Peter Offinga's SaaS Article

Hi all,

In an effort to contribute to this awesome and invaluable board again, I am sharing a summary of a recent article by Peter Offringa, an experienced SaaS investor and former CTO who I learned about during the FinTwit Summit a few weeks ago. (By the way, a big shout out to Muji and StockNovice for doing amazing jobs during their presentations at the conference! They represented MF and Saul’s board extremely well and based on the feedback in the chatrooms gained more than a few new fans and Twitter followers. Bravo!)

I thought this article was relevant for this board because it:

  1. helps us understand what we should be looking for when doing fundamental analysis on new SaaS companies
  2. helps identify important themes and metrics that we should listen for during earnings calls
  3. provides good resources to help us learn more about the SaaS space

I’ve selected some of the more interesting and relevant quotes from the article and rearranged them a bit to make the ideas flow better. I’ve also added my own summary/commentary throughout the post for anyone who just wants to take a quick look at the main highlights. For a quicker read, just scroll through and look for the bold-faced lines or ones with a double asterisk ** at the end of each section.

Original Article Link:
Building for Developers, 3/31/2021

ABOUT THE AUTHOR: Peter Offringa (taken from his website)

- has been leading software engineering teams for Internet-based companies for 20 years
- served in VP of Engineering and CTO roles at a number of high traffic properties, ranging from growing start-ups to publicly traded companies
- has been responsible for all aspects of software engineering and delivery, including architecture, technology selection, development processes, testing and data center operations * has a computer science degree from Princeton University
- named inventor on three US patent applications in internet related technologies

** Peter has extremely impressive credentials overall… he knows of what he speaks!


92% of company reps surveyed (out of 2500 respondents) said COVID accelerated move to the cloud.

Pick and Shovel Play. The key point to this strategy is that investors don’t need to worry about which restaurant chain, gaming platform, specialized retailer or collaborative fitness app will win. They just need to look at the common software building blocks that all these digital experiences will require and invest in those providers.

I think porting offline experiences online is only stage one of what is broadly being called digital transformation. Enterprises are realizing that AI and large data sets can spawn whole new services that are more intelligent, personalized and convenient for the customer. They all require more software infrastructure to deliver the UI, communications, data processing, storage and monitoring.

** The cloud transformation/takeover is here to stay and isn’t just a COVID play. Invest in cloud companies that provide the picks and shovels for businesses to transform into fully integrated, cloud-based enterprises (e.g., data processing, storage, monitoring).


The title of my talk was inspired by Jeff Lawson’s new book “Ask your Developer”.

“Every industry is turning digital and every company needs the best software to win the hearts and minds of customers. The landscape has shifted from the classic build vs. buy question, to one of build vs. die.” JEFF LAWSON, CEO TWILIO

By observing how developers evaluate the software providers that cater to them, investors can gain signals to pick the probable winners in the software tooling and infrastructure space…investors can assemble a basket of stocks in companies that should see demand aggregated across all industries.

This rush to create new software experiences is dependent on the work of developers. They are at the heart of a company’s ability to compete in the future, not salespeople or physical store designers. This puts developers in a new position of influence within their companies.

** SaaS companies that cater to developers and provide tools that they want/need will become leaders because developers are increasingly important in determining how companies spend their technology/cloud budgets.


Outsourcing Candidates

Software services that are ideal for outsourcing represent functions that can be serviced through an API integration. Examples include things like payments (Stripe, Adyen), customer communications (Twilio, Bandwidth, Agora), authentication (Auth0/Okta) and agreements (DocuSign, Adobe Sign). It wouldn’t make sense for a development team to choose to build their own SMS distribution or payment processing.

The same argument applies to common software infrastructure components, like hosting, containers, data storage, content delivery and monitoring. A development team wouldn’t write a database from scratch or set up their own CDN, unless they felt they could outperform commercial alternatives or needed to address nuances unique to their application.

** Many of the companies that we champion on Saul’s board provide services that businesses will choose to outsource because they are time/resource/talent intensive. SaaS companies can do it better than enterprises could in-house.

Stickiness, Low churn, Familiarity

In many cases, [developers] may already have experience with a particular technology, like a database, monitoring service or payment provider. That experience usually designates that provider the default. This motion in itself makes these software providers very sticky and explains their low churn rates and high net expansion.

However, many developers are asked to provision a new service or software component… for these cases, it is useful to understand how developers generally perform their research to select a new tool. To answer this, Stack Overflow (a popular resource for developers) conducted a survey of developers about how they perform research on new software offerings.

