The Hottest Sector in Venture Capital

The Hottest Sector in Venture Capital
By Adam Sharp
Date September 22, 2020

Generally speaking, I don’t believe that online startup investors should have a set-in-stone investment thesis.

Since deals come to us, we have to invest in the most attractive ones that come along. If we stick to a certain industry or category, we screen out potentially good investments.

However, I do always take a close look at enterprise software and software-as-a-service (SaaS) deals. These are probably the most popular deal type in venture capital today. And for good reason. SaaS is a very attractive business model. It has high profit margins and a very “sticky” retention rate (customers tend to stick around for a long time). 

But while I always check out active enterprise software/SaaS deals,  I rarely find ones worth investing in. Because these deals are so popular,  the vast majority of great ones get snapped up by top-tier VC firms. And they never make it to a platform like AngelList.

But there are always exceptions. The best enterprise software/SaaS deal that I’ve invested in is probably Aircall. I found it through FundersClub — which had previously invested in the company. Because of that prior investment, FundersClub had “pro rata” rights (the right to invest in future rounds). 

In my experience, finding great enterprise software deals is often the result of “pro rata” situations like that. So if you can find a syndicate on AngelList that has pro-rata — or a deal like this on FundersClub — and the numbers look good, I say go for it.

But just be aware that great software deals are few and far between. Out of my 10 most successful deals, only one is an enterprise SaaS. And out of the 100+ startups I’ve invested in, only a small number (4 or 5) have been enterprise SaaS. Yes, these deals are very attractive. But they’re also very rare.

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