Monday, February 10, 2020

Is It Time To Securitize SaaS Revenue Streams?

Sure, why not.
Maybe package those "Lidar as a Service" playas in the autonomous vehicle game as well.
A snip from a very interesting post by Alex Danco:
Debt is Coming
Ten years from now, what seismic change will we reflect back on and think, “well that was pretty obvious, in retrospect”?  ....
.... Recurring Revenue
The recurring revenue business model, which everyone in tech knows well by now, may feel mature. But I promise you: we’re only in the early days of its second-order consequences.
The model got off the ground after the dot com crash, from logical origins. The “pay as you go” model for subscription software is great for customers, who no longer need to shell out an up-front payment like they had to in the days of packaged software licenses. The software purchase already comes pre-financed, baked into the SaaS model. The downside to this model is that it takes longer for startups to reach positive cash flow. As Bill Janeway explains:

While the SaaS model made it radically easier to sell software and to forecast reported revenues as contractual payments were made over time, it came with a cost. was the first enterprise software company characterized by sound operating execution to consume more than $100 million of funding to reach positive cash flow. Now the poor start-up was in the role of financing the rich customer. Funding from launch to positive cash flow for a SaaS enterprise software company runs from that $100 million to twice as much or more, some five times the $20–30 million of risk equity once required to get a perpetual license enterprise software company to positive cash flow.

VCs have happily stepped in with the cash. The SaaS model was a great way to deploy capital: these new businesses spend an (often large) initial expense to create a user, and then harvest a (fairly predictable) stream of income from that customer you’ve created. Any one customer may be unknowable, but cohorts of customers can be modelled and understood decently well. VCs have successfully expanded this template to adjacent business models like marketplaces, recurring shared value transactions, and all sorts of consumer businesses.

As this new model came together, the word “user” became the most important word in tech. People on the outside sometimes wonder why businesses with so few traditional assets seem to require so much financing. Well, they are accumulating assets: users are the new assets, and their use is what you’re out to monetize.Whatever your business model is, acquiring users is the new building factories.

The overall bet may still be speculative, but the median VC dollar isn’t anymore. It’s buying customer acquisition and then financing service delivery. In plain sight, ever since the dot com crash, VCs have learned and applied the same lesson as GM and Ford years ago: the best way to make money isn’t making cars, it’s in financing them.

This looks as though it could be deployment money to me! But it isn’t yet: so long as this recurring revenue is financed with VC equity, there’s still this tension between VC’s portfolio approach (FK) versus founders’ and employees’ complete commitment (PK). Still, though, the fact that it could be aligned – given the relative stability and maturity of the recurring revenue software model – suggests that we’re overdue for some new financing strategies.

Maybe not all investors get this, but the smart ones do. Jonathan Hsu of Tribe Capital and I used to talk about this a lot back when we were at Social Capital, and when I interviewed him last year in the newsletter he put it this way:

When you acquire some customers and they start yielding revenue that behavior sounds an awful lot like buying a fixed income instrument and there is a lot of sophistication around how to value those cash flows. In some sense, what we’ve seen over the last decade is that software enables a whole new business model – recurring revenue – which is both good for customers and is good for investors. It’s good for investors because it becomes more “predictable” in the sense that it starts to look more like a fixed income yielding asset and thus more amenable to traditional financial techniques and thus potentially “in scope” for a wider set of investors. (Emphasis mine.)....