Software-as-a-Service (SaaS) startups are extremely popular with investors for a host of reasons. SaaS startups are extremely scalable because software has zero (or near-zero) marginal costs once developed, i.e. it costs virtually nothing to create another copy. Combining this scalability with subscription-based pricing results in a revenue model with high gross margins and predictable revenue (ignoring AI and data processing heavy models for now). In addition, many B2B SaaS startups are also fairly defensible because they benefit from high switching costs, i.e. those that are a “system of record” become “embedded” in the day-to-day operations of their customers’ businesses which makes it difficult for competitors to displace them.
So, much like network effect-based startups (although not to quite that extent), SaaS models are both scalable and defensible. They become even more attractive when combined with network effects to create greater structural advantages for startups. This does not include businesses like Udemy and ClassPass that simply use subscriptions to monetize marketplaces or content networks. Instead, my focus is on startups that genuinely combine SaaS products with a network or marketplace model. There are two broad ways of doing this