The 5 Keys to Unlock Hidden Value in PE-Backed SaaS Companies

What do the Goonies, Indiana Jones, and private equity investors have in common? A shared commitment to uncovering buried treasure – or, more specifically, an innate ability to identify, find, and unleash the power of hidden value.

For private equity investors, nowhere is this more critical than in the SaaS space.

Indeed, PE’s interest in SaaS companies began around 2012. Despite their lack of hard assets to lend against, the predictability of subscription-based recurring revenue models offered sponsors a reason to invest, even if the path to a return on that investment was unclear. In the decade since, realizing ROIC from SaaS-based investments has become formulaic. It’s detailed during diligence in a prescriptive 100-day go-forward plan that exploits all the traditional divers of value creation. But, given the combination of high valuations, companies created through numerous add-ons, and the acceleration of holding times, SaaS sponsors with an exit-ready mindset do more than just exploit those traditional drivers – they need to find (and then exploit) the 5 hidden keys of SaaS value. They are:

1. Building a Sophisticated RevOps Function:

Among all the buried treasures, there is, perhaps, none more valuable for growth-hacking SaaS companies than the creation of an appropriate RevOps function. This function creates and centralizes the finance, marketing, sales, and customer success processes, tools, and data-informed analytics required to optimize revenue and minimize leakage.

RevOps is particularly critical in a SaaS environment given its unique customer unit economics. SaaS-based companies need a sophisticated level of cross-functional collaboration related to acquisition costs, pipeline, and finance activities (commercial/contract and cash management, customer profitability, renewal pricing) in order to drive topline growth and valuation.

Given these nuanced interdependencies, SaaS companies demand a more centralized approach to the processes and data that support customer-related decisions. And herein lies the value creation treasure: too many companies ignore the centrality of the finance team to an effective RevOps function. SaaS companies should develop a finance-led function in which finance can either serve as the leader of a fully centralized approach, or as the main hub of a center-of-excellence framework.

Either way, by building an advanced RevOps function and transitioning finance’s role from that of enabler to leader, SaaS companies can recover substantial pockets of hidden value.

2. Cleansing Back-End Chaos:

PE’s involvement in the SaaS space has created the Frankenstein company – an entity that is the result of the original platform acquisition and multiple add-ons beyond that.

The default SaaS investment thesis has clearly determined that an active acquisition strategy is the best pathway toward driving value. But front-end acquisitions that drive topline growth can result in back-end disasters – the type of disasters that obscure data clarity and threaten to diminish exit valuation.

Without investing in a major ERP implementation, how can SaaS companies efficiently clean up their tech stack in order to access the reporting analytics required to 1) make in-real-time business decisions, and 2) paint a coherent picture for potential buyers at exit?

Here, the hidden treasure is the application of business intelligence to the back-end. A BI platform that incorporates data feeds from all key operational and financial data sets can power board-level SaaS metrics while also providing a deep-dive diagnostic tool for the finance team to quickly and efficiently understand shifts in metrics and financial performance. For sponsors, it can also, importantly, be the key toward converting Frankenstein optics into a compelling story and coveted company during an accelerated exit.

3. Creating a Consolidated Approach to Understand Costs and Reduce Contract Spend:

Back-end chaos is not the only result from regular rounds of SaaS add-ons – that Frankenstein-ing also contributes to a decentralization of company economics. It sounds like a simple problem, but its complications are significant.

Add-on decentralization creates a muddied picture of revenue forecasting and unit economics. Creating a consolidated approach enables the “bottom-up” view of fixed and variable costs required to calculate SaaS unit economics. Creating the tools and processes to enable that consolidation provides the visibility into per customer costs that SaaS companies need to better establish the minimum profitable price of cloud contracts in order to optimize revenue.

4. Achieving Development Velocity Excellence:

Just a few years ago, the typical PE hold period was 7-10 years. SaaS-specific sponsors have shrunk that hold period to fewer than 3. In order to align the product roadmap to the investment thesis, it’s therefore critical to achieve Development Velocity Excellence (DVE). DVE is the ability to accelerate development and product releases while concurrently minimizing costs, and it’s a wellspring of hidden value because it addresses inefficiencies all along the development timeline.

For example, SaaS companies who have achieved DVE will understand how to immediately capture requirements in a market, how to leverage their global footprint model to fast track delivery, and how to enable collaboration between the development, sales, go-to-market, operations, and customer success teams to understand market demands and customer pain points. Critically they will have also mastered the ‘buried treasure’ art of aligning the release of updated product roadmaps to periods of peak revenue generation and customer retention.

5. Transforming from SaaS to Platform:

Companies who have achieved DVE have effectively created the foundation for the next and ultimate phase of their value creation journey: the transition from SaaS to platform. This is the journey from a product to service to platform (the latter being an autonomous network which can leverage customer data and a community of users to create a ‘winner take all’ vehicle for multiple revenue streams).

The platformization of SaaS companies is the ultimate treasure trove, at least in terms of the hidden pockets of value it uncovers across the three stages of its platform maturation journey:

• Aggregating and Monetizing Data: This entails collecting all customer data and then aggregating and organizing that data for additional revenue opportunities. For example, creating a premium feature upgrade that provides customers with benchmarking information relative to peer users.
• Commercializing the Community: This entails enabling users to engage in commercial activity with each other directly on the platform in an online marketplace environment – ultimately driving revenue and enhancing platform stickiness.
• Upselling and Cross-selling: This entails articulating the benefits of multiple module platform use to those customers who currently only use the platform in a much more limited capacity. It also involves creating the ultimate upsell opportunity by enabling those limited use customers to purchase additional modules and premium features directly on the platform.

Building a sophisticated RevOps function, cleansing back-office chaos, consolidating economics to reduce contract spend, achieving Development Velocity Excellence, and then using that DVE as the foundation to transform from SaaS to Platform – these are the 5 keys to unlocking hidden value in SaaS-based companies. As the market reboots for growth, finding and leveraging these buried treasures that exist outside of the traditional value creation plan will become even more critical to successful exit.