Eric Vishria – The Past, Present, and Future of SaaS and Software - [Invest Like the Best, EP.183]

Episode Summary

Executive Summary: Patrick O'Shaughnessy and Benchmark GP Eric Vishria map software’s evolution from Gen 1 SaaS to API-first, data-driven businesses, arguing that cloud, digital shifts, and automation are expanding TAMs, redefining moats, and reshaping how companies and investors compete.

Main Topics: Why SaaS valuations are so high (Priority: 5/5): Public SaaS multiples rose as growth, margins, and digital demand stayed strong despite the pandemic. Gen 1 SaaS (Priority: 5/5): Early SaaS improved delivery and economics by moving software to vendor-hosted, recurring models. Gen 2 SaaS (Priority: 5/5): The next wave won via easy adoption, micro-purchases, and lower-friction try-and-toss usage. API-first software (Priority: 5/5): Software is shifting from human-facing GUIs to machine-to-machine APIs as businesses get encoded in code. New moats and network effects (Priority: 4/5): Benchmarks, ecosystems, marketplaces, and cross-customer data may create the next defensibility layer. Scaling company culture and teams (Priority: 4/5): Great founders must move from unscalable discovery to repeatable management systems without losing creativity.

Key Arguments: Public SaaS rerated because multiples expanded; forecasts mostly stayed flat or were withdrawn. Cloud index companies averaged ~35% growth and ~7%–8% FCF margin, above the rule of 40. SaaS is a 'win-win': customers get better software with less overhead; vendors get compounding margins. COVID made digital existential, accelerating shifts in retail, banking, and entertainment. Gen 1 SaaS shifted delivery from customer-hosted CDs to vendor-hosted, recurring cloud software. Gen 2 SaaS reduced adoption friction, enabling SMB and mid-market software via low-cost trials. API businesses price on transactions, matching software-to-software usage rather than seats. Cross-customer data and benchmarks could become a new moat beyond isolated customer instances.

Data Points: Dow and S&P 500 YTD performance: down 5% to 10% - Compared with SaaS public markets during the pandemic NASDAQ YTD performance: up about 10% - Broad tech outperformed the market Bessemer Emerging Cloud Index YTD performance: up 50% - Proxy basket of public SaaS companies in 2020 Public SaaS forward revenue multiple: 10 to 11 times forward revenue - Approximate trading level discussed for software companies Average growth rate in cloud index: 35% - Underlying revenue growth for the index basket Average free cash flow margin in cloud index: 7% or 8% - Index profitability measure used in the discussion Cloud and SaaS penetration of total IT spend: 15-ish percent - Benchmark for current share of IT spending Traditional IT / legacy spend share: 85% - Estimated remaining spend outside cloud and SaaS E-commerce penetration pre-COVID: 15% or something like that - Used as an example of low penetration before acceleration Nike direct-to-consumer digital revenue: 30% - Latest quarterly mix cited as having reached a 2023 goal early Nike revised digital goal: 50% - New target after acceleration in digital demand SaaS index performance vs market: up 50% in a pandemic year - Illustrates investor enthusiasm despite macro weakness

Pivotal Quotes: "digital has gone from kind of nice to have or sidecar to, holy shit, if we don't get this right, we're done." — Eric Vishria: Explaining how COVID changed digital from optional to existential "Businesses have historically used software, but what's happening now is businesses are actually becoming encoded in software." — Eric Vishria: Defining the shift that makes APIs central "The customer gets good software, thoughtfully delivered, a relatively good experience." — Eric Vishria: Describing the customer-side benefit of SaaS

Implications: The next battleground is cross-system automation and data sharing, so founders should build for APIs, benchmarks, and ecosystem leverage from day one.