Understanding The Game in the Trenches
Software isn’t always the first topic discussed at the family dinner table, although sports, especially football, oftentimes are. Whether it’s the New England Patriots or the Green Bay Packers, professional football teams surprisingly share a lot of similarities with B2B SaaS companies.
These football teams have Owners (like company Shareholders), General Managers (similar to Board of Directors / Chairmen), Head Coaches (CEO’s), Coordinators (CFO’s, COO’s) and most importantly players. Most of you are probably familiar with who the Quarterback is in B2B SaaS: It’s the product, service or solution that is being offered.
Much like football fans, B2B SaaS investors are often enamored by the big plays these “Quarterbacks” make for their team: big sales quarters, attracting new hires, garnering funding rounds at high valuations, etc. Despite the product/QB getting so much notoriety, we need to keep in mind that they are just one position in an offense of 11 players.
The average football fan often overlooks this sentiment and subsequently places a premium on skill position players, like the quarterback. However, those who are true students of the game understand one integral principle that will never change: The game of football is won up-front with a strong offensive line. Put another way, a football team is only as good as its ability to protect their quarterback and block for their other skill players.
Over the past ten years, the US economy has been like a high-powered football offense. The bull market offense put an extraordinary amount of “points on the board.” And yes, it played some tough defenses along the way (i.e., COVID), but none like the recession analysts are predicting we’re about to see in the coming quarters. This one is going to take a team effort. Let’s look at each of the O-Line positions and how they relate to B2B SaaS.
The Left Tackle — Recurring Revenue
If you look at NFL payrolls by position, you’ll see the average salary for Quarterbacks at the very top. The next highest paid position on the field? The Left Tackle.
Recurring revenue is the left tackle to B2B SaaS companies — it protects the product’s “blindside”. There is an inherent trust that when the Quarterback drops back to pass, they can do their job because of the conviction they have in their Left Tackle’s ability to be there for them. CEO’s and entrepreneurs have this same trust in their recurring revenue being there when different factors emerge in front of their business (i.e., a market correction, new buyer trends, competitors, pricing pressures, etc.).
Recurring revenue coming in the door on a predictable basis means there is stability in the “offense.” When playing a tough defense like a recession, consistency and predictability is critical in planning for the future. The same way a company can forecast with significantly more certainty via recurring revenue, an offensive coordinator can gameplan much more effectively and with more certainty when their Left Tackle is dependable. If you know the “backside” (left) tackle is going to be able to block on runs to the left side, then you’ve just unlocked a huge advantage. As they say in football, reliability equals your ability.
The Left Guard — High Gross Margin
From a payroll perspective, the left guard is the cheapest position on the football field. This is highly beneficial as it gives a team the ability to re-invest at other more expensive positions.
The same goes for the benefit of high gross margins in SaaS. Gross margins are oftentimes associated with scalability — If there’s a physical product (e.g., consumer goods companies), then there’s likely a large chunk of costs that goes out the door with each and every sale. SaaS holds a key advantage in being able to produce and scale with high gross margin structures given the digital nature of offerings.
When cash is tight and buyers become stingier, a higher gross margin means that you’re able to invest in areas of the business to continue driving growth (i.e., sales, marketing, new product development).
Yes, a left guard is important but, to a certain extent, they won’t be able to drastically change the game. You spend money where it needs to be spent in order to continue pushing it in the right direction — this optionality that gross margin provides is incredibly important in driving SaaS growth in a tough environment and is an incredibly valuable asset for the industry as a bear market looms. Conversely, a low-gross-margin software product will have a tougher road ahead.
The Center — Composability
Vision is the key for centers in football. A common trend you’ll notice in watching almost any football game is seeing the center stand over the ball, look up, and point out the “Mike” Linebacker and any potential blitzing defenders.
Much like the center in football is the incorporation of AI and Machine Learning in SaaS. It comes back to the point about eliminating variables from the equation. Trend and event prediction, all the way to automation, provide key tools to anticipate and solve problems. The more information and prescriptive actions you can take with that data, the bigger the competitive advantage.
Additionally, the ability to develop new solutions has become much easier through the years in SaaS. One timely example are the products being released by Open AI (ChatGPT) and DeepMind (a Google Company) whereby the power of a multi-billion-dollar AI engine can be licensed to a software business for a specific use case. The key take-away with respect to composability comes down to the fact that software businesses can release updates more rapidly and efficiently than seen in other sectors such as automotive, CPG, healthcare, etc. Relying on third party APIs, open-source software and AI infrastructure are just a few other benefits of having a strong O-line in SaaS.
The Right Guard — Asset Light
An interior lineman must be nimble and quick — they’re oftentimes some of the most athletic linemen on the field! As the game of football has evolved, we’ve begun to see a trend of athletic guards who can pull around to the play side at high speeds — highly advantageous for run blocking and keeping momentum in a drive.
Similarly, the pacing and growth of SaaS companies can be attributed to a lack of substantial physical assets. The “asset-light” nature of software is one of the reasons even in the 2008 recession, we saw software companies grow despite harsh market conditions. Because a SaaS company doesn’t typically have major office leases, inventory, or capital expenditures, it allows them to be flexible and athletic in their operations.
All of this to say, like a right guard in football, nimbleness is highly valuable to a company wanting to minimize damage from a bear market, but also to a company wanting to continue growing at a relevantly rapid pace.
The Right Tackle — Digitization Trends
The value of a quality right tackle lies in its ability to move with the times. This is to say, a front-side (right) tackle must be able to evolve to the modern era of football — this modern era requires them to be able to compete with the Left Edge Rusher (their direct competition) who are oftentimes the highest paid players on a defense and bring a ginormous threat to any offense.
The right tackle for SaaS is the wave of digitalization. COVID-19 and the tailwinds of the past 36 months have induced a myriad of problems that can only be mediated with software. Concepts related to data, efficiency, automation, scalability, and operations have all necessitated businesses to adapt and improve through the use of digital technologies. B2B SaaS’s ability to propel business’s through digitization and automation, is invaluable.
There’s no question about it, the next 12 to 18 months will present unpredictable and challenging obstacles for the broader market environment. As industries maneuver through various headwinds this coming year, we continue to be confident in the ability of B2B SaaS to navigate and even thrive relative to other sectors. Software’s ability to scale predictability, drive operating leverage and innovate makes it a continued attractive area to invest. That said, next time you see SaaS make a big play, remember there’s an offensive line protecting that quarterback every step of the way…