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Tag: SaaS

Are Software Companies Safe from Present Economic Conditions & COVID-19?

What’s happening right now due to coronavirus is a supply-chain crisis. Businesses have buyers but are running out of goods to sell. Once the business profitability is affected due to decline in sales, they will let go some of their employees. This could affect purchasing power of some of the people creating a demand-side crisis.

The pandemic could also affect demand as more and more people stay at home to avoid the disease, they would be spending lesser money on certain products. In addition, their purchasing power could also be affected by additional health related bills. If COVID-19 lasts long enough, which at the moment it is showing signs of, there will be both supply-side and demand-side disruptions.

To improve the situation, Fed has cut down the interest rates. The goal is to sustain the economy by offering cheaper credit to businesses. But I’m wondering how can a supply-side disruption be fixed with cheaper credit. Moreover, cheaper credit could help larger businesses but small and medium sized businesses are likely to suffer the most.

While it is obvious that trade and e-commerce are largely affected, are software companies safe? Some of them might be but I do not believe that they will not have a cascading affect on them. After all, many software businesses are intended to solve real-world problems.

In my industry for example, many software businesses are Shopify apps or WordPress plugins. Shopify store owners use those apps to improve their selling experience. But if there are no sales, or no revenue, the store owners will obviously stop using those apps until situation changes.

Softwares that have nothing to do with commerce, may be relying on advertising as a source of revenue, or may be assisting industries that depend on advertising revenue. They aren’t safe either. Once the commerce is disrupted, the advertising is meant to be disturbed too. In my own case, my e-commerce stores are affected due to supply-chain crisis, but I’m also not spending on Facebook and Instagram ads to drive sales which means the advertising industry is taking the hit too.

As a publisher, I also have data to support this argument as CPMs are going down across the board. So any software business which is dependent on advertising or support customers who drive revenue from advertising will see disruption too.

All other kind of softwares may be safe from this cascading affect, but will still be dealing with users with lower purchasing power.

While pure software businesses are much better off than other businesses, I wouldn’t say that they will not be affected. However, it is still a better time to be running a software business than any kind of traditional business.

Where Are Valuations Heading For Internet Businesses And What Does It All Mean

I believe it’s getting tougher on the internet. All markets are getting more competitive. When I started out, it all seemed too easy. Sometimes I wonder if it’s just me getting older & inefficient or are internet businesses actually getting more competitive? The answer always lies in statistics, so I decided to dive in.

I started off my career by making content sites or blogs. There was a mega estate on desktop screens for ads, and the ad-blockers didn’t exist. It was so much easier to monetize blogs compared to now as the screens have gotten smaller and tech-savvy customers are using ad-blockers. With some browsers such as Brave designed to offer ad-blocking by default, it’s getting tougher to run a content site. Despite this trend, a blog would sell for 3x annual profit multiple now compared to 2008 where 1-2x was considered the norm. I sold my first blog in 2010 for a 1.3x multiple or for 16 months profit but the same blog would easily sell for much higher today.

In theory, such low valuation for an internet businesses appear absurd to me. It appears absurd because real-estate in comparison is sold for 15-20x annual earnings which is commonly known as price to rent ratio. This means, buyers of internet property are willing to pay only 15% of what they would pay for a real-estate if both generated similar earnings per month.

The reason why buyers do that is because they believe that real-estate would generate revenue for a longer time-period than internet businesses. But have internet businesses started generating revenue for longer time-period compared to 2008? If not, how have the valuations gone up? Is that because people trust internet businesses more and are willing to believe that they do and will last long enough.

This multiple, in my opinion, will keep going higher. For large softwares, where this multiple is the highest, it already hoovers around 10x. While small to medium softwares go for around 3.5x to 4.5x.

E-commerce, both stand-alone as well as FBA, also seem to be selling for 3.5x to 4.5x annual profits as long as they have minimum 1 year history.

Why are the multiples getting higher? I think this is a sign of trust in the internet businesses. More and more people realize, trust, and believe that internet and internet businesses are here to stay and hence they are willing to pay a higher price to acquire these. With more trust and better valuations, more people want to start internet businesses. I believe that the valuation multiple and competitiveness on the internet are directly proportional.

This is no more an open field. There is cut-throat competition, and it will keep getting harder to the point that economics will be nearly identical of what it is for offline businesses. Before that happens, I recommend that you hop on and enjoy the journey.

How Can You Be Wealthy?

Each person looks at this term differently. Probably for some, it means being able to afford Lamborghinis without a second thought. Or being able to stay in presidential suite in Las Vegas. Not for me. I don’t think of wealth like that. Because if you do think of it like that, then there’s always going to be someone ahead of you, there are always going to be things you can’t afford and this is a never ending cycle.

