SaaS is dead, long live SaaS
Software as a service exists as an arbitrage of subscription costs vs engineering costs. Obviously AI changes the math. The time for an internal team to build a feature has decreased dramatically and will continue to drop. From the other front, vertical SaaS AI startups are similarly fast to launch, and markets get crowded very quickly.
Now, I am sure there will be winners here. Cue Jeremy Irons in Margin Call - just be first - is there a big, defensible, long-term opportunity to be had today? There’s two interesting B2B approaches I see.
The first is a Palantir-style core plus implementation - functionally a consulting business with some software involved, but also called ‘tech-enabled services.’ Replace software as a service with … service as a service?
A core team of engineers builds scalable abstractions, while an implementation engineer parachutes into a (usually non tech) company and helps do integration. This is a heavier touch approach than traditional SaaS sales, but it enables selling to more legacy businesses. Tight integration into the business also means that the product is stickier and harder to eventually replace. Companies doing this include Decagon and Sierra for customer support, and a number of stealth startups I’ve met.
The second is what I call ‘turnkey physical world software.’ Just add physical property and get a highly profitable business (in theory).
Examples are Metropolis and PingPod, both of which built camera tracking technology for tracking people walking or driving into a space, enabling operators to manage the space cheaply, with very few human operators. PingPod started off with their own rental spaces for ping pong and moved into selling their tech to others, while Metropolis started off selling the camera tech and acquired a large number of traditional parking lots - becoming the largest parking network and operator in North America. To abstract out a bit further, I’d also put Moxie in this category, which enables nurses to easily launch their own medspa.
I particularly like this second category because you’re selling the dream of entrepreneurship and because they engage with the physical world and its limitations. Crypto and AR/VR were big bets that the future of the economy would be digital - that we'd transcend the surly bonds of Earth (poem related). Perhaps this will still one day play out. Until then, physical businesses enjoy the advantages of scarcity.
Both categories should have lower long-term margins than software companies have enjoyed traditionally. The tradeoff is that they are likely more durable in the long run and harder to enter. I’m talking book a little as a founder, but it’s not obvious that long-term multiples need to come down.
The game is much harder now, doing another verticalized SaaS without any real moats except point solution with desperate GTM is not likely to present good EV. I pity YC founders, you simply cannot build a defensible business in a couple weeks of customer calls and pivots. Tincans at least made a bet that building a custom model would be defensible. I chose to give myself the best chance of winning, rather than simply stalling out failure.
The path forward is unclear. But this is also where real fortunes get made: when opportunities are mispriced, first movers can take advantage of the inefficiency and consolidate for efficiency of scale.
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Oh! I have slipped the surly bonds of Earth
And danced the skies on laughter-silvered wings;
Sunward I've climbed, and joined the tumbling mirth
of sun-split clouds,—and done a hundred things
You have not dreamed of—wheeled and soared and swung
High in the sunlit silence. Hov'ring there,
I've chased the shouting wind along, and flung
My eager craft through footless halls of air ....
Up, up the long, delirious, burning blue
I've topped the wind-swept heights with easy grace
Where never lark, or even eagle flew—
And, while with silent lifting mind I've trod
The high untrespassed sanctity of space,
Put out my hand, and touched the face of God.
(High Flight, by John Gillespie Magee Jr)