At Malpani Ventures, we have a special focus on B2B startups. One common conundrum we constantly face and see is whether the B2B startup should be a tech-based managed service or focus on becoming a SAAS product company.

Both have their pros and cons enumerated below:

• Managed services:
  • Pros:
    • Can be a steady source of recurring revenue
    • Can be customized to meet specific client needs
    • Often requires less initial investment than a SaaS product
  • Cons:
    • Can be difficult to scale
    • Requires a lot of direct client interaction
    • May not be as profitable in the long term due to low operating leverage

• SaaS (Software as a Service) product:
  • Pros:
    • Can be easily scaled
    • Has the potential for high profits
    • Can be sold to a global market
  • Cons:
    • Requires significant initial investment
    • Can be difficult to differentiate from competitors
    • May require a lot of ongoing development and maintenance

Should a founder initially start with managed service and then move to SAAS?

It can be a viable strategy for a founder to initially start with managed services and then move to a SaaS product. Starting with managed services can provide the founder with a steady source of revenue and the opportunity to gain a deeper understanding of the market and customer needs. This can then inform the development of a SaaS product that is tailored to meet the specific needs of the market. Additionally, starting with managed services can also help the founder to build a customer base and gain valuable industry connections that can be leveraged when launching a SaaS product.

However, it's important to note that this strategy also has its challenges, such as the need to manage multiple revenue streams and the risk of losing focus on the development of the SaaS product. The founder should also be aware that moving from Managed Services to SaaS usually requires significant investment in technology development and a different business model, therefore, the founder needs to have a clear plan and the resources to execute it.

Contrary to popular belief, both models work:

Managed services can work well in industries where businesses need customized solutions to meet specific needs, such as in IT, finance, and healthcare. For example, an IT-managed services provider can offer customized IT support and consulting services to small and medium-sized businesses that may not have the resources to maintain their own IT departments. 

SaaS, on the other hand, can work well in industries where businesses need a standardized solution that can be easily scaled, such as in software development, marketing, and project management. For example, a project management SaaS can be used by businesses of all sizes to manage projects, collaborate with teams, and track progress.

Managed services may not work well in a market where there is a lot of competition, or a high number of potential customers that require a low-cost, standardized solution. In this case, a SaaS model may be more appropriate, as it can be easily scaled and is generally more cost-effective than managed services.

On the other hand, SaaS may not work well in a market where the customers have specific needs that cannot be met by a standardized solution. In this case, a managed services model may be more appropriate, as it can be customized to meet the specific needs of each customer.

Summary:

It's important for the founder to carefully assess the market opportunity, the size of the customer base, and the potential for growth before choosing between a SaaS or managed services model. It's worth mentioning that the market is always changing and evolving, and smart startups constantly adapt to new trends and customer needs.