It's done! Here's the final thread in my scaled SaaS investing framework series. I saved my favorite topic for last: how to recognize extensible products that will create durable growth, with a few famous case studies. 🧵👇
1/ There are two ways products can be extensible: they can be natively flexible or "centers of gravity" that eventually attract other features/functionality into their orbits. I'll give a case study for each.
2/ A natively flexible product is one that can be easily repurposed to solve other problems. The canonical example of this is ServiceNow ($NOW). Many aren't familiar with this story, but the initial concept behind ServiceNow was to build a cloud-based app development platform.
3/ In a prescient decision, the early team chose to focus on IT Services Management as a big, vulnerable market suited for the sort of workflow management platform they were building. This was so successful that by the IPO, $NOW was bucketed as an ITSM vendor.
4/ However, that initial product vision (and the intrinsic flexibility of being built around "enterprise workflows") gave ServiceNow a natural way to expand into new areas like security, HR, legal, and customer support. Here's a chart from 2018 showing the early stages of this:
5/ Today, 42% of net new ACV comes from non-IT segments, and even within IT the product has expanded dramatically into ops management, security, etc. It turns out that workflows are everywhere and despite being an "ITSM company", ServiceNow was always a workflow platform.
6/ Contrast this with another all-time great SaaS company. Workday and ServiceNow were peers when I started investing in SaaS in 2015: similar scales, growth, valuation. But $WDAY had a challenge- its expansion area, financials, was not that adjacent to the core HCM product.
7/ The key underlying concept for its ERP product was financial data, not people data. Rather than repurposing a platform, Workday needed to build almost an entirely new one. Even the buyer was a different C-level executive.
8/ Workday has made a ton of progress and financials is a slow burn category- I've no doubt it will be successful. Still, from the spring-2014 highs, Workday is up 3x vs. ServiceNow up 10x. $NOW's platform extensibility is the main factor behind this.
9/ One trick to check if a product is extensible is to see if there are any customers/users who "go rogue" and use a product off spec. You'll find, Smartsheet, Servicenow, Jira et al used in creative ways the designers could hardly have imagined.
10/ Aside from flexibility, another way a company can attract incremental functionality to its platform is by occupying a "center of gravity" in the constellation of data/compute services that are needed for a business to get work done.
11/ Just like wisps of matter in a void, some software features "attract" each other. The benefits of a common UI, the same underlying data model, the same customer support team, bundled pricing, etc. can outweigh the benefit of buying "best in breed" for each function.
12/ As an example, consider Snowflake. $SNOW becomes the central place where critical business data lives for its customers. This is the product-gravity equivalent of being a black hole. Everything from ETL to data manipulation tools to visualization is on the event horizon.
13/ You can almost see the gravity in this chart- not only have multiple $1bn+ companies been built on/around Snowflake, but the company has an incredible opportunity to build out incremental features/functionality at the edges.
14/ It has chosen to monetize its position by building products/services that encourage usage of the core platform. That's a smart play- it's always difficult to compete with free and there's huge room for the core to grow.
15/ There's also a sort of data gravity at play- once a company has a critical mass of its data on Snowflake, it makes more sense to add the rest. The data exchange takes this principle across companies. Maybe the world would be better off if most data lived on Snowflake! ❄️
16/ So how can investors recognize products that are centers of gravity? Some signs I look for:

1) The company owns a vertical ($VEEV)
2) Startups rush to build around the edges ($SNOW)
3) It occupies a key layer of the stack ($SHOP)
4) New modules are rapidly adopted ($DDOG)
17/ One question I love to ask to vet this out: "What's the next feature that you're excited to release?" followed by "What share of your customers is it a fit for?" If the product is a true center of gravity, the first answer will come quickly and the second will be "most."
18/ One final point- almost all scaled public software companies benefit from this to some degree, and they are not just pulling in existing software use cases but also absorbing tasks that were previously completed manually by people.
19/ As an industry, SaaS is uniquely well-positioned to supplement and eventually replace big chunks of knowledge work, leading to decades of above GDP growth (and less menial work for us!). This is the crux of why I expect the sector to be a bigger part of the economy over time.
20/ I'll flesh that out in a future thread, but first I'm going to take a stab at thinking through how crypto/DAOs will impact SaaS. Happy investing!

Note: None of this is investment advice. :)

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More from @JaredSleeper

9 Nov
A few weeks ago, I published my public SaaS framework. Here's the third of five threads diving deeper. When is it right to worry about obsolescence risk? I'll cover the "product model superiority" of SaaS and discuss which categories are vulnerable to obsolescence. 🧵👇
1/ First off, obsolescence is rarely a meaningful risk in SaaS. Investors often trumpet SaaS's "superior business model" given how much they love ratable recurring revenue. Even more important is the built-in anti-obsolescence- a sort of "product model superiority."
2/ A useful analogy here is comparing software to physical real estate. Traditionally, one might buy a corporate headquarters up-front (perpetual license!), build it out/move in (implementation!) and pay a recurring fee for the occasional update/repair (maintenance!).
Read 25 tweets
30 Oct
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.
Read 22 tweets
25 Oct
Yesterday, I posted an outline of my public SaaS framework. As promised, I'm going to go through each of the five factors in detail with a mini-case study. First up: what is TAM saturation and what are the warning signs for a SaaS company at scale? 🧵👇
1/ First, some words on TAM. These three letters are essential to SaaS investing and yet are often glossed over. Shockingly (to me at least), many public companies pitch themselves to investors using poorly supported estimates from third-party research reports. 🤯
2/ This is remarkably useless given the importance of the exercise. I remember when folks thought ServiceNow was "running out of TAM" because a big research firm showed it had >50% share of ITSM. As it kept growing, suddenly the whole category ~reaccelerated~ to higher growth😂🪄
Read 25 tweets
23 Oct
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.
Read 13 tweets
19 Jul
Some personal news: I'm pursuing an exciting new opp and on leave this summer. One upshot is I can rejoin fintwit. I've learned so much here (thanks @AltaFoxCapital , @jamesjho_ , @GavinSBaker , @DanRose999 et al) so I'm excited to jump in. My first🧵is on $ZM + $FIVN 👇
1/ I'll break down some category history, the nature of $ZM's competition with $MSFT, why I think the acquisition makes sense and why I expect Microsoft will respond with a move of its own.
2/ First, a recap. $ZM entered the pandemic with roughly 4m paid users (assumes $17/month ARPU). Today it has >20m (including me!) along with hundreds of millions of free users. The free Zoom product is robust and allows unlimited minutes in a meeting hosted by a paid user.
Read 23 tweets

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