Understanding the SaaS Investment Model
“The next generation, that iteration speed is going to get tighter and tighter, so what was 10 years in the cloud, it is going to be five years.” The SaaS business is one of the hottest sectors to invest in. Their impact on the economy is incredible. Gordon Ritter, Founder and General Partner of Emergence Capital, joined Raoul Pal to discuss how this behemoth industry is only just beginning to take shape.
Macro View: The technology is growing fast in the SaaS industry. Data is king in this space as we move forward, but it is not just about the data, it is how a company utilizes it. These companies are cash juggernauts and have a high competitive moat, Ritter outlines. Once they get up to speed, they are difficult to compete with as the competitive moat develops.
Where is Ritter’s attention right now? He and his team are focused on coaching networks, which effectively act as overlays for Zoom (and video conference services). Those coaching networks are actively learning, processing information and providing real time feedback. The next wave of software, it can read habits and behaviors, and be used like a best practice world.
“I am aligned with helping your employer make you more productive, I am not trying to sell it to a third party,” Ritter stated.
“The reason we called these coaching networks is it is designed to help humans evolve and grow faster. If we stopped doing that, then we are in the land of doing evil,” Ritter explained. “At least as far as I am concerned, this industry has to grow with privacy, with ironclad customer agreements, and with that user growth in mind, it cannot be that we are harvesting you and then shunting you off.”
These networks will be intimately involved in people’s personal conversations, which is why privacy is an important part of the process for him.
Investment Thesis: You might be wondering, how do you figure out which are the next generation of companies to invest in? What will make them unique? How can I differentiate them?
“The highest margin companies going forward are going to be those that in effect, vertically aligned” – As Raoul summarized, “Deep and not broad, they know everything about one space.”
As Ritter points out for comparison, Google, in its current format, is broad. They cover a lot of ground with their services. They are a great company to invest in, but for the argument that he and Raoul are making, you will want to find a company that specializes and does it exceptionally well.
Watch the Full Interview – 68 minutes
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