Stack Overflow survey of 65,000 developers

77% Use a free trial to try out the product first
68% Ask developer colleagues for recommendations (social proof)
64% Visit developer communities like Stack Overflow

Providers that enable free trials and instant access to their services are most likely to get attention. Developers are often doing this work at 2am and don’t want to talk to a salesperson first. Therefore, the providers that offer free trials and frictionless onboarding will be included in the evaluation set. Those that throw up roadblocks get pushed to the back. After a developer has invested some time in a solution they like, they tend to stick to it, as there is a sunk learning cost.

The CTO will eventually engage with the preferred provider’s sales team to negotiate deal terms at scale, but this is normally after a selection has been made, not as the first step.

Cloudflare also has a thoughtful strategy around free versus paid offerings. Many of their basic services are sold through an initial free plan, with access to more extensive service levels and features on a paid plan. Cloudflare leadership claims they get many of their new product ideas by observing the activity of the free users. Also, free users will QA new features and provide feedback to improve the offering. Cloudflare has 30 free users for every 1 paying. New product offerings may drive free into paid.

** Developers usually prefer using software that they are familiar with and companies that offer free trials of their products or those that are already popular among developers are more likely to be considered when evaluating new alternatives. The familiarity, time commitment, and goodwill leads to lower churn rates. CTOs base their product decisions on feedback from their developers. Cloudflare offers free trials. The Stack Overflow website provides information about developer trends.


Finding evidence of real-world usage of software provider solutions by target customers can generate very rich signals for investors. StackShare lists the software components and services used by a particular company and is usually updated by a member of the engineering team.

Job Postings can be another insightful source of usage information. StackShare has relevant job descriptions, but investors can review other job sites as well, like Indeed and ZipRecruiter. I like reading through the job description to see what technologies are required or utilized by the hiring company. Many companies will describe their technology stack as part of the job description and include software skills that are requirements for the job.

DB-Engines is a great resource to see trends on data storage technologies. The rankings on that site are based on measured activity aggregated across many social channels. (Snowflake moved from rank #100 to #30 in the past year)

Podcasts about software development provide another useful source of information. My favorite is Software Engineering Daily. They often have guests who are mid-level managers at provider companies, supplying hints around strategy and execution at a more tactical level.

The quality and breadth of Developer outreach from the software provider is another important indicator of future growth. This is where the disruptive, progressive software providers excel and set themselves apart from legacy vendors and the hyperscalers. They often maintain high quality blogs, supplemented by active social media accounts on networks like Twitter.

Cloudflare has probably the best curated blog of the providers I follow. Another content source worth mentioning specific to Cloudflare is their video streaming channel called Cloudflare TV.

Developer Portals. Navigation, content structure and visual appeal must be considered on the same level as with any consumer app. The developer will quickly sense how serious the provider is about catering to the developer community, based on the quality of their developer portal.

As compared to the developer experience for Adobe Sign, I think DocuSign’s developer portal is more visually appealing, easier to navigate and comprehensive. The impact of this difference in developer portal usability is reflected by the relative amount of product usage driven by APIs between the two offerings, in which DocuSign’s API usage exceeds 60% of all agreements versus Adobe Sign hovering around 40%.

YouTube is another great source of signals around trends and activity for software companies. You can watch past presentations from leadership and engineers from provider companies at popular developer conferences, like O’Reilly’s Velocity conferences, QCon or RSA.

** The resources above provide great insight into various SaaS trends and the leading companies within this space.


After using signals from developers and community content to identify the leading software providers, we can look for certain properties and behaviors that will indicate the sustainability of their advantage over time. Some of the primary factors I examine are leadership, the velocity of product development, the addressable market and investment in R&D.


My preference in a software provider is that the company is founder led, and the founder has a technical background. Technical founders that are still in charge have two benefits. First, they understand the problem space. They don’t rely on a translation layer, like product management, to interpret customer feedback or competitive offerings. Second, they tend to attract other developers by building confidence that the engineering organization is competent.

Examples – Twilio, Datadog, Zoom, Okta founders all have tech, computer science background

Product Development

Probably the most important indicator of continued success is a software provider’s pace of product development. This can be a competitive advantage by itself as execution speed builds moat. Competitors who can’t execute as quickly will lose ground in platform breadth and capabilities comparisons. The software provider should be releasing major new product features quarterly at minimum, with some averaging significant product expansions every month or two.

Rapid, early releases can also collect customer feedback quickly that is bundled into a follow-on release. Most importantly, product development can drive TAM expansion. While some product releases provide necessary feature additions within existing product offerings, other releases create entirely new product lines that provide an incremental source of revenue.

As an example to emulate, Cloudflare has maintained a blistering product development pace. They seem to have a well-refined system for continuing to add new customers and extending spend over time. This combination provides plenty of room to expand into their projected $100B TAM and sustain high growth for many years.

R&D Growth

Another reliable indicator for investors to watch in software providers is headcount growth. This often correlates with revenue growth and can even be a leading indicator. Heavy investment in R&D spend will drive product development and TAM expansion, allowing the provider to support multiple product categories.

