B2B SaaS VCs identify the traits that define successful startups at Collision 2019

B2B SaaS VCs
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The variety of startups attending and exhibiting at Collision 2019 in Toronto this week might be dizzying for marketing, IT professionals and other potential buyers, but top venture capitalists said the B2B vendors with staying power will be vertically focused and architect their products in a very specific way.

A panel discussion at the event’s Venture stage on Wednesday featured Renee Yang Stewart, partner at Vista Equity Partners based in San Francisco. She said that while B2B software continues to offer opportunities for a broad base of enterprise needs, those that are purpose-built for a niche tend to have higher “win rates” and better economics that lead to longer-term success.

“You don’t want to go too small or concentrated like telco, but you also want to be careful about really large ones like health-care or education, where there is lots of competition and the possibility of an 800-pound gorilla,” she said. 

Of course, there are differences between what’s in the best interests of investors vs. B2B customers, but Stewart pointed out one area where they have a common interest: SaaS startups that target specific business units versus simply the IT department.

In some cases vendors have to continue to approach both, she said, but the firms that grow are usually those who can keep the power within a business unit to handle areas such as compliance. Today, she said, dealign with departments like IT or procurement are lengthening purchase cycles considerably past what used to be six to nine months of deliberation.

“We have situations (with our companies) where we’re spending six moths just in security review before we can get approved to move on,” she said.

Tomasz Tunguz, managing director at Redpoint Ventures based in Menlo Park, Calif., said his firm is also listening closely to B2B buyers who want something other than an all-cloud approach.

“We’re starting to her from enterprises that they’re looking for a separation between the app and the database,” he said, so that they can control what happens locally to meet compliance needs while taking advantages of fast product updates on the application layer.

B2B buyers may be at odds with VCs, on the other hand, in terms of which of their vendors get scooped up in M&A deals. Tunguz said the “premiere” B2B SaaS firms will still likely grow through IPO, but not all.

“There is a whole middle class of SaaS companies who aren’t going to be able to grow past a certain point,” he said. “(They are still) going to be profitable, and it’s an incredible rollup opportunity.”

Those “rollups,” or instances where a firm like Oracle acquires a slew of smaller firms, aren’t necessary bad for the industry, Stewart suggested. She pointed to Kazoo, an HR software firm within Equity Partner’s portfolio that has only become a viable “platform” for its customers by purchasing other firms.

“Scale is ultimately where you’re able to find efficiencies,” she said. “On the other hand, when they get swallowed up or rolled up, the innovation usually slows down and they aren’t able to be as agile, which means more opportunities for new players to come into the market. It creates a nice balance in the ecosystem.”

Not all B2B SaaS firms are vying to be bought, however. Hugo, which provides a quick and easy way for teams to take notes during meetings, is valued at least in part by its customers because of how it integrates with other tools such as Slack, Jira and Asana.

“Vendor neutrality allows us to integrate,” Hugo co-founder Darren Chait told B2B News Network. “The fact we’re not bundled and rolled up means that whenever or wherever teams show up to together, we can be there, too.”

Such firms are still of interest to VCs as much as they are customers, Tunguz said, admitting that his firm has regretted passing on firms such as Zendesk in their first found of financing.

“They’re all painful,” he said. “The wonderful part of it, and thing that gives me hope, is there is an incredible number of entrepreneurs continuing to create incredible businesses.”

Collision 2019 wraps up Thursday.

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Shane Schick

Shane Schick

Shane Schick is the Editor-in-Chief of B2B News Network. He is the former Editor-in-Chief of Marketing magazine and has also been Vice-President, Content & Community (Editor-in-Chief), at IT World Canada, a technology columnist with the Globe and Mail and was the founding editor of ITBusiness.ca. Shane has been recognized for journalistic excellence by the Canadian Advanced Technology Alliance and the Canadian Online Publishing Awards.