Nine Four Insights

SaaS: Gateway to FinTech Fund Flows

A few months ago, I wrote a blog post titled, “SaaS Enabled Marketplaces” where I talked about the power of SaaS and marketplaces and how the combination creates complex activity systems expanding addressable markets, expediting growth and strengthening competitive advantage over time. However, the combination of SaaS and marketplaces is not the only way to build complex activity systems. In this post, I build upon my previous blog and discuss how SaaS and payments and even lending represent other combinations contributing to the creation of deep activity systems leading to bigger addressable markets, expedited growth and greater differentiation.

SaaS enabled Marketplaces

SaaS based business models are attractive because they not only create dependable annuity revenue streams with high switching costs but also aggregate a customer base to layer additional models on top of. A common model layered on top of SaaS based businesses is a marketplace where the SaaS provider charges a fee, usually a percentage of gross merchandise value (“GMV”), upon the successful completion of a transaction between supply and demand. This is where it gets interesting. As more GMV is generated, suppliers need to buy more SaaS to manage growing demand. As suppliers buy more SaaS, that fuels more GMV growth. So, the alignment is clear: SaaS revenue grows as more transactions are successfully completed and vice versa. It is this virtuous flywheel effect that expands initial B2B SaaS addressable markets into B2B2C (or B2B2B) marketplace addressable markets whereby expediting revenue growth. And as the SaaS provider builds out its product suite horizontally, it becomes more and more critical to the operations of its B2B SaaS customers making its product harder and harder to be ripped out whereby increasing its competitive advantage.

Some of the most successful SaaS enabled marketplace examples include EventBrite, OpenTable and Shopify. More specifically, in 2004, Shopify started by selling a B2B SaaS website builder tool to offline SMB merchants. Shopify didn’t know it at the time, but by starting with a B2B SaaS tool, it unknowingly aggregated the supply side density needed to jumpstart its future online marketplace. Today, demand goes to Shopify’s online marketplace to search, discover, connect and transact with SMB merchants from all over the world. Selling B2B SaaS in the beginning is what allowed Shopify to evolve into the incredible SaaS enabled marketplace (B2B2C) it is today and a ~$40 billion market capitalization.

SaaS and Payments

However, marketplaces aren’t the only models that can be layered on top of B2B SaaS to expand addressable markets, expedite growth and strengthen competitive advantage. Companies such as are digitizing physical invoices and checks and replacing third-party payment processors with their own infrastructure rails to deliver and receive payments. Every time a B2B SaaS customer sends or receives a payment, charges a fee, usually a percentage of gross payment value (“GPV”). Controlling those fund flows is powerful because of the virality associated with sending and receiving payments. In order to receive a payment from a sender, the recipient needs to become a customer so existing customers essentially serve as a sales team. It is this combination of SaaS and payments which becomes deeply engrained in the daily critical operations of customers making it incredibly sticky and difficult to disrupt.

SaaS and Lending

And layering on additional opportunities doesn’t stop there. Because marketplaces and payments built on top of SaaS gives unique insight into a minimum number of transactions customers complete, the SaaS provider has the data necessary to potentially become a non-bank lender offering dynamic repayment plans to supply (ie SaaS customers). For example, Shopify merchants need to hire more employees, buy more equipment or rent more warehouse space to fulfill new, growing demand driven by Shopify SaaS tools and marketplace network effects. SaaS enabled marketplaces can even offer more flexible debt options and repayment plans than traditional, more rigid lenders. More specifically, the SaaS enabled marketplace allows suppliers to pay back more of the loan in busy months and less of the loan in slower months à la Shopify Capital (Square has a similar offering too called Square Capital). All that said, being a non-bank lender is a completely different business type and requires a lot of specific capital markets industry experience and knowledge. It’s really hard to make this jump, but it can certainly help strengthen existing customer loyalty, market position and competitive advantage.

At Nine Four Ventures we believe many opportunities exist to build successful SaaS enabled marketplaces particularly across home services and construction industries. If you’re a founder building a SaaS business and interested in marketplaces, please reach out!

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