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B2B SaaS as an Asset Class

December 30, 2022
Written by Golden Section


B2B SaaS as an Asset Class: What Is It and What Founders Should Focus On

Traditionally, there have been three main asset classes, groups of similar investments. These have been equities (stocks), fixed income (bonds), and cash equivalent (money market instruments). Today, many have added real estate and commodities to that list, while others include cryptocurrency and various financial derivatives. We’d like to include a different asset class: B2B SaaS.

How B2B SaaS Differs from Other Asset Classes

B2B SaaS is a booming market. According to BetterCloud, 70% of company software consists of SaaS applications. According to Reply, the U.S. SaaS industry is predicted to double, reaching $225 billion, by 2025.

B2B SaaS deserves to stand as its own asset class as it is primarily different from the ones mentioned above.

First, SaaS returns tend to grow at a rapid rate, outpacing the returns of most other asset classes.

Second, the success of a B2B SaaS company cannot be measured the same way as other assets. For example, a good return on assets for a manufacturing firm ranges between 10% and 20%. Its owners can then borrow against its assets and get a higher return on equity.

An SaaS company, on the other hand, is not likely to see a return on assets in that range due to expenses and R&D. Its success needs to be measured differently — by its recurring revenue and high margin revenue. Borrowing against recurring revenue is a relatively new phenomenon that’s gaining popularity among VC firms, as it’s a good way to gain funding without diluting current investors.

Broadly, the basic characteristics of B2B SaaS as an asset class are: 

  • Asset-light (recurring and high margin revenue are more important)
  • Requires only a modest up-front investment
  • Produces high margins
  • It performs well during a recession

Software companies essentially sell change, which it’s human nature to resist. During times of recession, people become more open to change as a way of bailing them out of troubled times. And thus, they become more open to software that will enable that change.

Value proposition and market size are most important drivers of growth

Investors Want to See B2B SaaS Founders Who Focus on These 7 Things

As B2B SaaS stands apart from other asset classes, investors need to use several unique criteria when deciding whether to put their faith (and funds) behind a company. We’ve found that there are 7 specific factors that are important to the sustainable success of a B2B SaaS, which means that investors scrutinize them carefully.

These factors include:

  • Value proposition
  • Market size and analysis
  • Normative evaluation of software metrics
  • Sales efficiency evaluation
  • Stabilized net cash flow analysis
  • Competitive analysis
  • Team analysis

Let’s discuss.

Value Proposition

Does your SaaS product/service add value to your potential clients, and if so, how much are they willing to pay for it? These are two basic questions that every SaaS founder must ask themself before launching any new endeavor — and it’s a question that any investor will ask as well. Combing through data (as opposed to relying on your gut or one instance) is extremely important to arrive at the right answer.

Market Analysis

If your value proposition is strong, you can turn to the second most important growth driver of B2B SaaS: market size. Is your market size large enough to support substantial growth? In other words, are there enough potential customers with the challenge to which your product/service proposes a solution? In the case of SaaS, you’re selling change, so getting enough early adopters on board is crucial for your startup’s future success. Do you have enough early adopters?

Isolation of Software Metrics

When investors want to see how well your software is performing, make sure to separate the software metrics from others like marketing, general and administrative costs, R & D, etc. Investors (and you) can’t get a clear idea of how the actual product/service is performing if all of the data is muddled together. 

Sales Efficiency Evaluation

Sales efficiency can be evaluated by comparing sales against expenses and revenue growth over the course of the company’s history. To get a true understanding of the sales efficiency, you’ll also need to take into account any changes in sales strategies as well as particular successes among specific strategies, such as inbound marketing, email marketing, etc. The goal isn’t to get a snapshot of sales efficiency, but rather, a trajectory and idea of whether continued growth can be maintained.

Stabilized Cash Flow Analysis

What kind of net cash flow is possible from your startup? This isn’t just about how much your SaaS earns, but about your expenses and management. Investors will look at how much you spend on customer acquisition, retention, R&D, marketing, etc. They want to see a founder who understands profitability, growth, etc. so that the startup can produce a stable cash flow. 

Competitive Analysis

How do competitors in your industry affect your startup’s value proposition and the sustainability of your sales efficiency? Is the presence of competition serving to make consumers more aware of their challenge and the need for a solution (preferably yours), or is it making you spend more on marketing to differentiate your product from others? The bottom line, how is your startup positioned to compete against others in the industry?

Team analysis

It may seem obvious, but the success of a B2B SaaS startup isn’t only contingent on its product/services, but on its leadership. Investors look for a startup where the leaders have experience and wisdom, and moreover, the ability to manage and delegate when necessary.

B2B SaaS as an Asset Class: New and Untold Potential

B2B SaaS as an asset class is relatively new, not only in theory but in practice as it gives founders and investors a new way of raising funds. However, it does require a shift in perspective, moving away from valuing a return on assets to focusing more on recurring and high margin revenue. Investors and founders who are ready to make the shift have the potential to take their startup in the right direction, at the right pace.

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