SaaS or Partner? Value Share In The Era of SaaS

Steve Sarracino @ Activant Capital and Alyssa Newcomb @ Technology Reporter/Media Consultant
Main Stage
Ascent Conference 2020

Alyssa Newcomb [00:00:04] All right. Hi, everyone, thank you for joining us. My name is Alyssa Newcomb. I’m a business and technology contributor at NBC News and we’re joined by Steve Sarasin from Accident Capital. Hey, Steve, how are you?

Steve Sarracino [00:00:20] Hi Alyssa, it’s great to be here. It’s good to see you.

Alyssa Newcomb [00:00:23] Yeah, good to see you. Real quick, can you just give us a quick rundown for people who aren’t familiar about what you do at accident?

Steve Sarracino [00:00:32] So I found it active in capital. We are a growth equity firm focused on B2B software, primarily enabling and commerce. So that’s everything from the manufacturing, physical or digital, the moving inventory management supply chain and the cell phone tech elements and everything in between. We’re based in Greenwich, Connecticut. Typical check size for us starting is 20 to 40 and we can build from there, but not a lot of B2C, but we enable the B2C so you can think about it as B2B to see.

Alyssa Newcomb [00:01:13] Cool. So today we’re going to talk a bit about value share in the era of SAS. Want to start out by asking you what’s so attractive about a partnership model?

Steve Sarracino [00:01:25] Sure. So a few things and just just a step back. When we when we talk about value share, what we mean is your your technology is aligning with your customers business. So the easiest way to think about it is in payments. You charge a percentage of revenue. Revenue is the most aligned aspect of someone’s business and you’re not charging a monthly subscription or annual subscription. There’s a lot of ways to do that. So when there are transactions, you can charge transactionally. The business is based on a commodity or price of an asset. You can charge based on the commodity or the price of the asset. And what we found is companies that can charge with the value share model tend to be a lot more sticky and tend to be very broad platforms rather than tools. And so when you look at particularly in the age of covid, companies that have and the has fallen four buckets and will get that minute. But companies that are doing well, the charge on SACE, right. You’re making a one zero decision and some of the companies that you’re enabling are doing particularly well in this market and are continuing to pay that SACE fee is not that you have to. It’s every year you have the chance to upgrade or increase price versus we have the partnership model. You can grow and shrink with your customer. It’s not a one zero decision. And so there are some businesses as businesses that have performed very well, obviously Zoome as one page or do the others. But there’s there’s there’s other categories maybe like employee engagement, where if you’re not performing as well, you may look to trim those SAS relationships. And so that’s why we have to look into the value share model. We obviously do SaaS as well. That value share has been performing extremely well through the current environment.

Alyssa Newcomb [00:03:19] Yeah. Are there any other companies that you’d want to shout out that you think are doing this particularly well right now? I mean, obviously, Zoome is a big one, but are there any smaller companies out there?

Steve Sarracino [00:03:31] Yeah, I mean, in FinTech, there’s a lot of them, you know, one in particular is better dotcom, which is performing extremely well, obviously charges based on a on per mortgage to its B2B customers. But it’s you know, this business model has been pushed so hard for so long now. And if you go back to 2000 and prior to the dotcom bust, there’s something called ASP application service providers. So Citrix and others. And it was essentially SAS. And when you had the dotcom bust, we we as a or as a group of technology investors renamed it so that people would invest in it because they stopped investing as we renamed it. And it’s a pricing towards super effective. It’s recurring and makes a lot of sense. But we’re starting to see the beginning of push back on just a flat tax pricing and figuring out how to price that something in a way that’s more aligned with your customer base. It’s not in every category. There are some categories that are very natural for SAS, but there are a lot of categories that aren’t and even see that the pursuit model, because you see that coming back a little bit. And that used to be big ten years ago. It went away. It’s coming back.

Alyssa Newcomb [00:04:43] And I want to ask, we’ve talked about how there are a bunch of companies just absolutely killing it right now with the partnership model, but are there any challenges that that model presents that people should be aware of?