Datadog as an example – Employee count up 56% to 2185 in 2020; R&D up 74% in 2020

Datadog invested heavily in R&D during 2020, while other companies slowed down spending. R&D spend now exceeds S&M spend, making up about 30% of revenue. The result has been an acceleration of product additions. Datadog now has 10 separate product offerings with their own pricing. Before 2017, they had only one.

Other software providers that added headcount aggressively in 2020 include Twilio and Cloudflare.

** The most important factors in determining the sustainability of a SAAS company’s competitive advantage for are founder-led leadership with a technical/software background, fast-paced product development/launch, and heavy investment in R&D (headcount growth).


For investors, we have seen that analysts and the markets have historically underestimated how persistent this growth can be. If providers outperform expectations, that will generate upward pressure on stock prices and creates alpha for investors.

As an example, Cloudflarer evenue growth estimates for 2022 – 2023 anticipate growth in the low 30% range. Given Cloudflare’s TAM, small run rate and rapid product development cadence, I think they could deliver 40-50% annual growth for several years, continuing their fairly consistent revenue growth CAGR since 2017.

As it relates to competing with the hyperscalers (large existing companies) I think the leading independent providers have three primary advantages. First, they are neutral. Customer engineering teams generally want to avoid lock-in with a single hyperscalers’ custom solutions where possible. Second, extreme product focus allows the independents to more closely respond to the needs of their customers and iterate rapidly through release cycles. Finally, the leading independent providers are magnets for talent. These individuals are seeking opportunities for greater financial upside and career growth.

** The markets underestimate the CAGR for SaaS companies and this is what leads to long-term outperformance for these stocks. Up-and-coming SaaS companies have an advantage over larger existing enterprises that want to compete against them because they are neutral, more flexible and attentive to developer needs, and better able to attract the best engineering talent due to greater financial upside.

For my personal portfolio, I maintain a list of the software building block companies that I currently favor. Below is a list of the publicly-traded companies that provide developer building blocks and perform favorably on the indicators that I have outlined.


All of the companies delivered at least 50% revenue growth last quarter. I expect high revenue growth to continue – maybe not sustained at that level, but certainly above what analysts are modeling.



I will likely cycle in and out of them at various points, as they experience stages of momentum and consolidation. A primary indicator for a surge in stock price is revenue growth acceleration, during which I will tend to lean into a stock. In my mind, the underlying revenue growth and market potential hasn’t changed. If anything, demand will be greater going forward. That will eventually work itself back into the stock price.

** Peter is apparently very fond of many of this board’s favorite stocks and it might be interesting to look further into his watchlist stocks, particularly MongoDB because of it’s huge popularity among developers (40% Growth, 70% Gross Margins). Okta has been talked about more on this board and is already on many people’s radars. I don’t know much about Elastic and we’ve already discussed how Fastly is no bueno anymore.

Anyway, I hope folks find this information useful and I look forward to any feedback/observations you have about the article and Peter’s insights (I’m adding a less germane ”bonus section” below for anyone interested in how SaaS companies might integrate with blockchain/decentralized technologies like Ethereum). Thank you all for your continued engagement and sharing of infinite knowledge. Crowd-sourcing is our secret sauce…

  • Ceez


On the horizon are newer Web3 applications, which feature a fully decentralized application runtime that utilizes blockchain-based protocols for data storage and logic enforcement. The Ethereum web site provides a useful primer on the main differences between Web2 and Web3, at least in the context of Ethereum. Decentralized applications (referred to as dapps) feature back-end code running on a decentralized peer-to-peer network. More broadly, the philosophy of decentralization will likely create whole new business models that don’t mirror the enterprises making up the current Global 2000.

It is worth mentioning that many of the leading Web2 software services providers are monitoring the evolution of Web3 and blockchain-based networks.

As an example, DocuSign saw an opportunity early on and has built in support for blockchain. In 2015, they worked with Visa to create one of the first public prototypes for a blockchain based smart contract. DocuSign is currently a member of the Enterprise Ethereum Alliance, and in June 2018, announced an integration with the Ethereum blockchain for recording evidence of a DocuSigned agreement.

A similar argument can be made for Cloudflare. As an example of recent work, he mentioned they had been examining the function of Ethereum and blockchain-enabled networks, and what opportunities may exist to align these with Cloudflare’s basket of software services. With their product development momentum, developer centric motion and financial position, it wouldn’t be a stretch to see Cloudflare expand their offerings to address aspects of Web3 software infrastructure and tooling.

** Web3 is a blockchain-base version of the internet that leading SaaS companies will look to leverage as they attempt to keep up with technology trends and expand their product offerings. Personally, I think Ethereum is a promising platform and SaaS investors should keep an eye out for developments in the blockchain space.