Understanding SaaS: Why the Pundits Have It Wrong

Excellent post about the SaaS business model from Andreessen Horowitz

Andreessen Horowitz

Tune into any cable network stock market channel and the airwaves resonate with one consistent theme: SaaS companies are simply too expensive. In fact, we might even be in a bubble!

The argument goes as follows — high revenue growth coupled with lack of profits means these businesses are fundamentally broken. Just as we saw in 1999-2000, investors’ willingness to pay for growth at any cost will end and many SaaS companies will be left behind.

a16z image: Andreessen Horowitz

But that line of reasoning conflates the lessons of the 1999-2000 tech bubble. The businesses that failed in the last tech bubble were valued on metrics that were both poor indicators of the health of the business (“eyeballs”, anyone?) and were nowhere to be found in generally accepted accounting principals (GAAP). In contrast, SaaS companies can be properly valued based on metrics that are both good indicators of financial health and…

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