecurity becoming increasingly significant issues even before the pandemic, SaaS companies are becoming more important as organizations rely on external providers for the best in specialised services. Small- to medium-sized businesses in particular can benefit from cloud-based Advanced Threat Protection (ATP) that allows them to monitor network and data threats in real-time, silo threats before they deploy, keep updates and upgrades as current as possible, and optimize flexibility for addressing issues as they arise.
Not surprisingly, the rise of SaaS companies addressing cybersecurity has paralleled the rise of AI and big data across all sectors and in companies of all sizes. Cloud analytics service providers and security-as-a-service providers saw significant growth in 2020 based on several advantages including operating cost reduction, capital cost reduction, and seamless cost-effective provision of advanced services. The global market for SaaS security is projected to reach $26 billion by 2025 at a compound annual growth rate (CAGR) of about 19 percent.