I was catching up with my good friend, Mei recently and she brought up the topic of Coinbase mentioning how some of the early employees are making not millions, but tens of millions as part of their upcoming IPO. When I first heard this number, I was startled because it sounded too good to be true, but later when I learned that Coinbase is valued at ~ $100B, I found myself nodding my head while remembering the Facebook IPO.
The prevailing wisdom in the investing world is that consumer markets are bigger, grow faster than B2B software markets and hence likely to bear more black swans – Facebook, Uber, Coinbase etc. Moreover, unlike consumer businesses, there’s no viral growth or tornado in SaaS. It’s almost always slow and steady growth, taking five to eight years to hit the first $100M ARR mark.
However, I wonder if we are at an inflection point in SaaS, especially in Business Software that it won’t be unusual to find Snowflakes, more often, let’s say once every six months if not once every few years. Case in point: UiPath ($35B), Databricks ($28B) and Stripe ($100B). And in business software alone we have Canva ($15B), Airtable ($6B) and Figma ($2B).
I believe that SaaS as an industry has matured over the course of the last two decades and just entered its growth phase. Being in SaaS today is like being a painter during the renaissance.
To expand on my bullishness on SaaS:
- The last two decades of software adoption was primarily fueled by tech companies. In the next two decades, almost every business (from SMBs to Fortune 2000s) will adopt SaaS-based solutions.
- Thanks to self-serve, product-led GTM motion, we now have a handful of SaaS companies who crossed $1B in ARR and growing ~30% annually with +100% net retention rates (thread).
- Horizontal application software companies have reached a point where their scale and growth rates match some of the best-in-class consumer internet companies (e.g., Canva has $500M in ARR growing 130% annually with 55M monthly active users, Calendly has 10M monthly active users growing 100% annually)
- The COVID pandemic has only accelerated the shift to digital, changing the way people work, do business, interact with their friends/family etc. All this means software will continue to eat the world.
While these theories nice to hear, I wanted to run some numbers to explain the real $ opportunity.
(ps: thanks to daniel levine for suggesting this idea)
|No. of workers in the US||160,000,000||170,000,000||source|
|The average annual salary of a US worker||$51,916||$60,000||source|
|Business software spend as a % of salary (modest estimate)||10%|
|Total potential business software spend in the US||$1.02||Trillion|
|The total market value of business software in the US alone (assuming a modest 10x revenue multiple)||$10.20||Trillion|
Even with the most conservative estimates, we’re looking at a $1T of business software spend in the next decade or two. Yes, that’s 10 trillion (with a “t”) dollars of market opportunity!!
This means, we are going to see a few thousands of unicorns (aka Figma), hundreds of decacorns (aka Slack) and a handful of centicorns (aka Adobe) at the very least.
As adults, we spend 50% of our total waking hours at work. It shouldn’t surprise you that B2B software markets are as big as consumer markets and are poised to more black swan outcomes in the coming decade.