Thread by @JaredSleeper

Last week, I published my public SaaS investing framework. This is the second of five threads diving deeper into each of the factors: when is it right to worry about competition hurting scaled SaaS companies? 🧵👇

1/ Competitive risks are usually overstated for big SaaS companies. A software product is a constellation of functionality, and even products in the same category that nominally compete head to head can be different enough that they aren't perfect substitutes.

2/ Further, as I mentioned in the first thread, SaaS companies have lots of momentum at scale. It takes a big change for something external to knock them off of their trajectory. Simplistic "X will compete with Y" arguments are prohibitively reductive.

3/ For example, let's say $NET announces an endpoint security product that theoretically competes with $CRWD. Odds are, the product is immature when announced. It will take years of learning, iteration, and feature development for it to be at parity with where CRWD is today.

4/ Even then, $NET needs to build expertise at marketing and selling it, customer references, etc. If this is highly successful, it still will be years before the product is 1/10th $CRWD's size. In the meantime, $CRWD will be developing, innovating, expanding, entrenching.

5/ If this theoretical new product does extremely well, both as a product and commercially, it may still be too small to make a difference. $CRWD already has a smaller yet highly successful competitor in SentinelOne, but it is literally at all-time highs!

6/ So SaaS disruption is hard, but there must be examples, right? Of course. Most that come to mind are directly related to Microsoft bundling (Slack, Box/Dropbox, Tableau, etc.). Microsoft has unprecedented tools to market/sell certain types of products.

7/ I have a simple framework for evaluating Microsoft risk: in some areas, Microsoft's distribution levers are a huge advantage (user-friendly, simple products that fit well in bundles/live on desktops) and in others, less so (cutting edge security, traditional enterprise apps).

8/ What about start-ups disrupting incumbent SaaS vendors? In honesty, this is pretty rare- it isn't easy to think of examples. I'm hopeful that will change over time, but even today is still uncommon to see a SaaS startup gunning directly for an existing SaaS co.

9/ When I brainstormed case studies for this scenario, New Relic came to mind. $NEWR is a category-defining company. They'd tell you themselves that they were disrupted by Datadog and are taking steps to rectify that. Here's what the disruption looked like in Google Trends:

10/ Searches for New Relic flattened as Datadog went exponential. The all-time high for New Relic's share price was in the same month Datadog passed it on Google Trends. New Relic has nonetheless almost doubled revenue since🤯, but the business has unquestionably lost momentum.

11/ To be clear: Datadog wasn't a direct competitor to New Relic at first. It started in infrastructure monitoring and only added APM (NEWR's core product) in 2017. But still, there's a lesson here.

12/ The competitor needs to have real scale before it manifests. Datadog was as prominent as New Relic in Google searches (and, by an estimate I made awhile ago, about the same size in net new ARR) before New Relic actually felt its presence in a way that hurt the business.

13/ So, thinking through Microsoft's victims and New Relic as a case study, I worry about competition if:

14/ 1) The products are close to perfect substitutes. Think "Slack vs. Teams" for Global 2000 companies, "New Relic vs. Datadog" in full-stack observability, "Tableau vs. PowerBI", etc. We're looking for situations where there could (one day) be 80%+ competitive overlap.

15/ 1) (cont.) One way to get at this is to look at all deals won by the upstart product- in what share of them was the incumbent considered? If the answer is >80%, the products are on a collision course. If it's well less than 50%, that's less concerning.

16/ 2) The competitor has huge momentum. It could be Google searches, revenue, reviews you name it: I need to see a frightening exponential curve attached to the potential threat; most worrisomely one that will overtake the incumbent player in under a year if current trends hold.

17/ One last example here: here's what Shopify vs. Magento looked like in 2015. That's a scary, scary curve!! 😱😱

18/ And here's what happened next:

19/ If both of those two conditions are present (overlap and overtaking exponential growth), it's scary to be an investor in the incumbent company. The competitive pressure may not show up immediately, but any given year the risk of it causing a noticeable impact goes up.

20/ Happily, that's a pretty high bar and rarely met in software. Scaled public SaaS companies are just scarily hard to disrupt. If you have ideas for how that might eventually occur, I'm all ears.

21/ That's all for this thread! Next up, a discussion on obsolescence and then on to the fun stuff, the factors that drive software companies to meaningfully outperform expectations over time: TAM growth and product extensibility.