After all, with over 666 solution providers out there, I should be in solution utopia, right?

In Part I, we said there are three big big reasons for this, they are people-centric, and they all start with F!

1. Founders
2. Financiers
3. Fashionistas

Then we went into detail as to why Founders are one of the three big reasons that the majority of ProcureTech firms don’t solve your problems. There were a host of reasons, but the major ones were lack of knowledge about the space, ego, and a reluctance to let either go.

However, founders are only the first part of the problem. The second part are the financiers. Right now, venture capital (VC) and private equity (PE) controls more of the space than they ever did, and while it could be a good thing, as there are many PE firms that know how to run a company responsibly and profitably for growth, some of them are only interested in a quick return (via growth and public exit or quick profit growth at any cost for a quick flip to a bigger PE firm), and most of them over invested in the firms they took a stake in during the last market frenzy. They often invested in valuations over 10X in bidding wars for companies that, frankly, weren’t all that differentiated from a dozen of their peers because they wanted into FinTech during COVID when everyone realized you had to be able to do business, and pay, online, and/or saw FinTech ProcureTech as the next big growth arena. While both are true, it’s almost impossible to grow a company more than 7X in their maximum investment time window, and that is ultimately one of the major reasons they are a major problem in the ProcureTech space right now.

The reality is that, even in SaaS (and B2B SaaS especially), you can’t responsibly sustain growth rates of more than 40% year-over-year. No SaaS is “flick-of-the-switch” no matter how much integration the provider claims to have out of the box, how easy they claim the initial data load will be, or how intuitive the User Interface is supposed to be.

Even the simplest module will likely take a few days to a few weeks to get integrated, populated, and configured, and then you will still have to provide training and support. And even if you have “one codebase”, you’re still not going to have “one instance”, and will have to roll those outdates out sequentially so that you can identify unexpected problems (due to unique configurations your developers didn’t expect) and fix them before you have a CrowdStrike scenario. Which means that for every X clients you add (where 1 < X < 10, typically, depending on how simple your implementation, integration, and support requirements really are), you’re going to have to add another FTE (in development, support, account management/client success, etc.), and guess what, training them and getting them up to speed not only takes precious resources, but takes time.

As a result, for most companies, the rate at which they can sustain growth and maintain the high customer service levels (which are critical for SaaS renewals, especially in tough economic times), is usually 30% to 50%, with most topping out around 40%. This says that, for a typical investment, after 3 years, if the company keeps prices steady, revenue will only be 2.75X, and after 5 years, 5.4X. For a top performer, we’re looking at 3.4X after 3 years and 7.6X after 5 years. Considering that there are very few PE funds that are happy to wait more than 5 years to make their investment back, it’s impossible for them to make more than a 7X return unless something changes in the equation.

There’s only four things that can change to affect the equation to the PE firm’s liking:

1. more/enhanced offerings (more modules, deeper functionality) that increases the price
2. (decreased) support levels (“do more with less”)
3. increase sales as-fast-as-possible to get (as close) to 2X growth year-over-year
4. increased pricing (charge more for the same functionality)

However, (a) requires more investment in development and product, and increases overhead, which decreases profit, and can take one to three years before you see a revenue increase. You can’t do (b) too fast, because as soon as support drops, customer satisfaction drops, and eventually customers get fed up, renewals drop, and revenue drops. So, you can really only do this in the year you plan to flip or go public. This means that most PE firms who over-invest will focus on (c) and/or (d).

Some PE firms will jack up the pre-sales and sales force to sell, sell, sell pursuing (c) and sometimes it will work. However, that will require their investments to quickly add support personnel for implementation, integration, and/or partner support, and if these new hires can’t be brought up to speed quick enough, we have the situation described in (b), which is undesirable. This just leaves (d) for the majority of PE firms that invest too much in their acquisitions.

Now, no one is going to suddenly pay twice as much as the last customer with no real increase in functionality or value, so for this to happen, they have to ramp up the hype, excitement, and marketing … to the max. And ensure that you are hit with a constant onslaught across all channels and that their investment is also hyped up by the big analyst firms and echoed by the Platinum/Diamond/Rhodium consulting and implementation partners. The goal: to make you think that it’s so much better than all its peers and worth that inflated price tag so you buy it and not a competitor’s product. When this marketing barrage works, it’s because you get an exaggerated view of the product, and believe it will solve a lot more of your problems, and return a lot more value, than it can actually be expected to. And this is another big reason why so many ProcureTechs don’t solve your problems.

However, it’s not the last reason!