The New Cool In The Startup World: SaaSy & Profitable

In reporting on funding rounds and talking to founders and VCs lately, a common theme keeps coming up: A path to profitability is becoming increasingly more desirable than achieving unicorn status, or a sky-high valuation in general.

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It doesn’t take a genius to figure out that investors are feeling burned by the WeWork and Uber debacles of 2019. Combine that with a number of layoffs from high-flying (and highly valued) startups–many of which were funded by Japan investment conglomerate SoftBank–and what we’re left with is wary VCs.

What we’re also left with is more founders pledging to be focused on profitability and less on achieving high valuations with a “growth at all costs” mentality.

In fact, the lean startup mentality may be making a comeback. It’s a refrain we’re hearing over and over again: achieving profitability is the new golden ring. But how much of that is just lip service? It’s too early to tell, of course. But in the meantime, we talked to a few people in the industry in an effort to wade through the hype.

Nothing but profits

To dive into this, I am specifically taking a look at SaaS (also known as software as a service) companies.

Overall, startups with SaaS offerings in particular seem to be doing really well. Why is this? Well, as Life House founder Rami Zeidan explained it to me, once you’ve built out a platform, you get to sell that platform to customers without any other major expenses outside of hiring a sales and marketing team, for example. (Read more about Life House, a SaaS company with a goal of profitability by the end of 2021 here.)

Of course, any good startup will always be putting money into continuously improving its platform. But with SaaS operators, the bulk of the work is done. As such, it’s no surprise that we’re hearing about  more and more SaaS operators hitting or surpassing $100 million in ARR (annual recurring revenue) or becoming unicorns (having a valuation of over $1 billion).

But at the end of the day, all of that is less meaningful if a company is bleeding cash in its efforts to grow. So that’s why when I hear about companies that are actually profitable, my ears perk up.

Profitable, minimal venture

Case in point. Last week, I exclusively interviewed Tom Logan, the CEO and co-founder of New York-based Cohley, a content platform that helps brands streamline content generation. His company just raised a $1.5 million seed round led by San Francisco-based ​Right Side Capital​. Other investors participated in the financing, including San Antonio-based ​Active Capital​.

Now, $1.5 million isn’t a huge round. And typically, we don’t cover financings of this size. But this 4-year-old company caught my attention because despite having raised very little venture funding, it is profitable. It has over 200 customers and saw its ARR climb by 375 percent year-over-year in 2019. Logan projects Cohley will see 500 percent ARR growth this year.

“Because we’ve been so capital efficient, we’ve been able to operate a very lean ship,” Logan told me.

So what does Cohley do exactly? The startup’s software platform functions like a marketplace where users such as Unilever, women’s retailer Ann Taylor and Samsonite post campaigns that are presented to content creators and/or photographers who fit their content goals. From there, creators apply to the campaigns with an understanding of timeline, required deliverables, content guidelines and compensation. The brand then uses Cohley’s guided creator selection to collect rights-approved videos, photos and text reviews that are housed in their content libraries “where they can easily activate those assets across digital channels.”

For Logan, sustainability is the key.

“As an entrepreneur, it’s really important for me and the well-being of employees and investors, to have something not subject to short-term changes in the economy,” he told me. “We just want to be able to provide diverse content and meet companies’ content needs, now and in the long term.”

In November, I also wrote about another profitable SaaS company: Austin-based LawnStarter. The company, which operates an on-demand lawn care and maintenance service, announced it raised $10.5 million in a growth round led by Edison Partners. Lerer Hippeau, Bull Creek Capital and Binary Capital also participated in the round.

Via its website and mobile app, LawnStarter matches consumers with a lawn or outdoor service, and makes a percentage of every such service booked on its platform. Unlike many of the startups we cover, LawnStarter claims it reached profitability in early 2019 (also unlike many of the tech companies that have gone public, or planned to go public, last year).

Not only are both companies SaaS operators; both are profitable. And both are operating with minimal venture backing.

Building SaaS layers

Also last week, I had a catch-up session with Egnyte co-founder and CEO Vineet Jain. Mountain View-based Egnyte, which surpassed $100 million in ARR last year, is a hybrid-cloud storage and collaboration company.

While Egnyte is not currently profitable, it was at one time. In fact, the company was cash-flow positive from the fourth quarter of 2016 to late 2018, when it raised a Goldman Sachs-led $75 million Series E. A hiring spree to help 12-year-old Egnyte merge its two products was the main reason for the retreat. Last year, the company added 224 employees in five months, bringing its headcount to north of 725.

Jain is not interested in making Egnyte the next unicorn. It’s still growing (ARR climbed 39 percent year-over-year in 2019), but Jain’s focus is on profitability.

“We’re very fiscally prudent,” he told me. “We’re not interested in top-line growth at any cost.”

At this time, Jain is also not interested in raising more than the $137 million in venture capital Egnyte has already raised.

“We’re getting a lot more respect in the industry, and that’s being seen in our ability to attract top-tier talent, and analysts wanting to talk to us,” he told me. “We’re also constantly approached by VC firms to see if we’re interested in taking more capital. But we’re not planning to raise VC money anytime soon. In fact, I don’t think I see any need to raise any more private capital at all in the future.”

Long term, Jain’s goal is not to propel Egnyte to unicorn status. It is to take his company public. And, he wants to do it responsibly.

“An IPO is the next logical step,” Jain told me. “Until then, our goal is to be profitable by the second half of 2021. Right now, I think unicorn culture is dead. It’s time for stallions.”

Jain also gave me a good analogy for why he believes the SaaS model seems to be working so well for so many startups.

“It’s like a wedding cake,” he said. “You just keep building on top of it, and focus on churn and retention, not the filling on top.”

VC perspective

Last year, I covered 1Password’s massive $200 million Series A, marking the Canadian password manager’s first external capital raise in its 14-year history. The story was one of our most read in all of 2019, as the Twitterverse exploded with questions as to why a profitable company such as 1Password would go the VC route.

At the time, I spoke with Accel Partner Arun Mathew (his firm led the round) about how the deal came about. He told me that his firm actually approached 1Password about a raise and the company was reluctant at first. But ultimately, he was able to win it over.

“In an era of growth at all costs, we don’t come across companies like 1Password very often,” Mathew told me at the time. “Like Atlassian and Qualtrics, the 1Password team impressed us by building a business that’s not only scaling extremely quickly, but also has been profitable since day one.”

The strategy of investing in already profitable companies seems to be working for Accel. As we continue to see other highly-valued, deeply unprofitable companies struggle, I expect we’ll see more VCs trend toward backing startups with a tangible eye toward profitability, or those that are already there.

Illustration: Li-Anne Dias