Next wave of SaaS
In my last post, I shared why I believe Trello's exit means we are coming to the end of the first wave of SaaS (software as a service). Before 2010, majority of us got into SaaS business by creating consumer facing apps. These apps were mostly replacements for traditional desktop software.
Things have started to change in last 5-6 years. Computing has become ubiquitous. Software plays a part in almost every mundane task in our daily lives. We ask Alexa to buy our groceries. We don't hail taxis any more. Every business is transforming themselves to become a software business. This is what Marc Andreessen famously called as "software is eating the world".
Pre-2010 SaaS businesses leveraged the migration to the cloud. Today, People are always connected. There's little distinction between online and offline from a user's perspective. Cloud is the norm, rather than a buzzword.
This cloud native world has opened up some unique SaaS sectors. They don't have any incumbents to displace. They get to set their own pricing strategies. Their growth will be measured in different yardsticks.
Here are the 3 SaaS sectors I believe that will create the next unicorns (billion dollar exits).
Service Reliability and Incident Management
If you ever worked in any kind of cloud software, chances are pretty high that you had to wake up in the middle of a night to respond to a service disruption or a security incident. Users have high expectations when it comes to availability and reliability of cloud software. Most service level agreements (SLAs) promise to refund the fees if the service fails to achieve a certain uptime threshold.
In this context, most businesses have to invest heavily in service reliability (also known as site reliability - SRE) and incident management procedures. These happen in the form of automating the deployment & testing pipelines, setting up monitoring & alerts and preparing runbooks to handle incidents. These require non-trivial effort and co-ordination.
API services are not new, they did exist from the early SaaS days. Twilio is a great example of a successful API services company. But in a cloud-native economy, API services are becoming the equivalent of business processing outsourcing (BPO).
Given the rising engineering costs, it's becoming cost-effective for businesses to rent services rather than building them in-house. My favorite example in this sector is Auth0, which provides user authentication services. Every cloud business has to put a significant effort in building and managing the user authentication layer. This is not a core business feature, but also not something you can afford to give low priority. Auth0 takes away this burden. Also, they can offer services that are not feasible to build in-house like breached password detection.
Auth0's pricing model is interesting - rather than charging per API usage they charge based on the active users. This means onboarding few high growth customers can set the pace of their growth.
The effectiveness of a cloud business relies on how well you manage user engagement and resource utilization. Traditional business intelligence through querying production database and log ingestion is no longer sufficient in here. That's why there's a high demand for services that can go beyond to give holistic views, automated action flows, forecasting and anomaly detection.
This sector actually has so many players since there are no one size fit all solutions. However, in the product analytics space, Mixpanel seems to gain the critical mass. For resource usage tracking, I like what Datadog is doing and bullish of their future.
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