I define wealthy differently. For me, it’s the ability to pay all your bills on an automated basis, without working. In bills I generally include the unavoidable bills including rent, utilities, grocery, school, medical etc and some leeway for vacations, gifts, shopping etc.

I recommend you to find this numerical figure. It’s extremely important to do so. For example, you have calculated that your annual expense end to end is Rs 2 million. This means Rs 165,000 per month or approximately $1079 per month. If you can create a way to generate Rs 165,000 a month without working, you’re wealthy. You are financially free. You can actually retire, regardless of your age.

The second step is finding a way to acquire assets that generate $1079 a month. The mistake that most people make is they don’t wait to spend on luxuries. I want to spend on luxuries too, and I feel everyone should be able to do it. But not without following the right framework.

The right framework requires earning money, saving it, acquiring assets, generating income and spending that income. What most people do is earn money and spend it. Doing what most people do is a perfect way to work until you die. Doing what I recommend you to do is a perfect setup to retire between 5-15 years.

To generate $1079 per month, you can acquire (or build) SaaS/Blog/App for $32,370 (at 30X monthly multiple). If you’re more into “real assets” you can acquire property that does 5% per year for $258,960 or you could invest in stocks that generate annualized average 8% per year by investing $161,850 in stocks. Or you could do a mix of these things by diversifying and invest a total of $100,000 to generate $1079 per month.

It may sound tough, but it really isn’t. Especially if you’re young and have the ability to save more. All you have to do is have a clear goal: A) the numerical figure that you need every month, and B) the numerical figure required to invest to generate ‘A’ every month. Once you have these numbers, you need to see how much can you save each month, and calculate the number of months it’s going to take you to save until you’ve hit ‘B’. By doing so, you’ll have a set date for you to become wealthy.

I recommend you to read the book “Rich Dad, Poor Dad” by Robert Kiyosaki. It’s not the best finance book to read, but it is the best first finance book you should read.

Fiverr Is Awesome, But It Can Ruin Your Life

This blog post isn’t about Fiverr in general. It’s about freelancing, which I think is a great place to kick-start your internet journey from. I mentioned Fiverr over other platforms because it starts as low as $5 and that’s a great point to start from. But I’ll get back to this later.

Back Story

As already mentioned many times over, I started in 2002 with a homepage, a music site and a web-forum. Given that I didn’t have $50 as a teen to buy a domain or a hosting, it was difficult to get started. Many other young Pakistanis and people from other emerging countries face the same problem even today; investment. They don’t have money as little as $50 to start their internet business. Which is why I love Fiverr. As a kid, I didn’t know you could earn a living on the internet by providing services. I only knew about the display ads and running a website needed investment. That has changed drastically over the past many years.

Why I Love It

You can basically get started today if you know anything at all. If you know a certain language, you can translate. If you are a fluent speaker, you can provide voice-over services. If you can click, I think you’ll find a job for that too. For clicking thousands of times everyday. And I love all of this because it is the simplest way to get started. It requires no money, little skill, and you can start selling. This is why I love Fiverr.

I also love Fiverr because selling services is not just about having a skill. It’s also about marketing, sales, customer service and more. And running a gig prepares you for all of that. You learn everything about selling end to end. Along the way you can make some mistakes, and it’s all going to be fine. Your customer only pays very little and expects a few mistakes. He’s gonna be some-what patient with you. Fiverr teaches you a lot. I think the hardest part is making the first $100 online and Fiverr makes that easier. $1,000, $10,000 and beyond comes fairly easily compared to the first $100.

So if you don’t work online at the moment, go ahead and sign up at Fiverr straight away. But if you’re already working as a freelancer, keep reading.

Why I Hate It

As mentioned already, I think Fiverr is a nice starting point, but just that; a nice starting point. I believe in value creation over the long-term, passively or actively, but over the long-term. None of that happens on Fiverr, or any other freelancing platform unless of course you’re running an entire company or agency over the freelancing platform.

One of the greatest investors ever, Warren Buffett, says

If you don’t find a way to make money while you sleep, you will work until you die.

I believe in that. In making money while you sleep and it’s just not possible if you are only trading time against money. Time is limited and it is going to only make limited money for you and of course only while you’re awake and working.

Blogs, on the other hand, could provide long-term value. You could keep making money for many years even if you stop updating, or leave altogether. You could also sell it in the end for at least 20X your monthly profits. Software as a Service would also build long term value for you. Instead of providing your service individually and only once, you could be offering it to everyone again and again building not only nice monthly recurring revenue but a great value asset at the same time. Youtube channel, Instagram, Facebook Page; all of these can create long-term value. It doesn’t just have to be one of these things, but I highly encourage you to build a product or a user-base, no matter what kind.

Because I feel freelancing is great, but products are the shit!