Businesses that make other businesses grow faster
A positive characteristic that we like to see in startups is an ability to make its customers grow faster. I like to think of these companies as “Velocity-as-a-Service” (VaaS) businesses.
“Velocity,” in the case of a company’s operations, is a catch-all term — it refers to selling faster, being stickier, hiring stronger and building better. Admittedly, under this broad definition of “velocity,” we could include a huge portion of B2B startups as VaaS companies in one way or another. But I’m reserving the term for companies and products that enhance velocity in an especially acute, clear and measurable way.
Some examples from the Aleph portfolio would include:
- Unit, unlocking best-in-class embedded financial services that would take years for companies to build and embed themselves, despite the products being clearly understood and defined
- Coralogix, streaming application, security and data insights directly out of logs, metrics or traces, thus saving developers and business users the ongoing manual work of searches, cross-references and wild goose chases
- Lawgeex, accelerating sales cycles and success by removing legal friction and processing time from revenue operations
VaaS businesses are not just about sales growth — they are about driving velocity across every function. And while much of VaaS involves automation, not all automation reaches the level of VaaS (at least, by my subjective measurements). If an infosec compliance tool can help a compliance stakeholder more easily deal with SOC-2, it’s a useful automation tool (or maybe just a workflow tool, in the case of the incumbents in this market). But if an infosec compliance OS with world-class architecture, like anecdotes, can free up man-years of engineering time on a consistent, ongoing basis, while making compliance a strategic tool of a business instead of an annual overhead — then it’s more of a VaaS offering and we can expect thoughtful companies to increasingly adopt it over time. By freeing up a critical set of limited engineering resources and compliance operators to focus on higher-order novel tasks, instead of repetitive work, VaaS customers position themselves to sell new, better and more expensive products in the long-term.
All of these companies allow their growth-minded customers to scale faster and better.
The ROI of VaaS
For the last number of years, the best thing a startup can do to finance their operations efficiently is to grow quickly. This is not just about revenue multiples — it’s about what growth does to the cost of cash. Velocity lowers a startup’s cost of cash, because higher velocity leads to higher enterprise value, which leads to a startup being able to raise more money for less dilution. In other words, when given the reasonable option to trade cash for a permanent speed boost, it makes financial sense to take it, not just operational sense.
It’s not a black and white relationship (you can grow faster and hit a bear market; or not grow substantially faster enough to impact what a future financing round eventually looks like), so a VaaS vendor cannot price themselves in an overly formulaic way to customers. But structurally, good growth-oriented companies should seek solutions for maintaining consistently high velocity, so they should be inclined to buy such a product, at the right price. They get a good cash return on that “investment,” as VaaS tends to make their cost of cash cheaper.
So in a sense, VaaS pays for itself in the form of long-term valuation. It makes sense for most startups and growth businesses to buy a good VaaS product, because the absence of long-term velocity can be extraordinarily expensive. For some time now, the public market has disproportionately rewarded growth. A tremendous business like WalkMe, with $200M of ARR and $300M of cash, but only 30% growth, is currently valued at less than a number of high-growth companies with <$10M of ARR. This might not be sustainable, but regardless — it shows the “true” cost of more moderate growth.
A Peek into the Future of VaaS
Is the attractiveness of VaaS a reasonable, long-term trend? I suspect that many of the underlying reasons that velocity is currently so appreciated are likely to be persistent:
- We are in a digital industrial revolution, so the “prizes for winning,” in the form of company valuations, are bigger.
- Markets are more global than ever, so growth can be generously interpreted as a sign of a higher “long-term revenue and profitability” than previously modeled.
- Talent is scarce and expensive, so automation must be sought (and automation is a key ingredient of VaaS).
- Markets are more competitive than ever, so it’s expensive to give years of room for new entrants to compete by growing slower than what is possible.
- It is easier to start companies than ever, so there are more businesses for whom VaaS is an attractive value prop, broadening the VaaS market.
This bodes well for VaaS as a company-building and investment strategy.
One would be remiss, however, to discuss the premium on top growth assets, and the corresponding value prop of VaaS, without discussing interest rates.
Interest rates have been close to zero for a long time. This leads to a premium price for growth assets — future cash flows have less of a discount rate applied to them when computing present value. When interest rates go up, the present value of future growth goes down. Since the value proposition of VaaS is about long-term growth, higher interest rates bring down the relative attractiveness of VaaS investments as a strategy, both for companies and investors. In other words: long-term growth is “worth less” in the present moment when interest rates are higher. So rising interest rates makes VaaS and VaaS investments less valuable.
High interest rates would certainly harm the VaaS value prop — the importance of velocity is related to the cheapness of money. But it wouldn’t completely wreck this value proposition. As long as people remain hopeful about the long-term growth prospects of enough of the current cohorts of startups and growth companies, at a meaningful enough scale, VaaS offerings should still see ample amounts of consistent customer demand.
The story of B2B SaaS in the last decade is the story of economic automation. This has happened on a macro level, as startups fight incumbents and build new markets with a higher rate of success than seen in the decades preceding. It is also happening on a micro-level within the companies themselves. And this is where VaaS plays a major role.
VaaS and B2B SaaS is not about delivering services to companies — fundamentally, it’s about automating the micro-functions of the companies/entities that themselves are automating the macro-functions of the global economy. In line with the famous Jeff Bezos comment that “your margin is my opportunity,” those startups that focus their limited cash resources on building novel innovations and applications versus reinventing the wheel (when “the wheel” is a quality, reasonably-priced SaaS offering) are often making a wise choice in a very competitive world.
So I think VaaS is here to stay. And we’ll keep investing in these sorts of businesses, while recommending to our entrepreneurs to spend money on these products to grow better and faster.