Steve Sarracino [00:04:56] Yeah, so generally, great question. The bar for sale tends to be much higher because if you’re charging on a percent of someone’s revenue, just to take the simplest partnership model, that bar versus charging them a five hundred thousand dollar AKB is very high. And so the sales cycles tend to be longer. But once you’re Analisa, it tends to be much stickier. So the churn or net retention on the partnership model, it blows away anything we’ve seen in past. Obviously exceptions, particularly in this market, but it blows away the average and SACE. And, you know, you can’t be it can’t be a tool or simple endpoint solution. To have the partnership model, you really have to be a full platform for your end customer, whether you’re selling into, you know, distribution and consumer goods, retail, whatever it is, it’s got to be a pretty broad platform. And what we’re seeing also that’s been interesting and covid is these companies have really fallen for Buckett. So the first one are companies that are struggling. And when I say companies, I mean B2B tech, not the end market companies are struggling and may not make it. The second bucket is those that are are bouncing around. They’ll be fine. They’ll get it through the other end of this, but they’re not growing at the same pace. The third bucket is, is the companies that are ripping. And what we’ve seen, interestingly, in the last six months is valuation multiples have gone up. And if you have a partnership model versus model, they were actually able to increase the second. Second derivative on growth is positive because they are growing with their customers and those valuation multiples have gone up even more. That’s that’s that’s probably been the highest multiple sector that we’ve seen. And then there’s the fourth bucket, which is pretty interesting, which is the companies that are struggling, they’re going to make it through. But the market dynamics are going to change so much when we get through covid that they’re going to be in the lead in a very different position. And for those that that’s a very interesting place for us to look as investors. But also it’s a good time to rethink your your your pricing model if you fall in that bucket.

Alyssa Newcomb [00:07:03] Yeah. So while we’re on the topic of covid, I mean, you can’t escape it. It’s everywhere, but it’s rapidly increased demand. And as a result, some companies are having to scale much faster. Do you have any recommendations or insights into just responsible scalability?

Steve Sarracino [00:07:22] Yeah, so there are two key KPIs we look at as investors, obviously, when we invest, it’s all about team. The only mistakes we’ve made as investors is has been it’s been team the past, that it’s growth and runway. And those two aspects drive valuation more than anything. If you’ve got runway and growth, your value is going to be very high. If you’re running out of runway and you’ve got growth, you’ll do OK if you don’t have growth and runway. Obviously, it’s very important to raise capital. And so depending on which of the four buckets you’ve fallen, particularly bucket one and two, where we encourage companies to go out and try to raise money. The other interesting thing, what’s happened in our market is that you’ve had entire sectors where capital is pulling out of Iraq. And this is a generalization again. But if you look at hospitality, real estate, parts of retail and the capital is looking for other places to go. And we’re seeing a lot more capital enter the tech market. And you know what, for instance, like this conference is all about like this. This is a very early innings of capital flows into tech. And when you say tech now, it means a lot of things. You know, 20 years ago, it was ones and zeros and semiconductors. Today, you can define tech pretty broadly because they’re vertically integrated companies that are using technology to drive better outcomes for their customers. And so if you have a better business or B2C tech business, it is a good time to fundraise. There is a lot of capital out there. And so that’s my my number one advice. If you’re in Buckett one or two struggling or bouncing, you’re going to make it through. But it’s going to be difficult and there will be receptive audiences to your to your pitch if you’ve got a broad enough platform.

Alyssa Newcomb [00:09:12] So we’ve talked about the flow of capital into these tech companies, and can you talk to me also a bit about how dealmaking has changed on your end during covid?

