Thread by @JaredSleeper

I took some time to write up my public SaaS framework and honed it down to three "negative factors" to avoid and two "positive factors" to seek. I'll post a separate thread on each in the weeks to come. For now, here's a working outline of the five things I watch for🧵👇

1/ The (now thoroughly understood) reality is that SaaS is a great business model and, at a certain scale, remarkably predictable. Net retention and sales efficiency change slowly in most cases, leading to a fairly narrow cone of uncertainty.

2/ Why? Most SaaS cos sell a broadly applicable product to a large, diverse customer base with a fairly predictable funnel. As a result, there are often no natural discontinuities in product-market fit or sales efficiency. What works today is likely to keep working, give or take.

3/ So the default in SaaS (ex-COVID) is that current trends will ~hold~, other than some modest deceleration here, a bit of margin expansion there, etc. First, let's think through what factors might drive underperformance relative to that trend. I've narrowed them down to three:

4/ 1) TAM Saturation. When a company dominates a segment and has climbed to the steep part of the S-curve but does not have a "next play" product or customer base established. Growth slows as the S-curve flattens, regardless of incremental S&M investment.

5/ 2) Competition. When a competitor starts winning enough deals to make a difference. For this to occur, it must be a direct substitute (i.e. very high consideration overlap on deals) and the alternative product should be experiencing rapid growth with a clear path to dominance.

6/ 3) Obsolescence. When the company's product becomes rapidly less relevant due to technological changes and accumulated tech debt. Again, for this to be an issue there has to be a powerful, ubiquitous and exponential trend that outstrips the company's ability to evolve.

7/ It's remarkable how few SaaS companies have suffered any of these three fates. I can think of only a few great examples for each. As a result, the vast majority of "at scale" SaaS companies have done well over time. It's been fun. Many egos have been inflated.🎈🎈

8/ Of course, the real fun happens when a company outperforms expectations dramatically over time. There are many examples of this in SaaS, some of them practically legendary at this point and great topics for future threads. Here are the two most common patterns I've seen:

9/ 1) The market the company serves is growing, underpinning its growth rate. For example, it's been a great decade to be selling tools to companies that sell online. As e-commerce GMV grows, so does the addressable market for any company enabling it.

10/ 2) The product proves more extensible than expected. Some products are, by nature, either flexible enough to serve many use-cases over time (more users!) or core enough that they naturally become the "center of gravity" for other functionality (more modules!).

11/ In summary, fundamentals-focused investing in public SaaS is a function of avoiding negative inflections (competition, saturation, obsolescence) while seeking drivers of more durable growth (TAM tailwinds, extensibility).

12/ In the threads to come, I'll dive deeper into each factor and then do my best to map all of this to SaaS valuations, which may have finally caught up to the quality of the business model. :)