Pictured: Tomy Han, Partner at Volition Capital
Over the past few years, Volition Capital has been executing on our Hardware-Enabled SaaS thesis. From observing the success of Volition portfolio companies like ButterflyMX, HAAS Alert, HALOS, among others, to speaking with hundreds of founders, below is a set of best practices and characteristics that consistently define the strongest businesses in this category:
1. Hardware is the gateway – Leverage the hardware deployed at customer sites as a gateway to bring more data, automation, and AI to customers. It’s how software makes an impact in the physical world.
2. Hardware drives retention – The hardware piece is a moat. Having it deployed on customers’ sites drives higher Gross Revenue Retention (GRR) as the cost of replacing installed hardware is high.
3. Software drives expansion – Software, however, is the driver of Net Revenue Retention (NRR) and Gross Margin (GM%). The more software features and functionalities for upsell that are dependent on the hardware, the more powerful the business model becomes.
4. Gross margin drives enterprise value – GM% will be a key driver of enterprise value. It will dictate valuation multiples and the capital efficiency of the business. Hardware-Enabled SaaS businesses will proactively have to fight the perception from capital markets of being a hardware business.
5. Sell the hardware when possible – The cash flow benefits of selling the hardware alongside the SaaS piece compound over time. Not only does this improve inventory-related cash flows, but CAC payback periods also accelerate, enabling reinvestment back into the business. Make the hardware margins an advantage.
6. Keep an eye on hardware payback period – For companies giving away or leasing the hardware, if it takes more than 4-5 months to recover the cost of the hardware (on an accrual basis), it’s time to rethink the pricing or business model. This effectively adds to the CAC payback period.
7. Cash is king – Capital efficiency will be worse than a SaaS business because of the hardware inventory needs. Re-adjust KPIs to track unit economics and cash flow of the business versus comping to pure SaaS businesses. Get paid upfront, even if it means at a discount.
8. Keep hardware SKUs to a minimum – The more hardware SKUs, the more complicated the operations and more cash consumptive the business will be. A true Hardware-Enabled SaaS business should have plenty of room for upsell of software products, delivered via its hardware. If hardware SKU expansion is the only option, it is important to ask whether the business is really a hardware leasing business masking as Hardware-Enabled SaaS.
9. Build an implementation network – Hardware installation will become challenging at scale. Ensure the implementation playbook is being built in a channel/partner friendly way. Avoid becoming a services organization at scale.
What best practices would you add? If you’re a Hardware-Enabled SaaS founder that resonates with this piece, I would love to connect!
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