Steve Sarracino [00:09:22] It’s a great question. So we just did our first deal over Zoome. I guess Zoome is now going to be a it’s a verb I guess resume to deal like Googling or Kleenex. It was a little scary. I think. Look, on our end as an investor, if you’re raising capital from an investor to understand that the comfort level, it’s going to take more time to get the comfort level. Because you know what I said earlier about team, most investors know that it’s all about team. It’s a relationship with most of our investments last longer than than the average marriage. And to not be able to meet that that CEO, founding team, senior team, junior team in person is a scary prospect. So on this investment, we probably spent two and a half the amount of time that we would have normally, but over Zoome just to get to know, just to get to know the company. So I think that’s one big difference. I think the other that’s really exciting is that it’s becoming a lot easier to see who’s doing well and who isn’t in this environment. Like a list of the winners and losers are becoming very clear and what we call as a leader laggard. Multiple separation is increasing, meaning the number one in the space is trading at multiples. Their multiple is a multiple of the number two player. And and we’re seeing that spread widen. And that that’s happened before. It definitely happened after the dotcom bust. So no two or three or four, that leader laggards spread, widened, and it narrowed and narrowed into it. So, you know, the good companies are going to trade at much higher level. It’s highest I’ve seen since ninety nine. Two thousand, which is interesting. And then the third the third interesting thing about about investing in this in this environment is that, you know, just the level of uncertainty because we don’t know if this will end in the spring. We don’t know how long it will end. And so that’s got to inform not only your product build, right, as a as a manager of a business, as you’re building your product out, but also your go to market. Like we’ve got to make changes now and our and our go to market approach and assume that we can be in this for for quite some time. And so we do look for that. We look for how the teams have reacted quickly in this environment rather than delaying it.

Alyssa Newcomb [00:11:53] So I’m going to ask you, is it a problem if you’re only revenue line, is Stass, is there something entrepeneur should be doing to build a winner take all companies?

Steve Sarracino [00:12:04] No, look, no, absolutely not. Look at Salesforce. Look at these big companies that have done very well. It’s not surprising. It is. You know, unless you’re going B2C and there’s some great companies that have they have monthly pricing, annual pricing or they are SMB. If you’re going to Enterprise, it is really hard to start out just pure SaaS without services. And the reason you need services, it’s obviously for implementation, but that early feedback from your customer you need to be very attuned to because in the early days you’ve got to be able to adjust your product roadmap quickly. You’ve got to be able to just feature and functionality quickly. And the only way you’re going to be able to do that is you’ve got a phenomenal customer success and services team on the ground with your customer. So services revenues, you know, I think they’re coming back. It’s OK. It happens. I mean, look at Pelletiere just went public. They obviously have a huge amount of services revenue, but it’s it’s expected in the early days and then longer term, you can make the decision. Elyssa, if these companies want to partner with the systems integrator or continue to do it on their own, I think if you can make it if if the business can make a run it what we call the valuation model. They should definitely explore and be tested with some customers because being able to agree with your customer is amazing because you can’t always increase your voice at the same rate your customer is growing. And if you’re in a good and market and you know that and or you’re digitally transforming their business in a way where there is Arawa in the table, you’re able to capture that.

Alyssa Newcomb [00:13:40] So let’s talk about that value share model, though, are there any challenges with it?

Steve Sarracino [00:13:46] Yes, yes. And one example comes to mind. I was talking to someone that built it. I mean, really machine learning, as most of the audience does around pricing for airlines. And what they did and this was a couple of years ago, they they looked at Treasury markets. And so, for instance, like if you find a flight to Pittsburgh, they knew that there is no Carnegie Mellon or University of Pittsburgh was having their graduation. And so rates went up long before long before graduation was to occur. So they generated something like three or four hundred million for the airline. And this airline, major, one of the major airlines was piloting it. They came back and they said, look, we can use ASML in different ways, but we should be able to charge like 30 or 40 million for this. And, you know, they were going sort of Arawa model value share model for the challenge was, you know, that tack is it was more of a pricing tool versus a complete platform. And that airline could not easily by go hire their own people for a lot less money and build it themselves. And so if you want to go that route, we need to be realistic about how easy or hard it is to replicate what we built. And so that’s why if you do get to value share pricing model Elyssa, you have built a very powerful business. It’s hard to replicate both from a customer standpoint, but also competitors.

Alyssa Newcomb [00:15:17] Definitely, and I want to ask you, we don’t know when covid is going to end, of course, but are there any particular sectors you see exploding or you see potential for growth in the next few months? Short term.

