Companies are VCs

Over the past ten years, b2b SAAS businesses have exploded across private and public markets. B2B stands for “business 2 business.” These are companies selling “enterprise software” to other enterprises. SAAS stands for “software as a service,” generally powered by a subscription revenue model. If executed correctly (which is hard), these businesses can reach extreme scale under high high margins.

Today, I explore the idea that B2b SAAS businesses are really venture capital (VC) firms, in many ways.

I make this case, having worked at / created many enterprise software products as well as spent some time interning at VCs. But even having done both, this was not an obvious comparison to make.

The analogy becomes most clear when you look at the incentives of both parties.

Ben Thompson – from Stratechery – does a great job doing this in his essay titled “The Amazon IPO.”

From the venture perspective, partners are incentivized to invest in companies that yield high returns. While there are a number of thesis around “how” to deliver shareholder value to their stakeholders, VCs, in general, have the job of picking the most promising/high potential founders/teams/products. Why? They are incentivized (via commission) to aim for high returns. They invest in young teams before they have much traction (sometimes) so they can get higher returns long term. That is the overly simplified basics of VC.

Now B2B SAAS products, take Mailchimp or AWS for example, try to deliver high returns as well (like any company). They do this by aligning incentives with their customers and effectively onboarding larger and larger enterprises. To accomplish this, though, Mailchimp/AWS “invest” in startups by giving out small free credits. These credits are micro-investments in potentially promising companies. When/if the companies grow, then the b2b business does really well (as they have scaled alongside their users).

Ben says it more elegantly than me:

This is great from Amazon’s perspective: the company effectively has a stake in nearly every significant startup, and for free; if the company succeeds, Amazon will be paid, handsomely, and if they fail, well, Amazon covered their own costs of providing cloud services along the way.

And that is how B2B can be venture capital.