SaaS 2020: Will an Avalanche of VC & PE Capital Change 2020 Budgets?

January 30, 2020

The SaaS 2020 outlook for CFOs reminds me of swash (look it up – turbulent water caused by an incoming wave hitting the shore and meeting the outgoing backwash from the previous wave).   More capital invested, more SaaS offerings, continued expectations of rapid growth are running smack into limits on the availability of qualified employees and a potential economic slow-down which may or may not happen.

On the one hand, the waves are coming in:  the capital expected to be invested into SaaS has never been greater:  according to Pitchbook and NVCA’s Venture Monitor’s Q4’19 report, 2019 saw a record-breaking VC exit value of over $250 billion, nearly 80% of which came from VC-backed IPOs. Not all of that will be reinvested, but a lot will.  Plus, capital raised by US venture funds reached $46.3 billion in 2019.  That’s a lot of capital that needs to be put to work.  That’s after $136.5B was invested in the US alone by VCs in 2019On the other hand, there’s the oft predicted forecast that the longest running economic expansion has to hit a down cycle, sparked by US domestic or international tensions, or disasters or other some other factor outside of a company’s control and growth will slow.

The latest reports show US manufacturing trends diverging from stocks – manufacturing activity is down while the stock prices are reaching record heights.  And now corporate profits are showing a historically wide spread from stocks -  profits are down while the stock market, again, is experiencing record high prices.  Business investment generally remains weak despite very low interest rates.How is a CFO in a hot sector like SaaS expected to plan?  Here are my thoughts: with more capital flowing in, there will be greater competition for:

  • Skilled labor
  • Customers, and
  • Market leadership

Labor & Hiring

CFOs will need to carefully track hiring and hiring efficiency.    SaaS companies typically spend 65-80% of revenue on employee compensation.  We are in a time of record-breaking low unemployment - and even lower unemployment in highly educated/highly skilled labor. There will be greater difficulty finding well qualified developers, sales, marketing and even Finance professionals, especially in hot locations like the Bay area, Boston, Austin, Denver, Seattle, Toronto, and Vancouver.

SaaS companies are being founded all over the place and have expanded throughout the US outside the traditional tech centers, and in major cities of Canada, plus growing in major European markets (and Australia/New Zealand).  This means that established SaaS companies won’t have an easy time reaching out to new areas for hiring, since hot new SaaS companies will be competing locally for talent.

Customer Growth

Everyone in the SaaS world knows that the SaaS model is based on strong new customer acquisition, expansion and high customer retention rates.  Investors look closely at customer retention and valuations are correlated with the revenue growth driven by customer acquisition and retention.

Most B-2-B SaaS companies we speak with going into 2020 have plans to expand into new customer profiles, whether by moving up from mid-market to enterprise, or down from enterprise to the mid-market, or acquiring new customers in new geographies or sectors.

Growth by increasing Average Contract Values (ACV) has been a major SaaS growth strategy over the past decade (with investors touting Net Retention Rates of up to 140+%).  The new decade may bring a stronger focus on growth through sheer volumes of customers that a company can acquire and retain.

SaaS Markets

The flood of capital invested in SaaS means more pressure on vendors to dominate markets because market leadership delivers the highest returns for investors.  Investors generally have two routes to exit:  IPO or M&A.  It is expected that M&A will continue to be strong in 2020.  The big established tech companies should feel confident enough with record high stock prices to continue acquiring smaller SaaS companies and move more products and customers to the Cloud.  Acquisitions are a way to buy employees and customers, and show a Cloud strategy.  The consolidation of complementary companies is another established path for growth and exits.  And investors like to do deals.


Overall, the SaaS marketplace is expected to continue to grow by 20-25% overall.  Increasing competition can also expand markets, with more marketing normalizing SaaS so overall the outlook is positive.   Companies have to be more data-driven to avoid the back-wash and carefully navigate their growth.  Now, more than ever, CFOs need to focus closely on how key metrics and benchmarks are trending for:

  • Hiring rates and expense
  • Employee productivity (hiring too many too fast almost always reduces productivity)
  • Ramp times
  • Customer Acquisition
  • Customer Retention
  • Customer Acquisition Cost (CAC)