Steve Sarracino [00:15:31] yeah. So we’ve seen fintech broadly has been very hot, and I think that trend will continue for a long time. We’re in early innings there. There’s still we’re still paying interchange fees, which are set up a long time ago. And now that we’ve moved more digital. So mindsets have shifted. This is a structural change. Technology hasn’t changed as fast as mindsets. And as we move online and digital, you’re going to see you’re going to see payments and financial technology change quite a bit. I think the other broad area is we look for digital transformation and we talk about that in two ways. So one is digitally transforming the whole industry. So you build a company from the ground up to do whatever function it is, whether it’s a product, a good or service digitally. An invention like is one where just reimagine the mortgage from top to bottom. The other way to digitally transform is actually to enable tools for that, for that industry to digitally transform, like uncorks a great example of how they are digitally transforming the insurance industry. And so, you know, when we need when you can do one model or the other model, that is a very powerful business right now. And a lot of those businesses can charge relative to our higher value share because they are so powerful either for their customer or their end customer if you’re if you’re building a top to bottom vertically integrated business. So, yeah, I think anything you can do to digitally transform right now is super interesting. And you can attack any industry. Any industry is up for grabs, health care, banking, insurance, retail supply chain. And so this is actually like. I know we’ve got a lot going on. We’ve got covid going on, we had the debates last night. I don’t know what you call that. It’s a little scary, but also there’s going to be more money flowing attack. There’s going to be more innovation. And a lot of it’s frankly going to come from the US and even see Europe catching up now. France has had its first unicorn price. We’re going to see more exciting things, I think, in the next three or four years. And our market could generally rep for for for quite some time. So, again, it goes back for those companies that are struggling during covid. There is a liquid capital market system on the private side like there are. There is capital available. And those of us that are deploying it can see the performance across our portfolio are going to continue to deploy and are excited about the market.

Alyssa Newcomb [00:18:16] Definitely, and just I know you’re great with predictions, so I’m looking maybe 10 years, 20 years into the future. No pressure. You can’t there’s you can’t be wrong here. Any sectors or opportunities for SACE that you’re thinking about right now.

Steve Sarracino [00:18:40] So. I’m going on the fly here, I should have been prepared for this question. I think. I think being able to digitizer tokenized information, payment and personal information and transact with it outside of the normal means, meaning Eddi Interchange, SWIFT, what have you is super, super interesting. And there are phenomenal network effects with those types of businesses. We’re looking at a number of them and it could start with like from virtual credit cards all the way to tokenized in my personal information, be able to use that to transact. And it doesn’t mean I’m just buying something. It could be a financial product. It could be renting an apartment or or joining a a country club or any sort of major life transaction. So we think that that’s pretty, pretty interesting. We’re also B2B marketplaces, which have been very difficult to build for a variety of technical reasons and go to market reasons, I think are going to start getting very interesting. So you’re going to see an agriculture like just rethinking hundred multi hundred year old businesses like Dreyfus and Cargill and how we manage the supply chain and crop identity from from beginning to end. And that applies with a lot of goods. That’s not just agriculture, but I think, you know, reimagining that’s going to be really interesting and putting on a marketplace, again, tokenization and identifying assets like penology, asset identification and super interesting. So we like all of that. I think banking is going to be up and they’re going to be continue to be upended. That’s an obvious one. I wish I had better predictions of less of it. That’s what I got on short notice.

Alyssa Newcomb [00:20:38] That’s enough to be excited about the future. And then finally, I want to ask you, I think we’ve established here it’s a great time to start a company. It’s a great time to go out and fundraise. Any advice for people on how to do it in a digital world or special things you might be looking for?

Steve Sarracino [00:20:57] Yeah, I mean, I think, look, be prepared. It depends on what stage you are. So later stage, it’s easier, but let’s go earlier stage. You know, I think having those interesting stories of how you got there and I’ll give you an example, we met with an entrepreneur and they they made money in college to get this business started. And we said, well, how do you make that money? And they sold snakes. And I don’t like snakes who sell. How do you even do that in your dorm room? Like what is the logistics behind that and the fact that this person was willing to do that to get this business started with super interesting. So, you know, things that you’ve done in your life that you may think are not important or interesting or really part of the whole picture, because ultimately we’re investing in you, right? Like the team is building the business and most tech businesses, most can be recruited into ones and zeros, even semiconductors. I mean, you get a patent, but there it’s gates and they’re certain sizes and they do certain things. And so just be prepared to tell that why you’re special and then, of course, why the business is special.

Alyssa Newcomb [00:22:06] Great advice. Well, thank you for taking the time, Steve.

Steve Sarracino [00:22:10] It’s great to see you again.

Alyssa Newcomb [00:22:11] Take care

Leave a Reply