End of the first wave of SaaS

This week, Atlassian acquired Trello for $425M. This is a massive win for Trello considering they have raised only $10M in funding.

But I believe from an wider industry perspective this also confirms the end of the first wave of SaaS. First wave of SaaS was built on consumer facing web apps that took over the tasks done by desktop software or manual processes.

Basecamp, Xero, SurveyMonkey they all built businesses by replacing traditional tools and processes. Subscription based pricing model made them more attractive to consumers over purchasing licenses. Their grew on word of mouth and virality. For sales, instead of the top-down these companies followed a bottom up approach. Individual employees (mostly developers), contractors and freelancers became the early adopters. They took these tools to places they worked. Salesforce, Atlassian, and Shopify are some of the big winners of this wave.

T-shirts, stickers, sponsoring pizza for meetups and fancy developer conferences became more efficient sales channels than taking top-level executives to Michelin star restaurants or golf courses. There were no closing of deals. You were in a continuous hustle. If you can win more individual users, you will have a strong momentum. Some call this the flywheel model.

MAU (Monthly Active Users) became the cherished metric of the SaaS world. Analysts announced MAU is the one true metric that matters. Monthly Recurring Revenue (MRR), Life Time Value of a customer (LTV) are correlations of MAU. MAU is a lagging indicator of Net Promoter Score (NPS).

SaaS companies started to put their hearts and minds in pumping up the MAU. Some may take questionable approaches to derive their MAU numbers (i.e. on how they decide whether a user was active). Overall, MAU madness has resulted in more generous freemium offerings. This means majority of the active users are not actually paying for the product.

I believe this was the case for Trello as well. From two of thier blog posts (from Oct 2015 and Aug 2016) they seemed to have added closer to 6 million users within a 10 month period. That's impressive. But I don't believe many of those users were actually paying for the product. Their pricing doesn't offer a compelling reason to upgrade to a paid plan. You can create unlimited boards with the freemium offering. People use Trello for boards.

If majority of the users aren't paying, it won't be sustainable for Trello to operate as a standalone business in long term. But their impressive MAU numbers presents an attractive opportunity to someone like Atlassian, who has championed in cross-selling and up-selling. So I think the exit was a sensible decision.

Not everyone is lucky as Trello. Other consumer focused SaaS companies are also facing the perils of freemium model. We heard the struggles of GitHubDropbox and Evernote in the past 12 months. All of them got "unicorn" valuations (over $1 billion). I bet we would hear a similar story about Slack in the next 6 months.

Consumer focused SaaS had its hay days. But going forward it won't be a rosy path. We will rarely see a unicorn. The first wave of SaaS is fading.

Meanwhile, I see a new wave of SaaS emerging - cloud-native SaaS. Rather than trying to replace traditional processes these companies are solving problems that are unique in cloud economy. These companies would not have made sense in a world without social media, mobile or first wave of SaaS didn't happen. They will operate on different business models and metrics. Will share more on them in another post.