SaaS Entrepreneurship 101
If you are an entrepreneur starting a company that provides a service to your clients using software as the primary interface, then you should probably view yourself as a SaaS (Software as as Service) provider. It is important to note that I’m not talking about a retail company with an eCommerce presence, but a software driven service. The extent to which you leverage the patterns of born-in-the-cloud innovators in the SaaS space will be highly dependent on your business model, but there are a few core concepts that should permeate your organization if you are to be a successful service provider. These concepts should impact how you design, build, run, monetize, market, and promote your service. In this article I focus on those first three items, how you design, build, and run a SaaS platform. These principles will have implications in the other domains as well, but I want to talk about how your Development and Operations team drives value. Let’s start by making sure our business plan is aligned with an innovators mid-set that moves beyond linear growth to bring exponential returns on investments. How does an innovators mid-set impact your business plan? Let’s start with how you view the cost of the team that will design, build, and run the solution.
A Note about the numbers below: While the numbers shown are somewhat arbitrary, all of the graphs use the same basic assumptions about the cost of a team, and the value curve that investment might render over a 2-year period. The intent of the graphs is to show the pattern, not to project expenses or revenue. I am not an accountant, and while this article discusses accounting practices you should consult with your tax professional to understand the implications of CapEx and OpEx practices in your industry.
CapEx software, when you have just enough money to fail
Agencies who build software often present it to an entrepreneur as a Capital expense. They will draw parallels with building a store, where you can make a large up front investment in an asset, and then sit back and earn revenue with significantly lower operational costs than the initial development work. This approach is shown in the graph to the left. It should be pretty obvious that this is a very short-term view with rapidly diminishing returns. Often entrepreneurs that find themselves in this space discover that their business plan gave them just enough money to fail. If you are viewing your services as being based on software that is a depreciating asset then you probably need to reassess your business plans.
DevOps means Development is an Operating Expense
The fundamental technical and organizational changes that drive modern SaaS platform success are centered around implementing a successful DevOps organization. It might not be quite as obvious, but if you had separate Development and Operations departments, with separate Capital and Operational budgets then you may have some accounting changes to make. When you implement a successful DevOps organization, you must recognize that DevOps is an Operational Expense. This view will result in the value model shown to the right, where you have a flat expense, resulting in linear growth in value.
Innovators think Exponentially
If you recognize that the thing you are building that has value is the DevOps team, and not the software, then you will see your team as a force multiplier and not a cost center. You will increase your investment in that team to realize exponential growth in the value of what they create. In short, if you are a SaaS company that is building software, you will be disrupted by a SaaS company that is building a team who creates engaging software.
Let’s compare costs
Note that the initial investment for all three approaches is equal. The difference appears when you reach a point in the product lifecycle where it is starting to generate some initial returns on investment. It may seem counterintuitive, but the most successful approach is actually the one with a built in assumption about increasing costs. When the value generated is starting to exceed the monthly DevOps costs is exactly when you have an important decision to make about which path you will follow.
Meaningful Business Outcomes
When you compare the relative value generated by your business, it becomes obvious that an Innovators mind-set is what drives the types of returns that entrepreneurs and investors are looking for.
In conclusion
Software development is an ongoing process that typically involves regular updates, maintenance, and improvements. As a result, the costs associated with it are ongoing and continuous, rather than being a one-time expense. This makes it more akin to other operational expenses, such as salaries, utilities, and office supplies, which are typically incurred on a regular basis. The value of software development can be realized in the short term, and should continue to grow rather than stagnate and depreciate like a capital expense.
Finally, the tax treatment of operational expenses is often more favorable than that of capital expenses. In many cases, operational expenses can be fully deducted in the year they are incurred, whereas capital expenses must be depreciated over a longer period of time. This can make operational expenses a more attractive option from a financial perspective.
If you need help building a team that can make your idea a reality, please reach out and schedule some time with me to discuss what we can accomplish together.