“The next $1T company will be a software company masquerading as a services firm”
- Julien Bek, Sequoia Capital
As the SaaSpocalypse continues decimating SaaS values, VC and Growth Equity firms are focusing more on Tech-Enabled Services companies. Those built around domain expertise and industry experience have more formidable AI moats. Services companies also solve the problem of the trust gap that large enterprises have with AI. As we have written, that is one of the biggest challenges to AI truly automating more work. Services firms provide an accountability layer between AI automation and mission-critical decisions.
Now the question is: How do we achieve higher Enterprise Value (EV) multiples for Tech-Enabled Services firms? Most are valued at lower multiples due to their one-time or “reoccurring” revenue and lower gross margins than comparable SaaS companies.
The answer is productization. Based on our experience transforming Revenue Analytics from Services to SaaS, there is an opportunity to drive a 3-5x increase in Enterprise Value in 3-5 years with productization.
To us, the productization opportunity is two-fold:
Based on our experience, the transformation work to change the business model is a 12-18 month effort. The GTM strategy, delivery model, and customer base must be assessed for fit. How much “reoccurring” revenue is there? How could customers benefit from a new, ongoing offering that is truly “recurring” revenue? Then the new GTM strategy and delivery model must be designed and piloted. The key here is to combine domain and industry expertise with a product mentality. The organization will need to change as well – our pivot overhauled our Sales, Marketing, and Product Development teams. It won’t be easy, but we are proof that it is doable.
Of course, there are many pitfalls along the way. Managing change with the delivery organization is critical to retaining key talent. We lost people who identified as “strategy consultants” and were threatened by greater automation. And there is always risk in re-framing offerings. Finding compelling wins for the customer could be a hit to margin. We leveraged experienced operators to guide us through our transformation, and we see the opportunity to work with founders and investors to provide that same guidance.
A successful transformation results in a Services company with the SaaS attributes that drive higher EV multiples: higher gross margins, better EBITDA margins, and a higher mix of high-retention ARR over one-time project revenue or “reoccurring” revenue with consistent projects over time. Delivery automation drives margins, and recurring revenue drives ARR mix.
As a response to the SaaSpocalypse, investors are honing in on the productization opportunity in Tech-Enabled Services. Sequoia’s $1T services firm quote is provocative, but our experience is proven – productization drove a 3x increase in Enterprise Value in 3 years.