Why VCs love recurring revenue from SaaS — and why agency owners should, too

Markeitng - digital agencies - martech // October 31 2018

There’s a reason that SaaS (software-as-a-service) is popular among venture capitalists. So popular, in fact, that VC firm investment in SaaS companies has grown nearly 10x since 2010, according to CrunchBase.

That reason: predictable, recurring revenue.

“Investors more highly value companies where the majority of total revenue comes from product revenue (vs. from services),” said authors of a post on the Andreessen Horowitz blog. “Why? Services revenue is non-recurring, has much lower margins, and is less scalable.”

 

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   [caption: Growth in early-stage VC investment for SaaS solutions has grown nearly 10x since 2010,

and was up 56% in the first half of 2018 vs. the second half of 2017. Source: Crunchbase.]

 

The predictability of SaaS recurring revenue is one of the reasons that today’s leading digital agencies are taking ownership of martech — and becoming providers of SaaS and other solutions for their clients. In our new ebook, Merging tech with tactics, we provide an overview of why and how more agencies are bundling martech with their talent to bolster their capabilities.

At the root of it: Separating the technology from how agencies execute marketing programs just doesn’t make sense anymore. Especially when clients, particularly small and medium-sized business owners, need help navigating the increasingly complex martech landscape.

But make no mistake, agency owners are also motivated by growth and revenue predictability. Re-selling SaaS solutions (like Agendize) checks both those boxes. It’s pretty powerful when you can easily provide a value-added SaaS product for your clients — and it generates monthly recurring revenue without much investment.

The traditional agency revenue challenge — and how SaaS can help

Revenue predictability is one of the biggest challenges of traditional agency services that are based on hourly billings. Project-based work is often short-term in nature. You might have a web redesign project that lasts three months. But when that project is over, you may not immediately have billable work for those team members — putting stress on business development and account teams to quickly find replacement projects.

In the past, agencies countered the ups and downs of project work by entering into retainer-based agreements — in which clients pay a fixed monthly cost, regardless of how much work is done month to month. But reports suggest that the majority of businesses are moving away from retainer-based agreements with agencies. Today’s SMBs prefer to engage with agencies on a project basis.

Further magnifying the problem, agencies don’t often have a lot of excess cash. According to a recent survey, 57% of agencies have less than three months of available cash flow.

All of this volatility and unpredictability gives agency finance team members headaches, as they are often chartered with the unenviable task of forecasting revenue months and years out.

This is where product services enter the equation. They can help stabilize the revenue picture, raising the floor of an agency’s financial outlook — and making down periods a little less severe.

Our agency partner finance teams love product services — especially SaaS solutions like Agendize — because it makes the financial valleys and gaps in hourly billing less catastrophic. If an agency can establish even 10-20 percent of its revenue via product services, that can make it much easier to invest more in its own business development and growth.

 

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Want to add SaaS to your offerings?

To learn more about how to add SaaS to your offerings, download our new ebook here. We provide an overview of types of product-based services, including SaaS, that you can add to capabilities. And you can also contact us and set up a time to talk. We’re happy to share more about how our agency partners are offering Agendize as a white-label value-added service for their clients.

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