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Can You Still Make Money Starting a SaaS Company?

March 3, 2021

Where is the SaaS world relative to how far it can go? With valuations of as-a-service companies and all-time highs or close to it, and more and more startups leveraging this model to serve an ever-larger number of consumers, I wondered how much more business is there to capture?

Let’s try to estimate. We do have enough data to get a sense of total as a service penetration. Last year, Zylo published a study suggesting that the average business spends about 10,000 dollars per year on as-a-service (aaS) software.

There are approximately 120m workers in the US. Today, sixty percent of which are white-collar workers. Assuming a $10k SaaS budget per year per worker, we obtain a theoretical market size of about $720b annually.

How does that compare to market research? Gartner’s research contends aaS spending in 2019 totaled $228B. 32% of the potential market has migrated to as-a-Service.

How much value has that $228B generated in terms of market cap? According to our internal analysis, the average forward multiple of a modern software company is about 12.8x. Gartner projects $266b in as-a-service spend this year. So, theoretically, aaS has created $3.8t in market cap.

How does that compare to reality? Summing the value of all the pure-play aaS companies yields $1.2t. Assume one-third of Amazon, Google, and Microsoft market cap is as-a-service value; that adds another $1.3t for a total of $2.5t.Where is the missing $1.3t? It’s probably inaccuracy in the Gartner spend measurement, no consideration of international software spend, and undercounting in the market cap analysis.

In any case, if we were to assume a terminal aaS penetration of 60%, aaS companies have the opportunity to generate another $2.5-3.7t in market cap. And this doesn’t account for the new software spend as vertical SaaS reaches deeper and more businesses modernize.Another 13 Salesforces or Zooms. 48 Workdays. 250 Zendesks. However you count it, the opportunities in aaS remain massive.

This blog was originally authored by Tomasz Tunguz. Republished with permission.