6 min - Jun 22, 2023

Move Over Enterprise SaaS, Here Comes Industrial SaaS

by Lauren Thibodeau

If there was a theme running through the McRock Capital 10th Digital Industrial Symposium held recently in Montréal, that was it. The enthusiasm was palpable; the sentiment of speakers and attendees was aligned that a sea change is here.

I’m seeing the wave first-hand working with both Enterprise SaaS companies, and Industrial Software companies, the latter falling into one of two categories:

  1. Transitioning to SaaS – Going from lengthy on-premise deployments and large upfront customer investments, to more nimble cloud deployments and a SaaS business model.
  2. Born in the Cloud – Industrial software that’s disrupting traditional industries and approaches, and embracing the way next gen industrial workers want to work.

While it’s impossible to summarize all the gems of insight shared at the McRock Capital Symposium, I’ve picked some standout highlights for companies of all sizes, and then specifically for startups.

For Companies of All Sizes

Dual Challenge

On a macro perspective, we’re facing a dual challenge of epic proportions. With the world population growing from 8B in 2023 to 9.7B by 2050 we’ll see growth of the middle and upper class of 40% by 2030 and the demands on consumption that brings, alongside the imperative for net-zero carbon emissions by 2050 with increased focus on circularity in the economy.

Aspen Technology President & CEO Antonio Pietri laid out sustainability pathways to address this dual challenge, and no surprise, industrial innovation is at the heart of it.

Sustainability And Profitability

We heard loud and clear that there’s no trade-off between sustainability and profitability. Being more sustainable leads to being more profitable. We can take inspiration here from mature companies and startups alike. BASF’s Irene Yang explained that BASF now publishes the carbon footprint for its 45,000 products to drive transparency and continue to focus on sustainability. And Miovision’s Adelaide Denison outlined how Miovision is leading the charge to write the industry spec for the environmental impact of reducing carbon from vehicle emissions, thanks to optimizing traffic flows. This will enable Miovision to accelerate adoption of their tech by making it possible for customers to take advantage of carbon offset credits.

Industrial Software Valuation

Industrial Software valuations have experienced smaller corrections than the average Enterprise SaaS company per Aspen Technology’s Sophie Xu. The average SaaS co was trading at about a 23x revenue multiple at the height of the pandemic, and is closer to 6x today. Industrial software was trading at about 15x multiple, and is now closer to 10x.

Industrial Software Panel L to R: Jessica Poliner of Relayr, John McEleney of Onshape/PTC, Sophia Xu of Aspen Technology, and Marie-Pierre Bélanger of Schneider Electric.

Industrial Workers

We’re at a significant changeover of workers on the shop floor and on industrial job sites – lifers are retiring, a process accelerated by Covid. The next generation of workers, even in complex process manufacturing environments, has a completely different expectation for the user experience at work. As we heard, they expect “2 clicks and an answer”. We need to raise our game big time in Industrial Software. There so much opportunity for innovation.

The good news is leaders in the space like PTC/Onshape’s John McEleney are seeing clear evidence of increased momentum and reduced resistance to change. Onshape, PTC’s Computer Aided Design (CAD) software that allows multiple users to access and work on a single manufacturing component design concurrently over the cloud, saw 60,000 users pre-Covid, and now has 2 Million users! While CAD software itself is not new, being able to collaborate in real time over the cloud on manufacturing designs is.

And not only are the expectations of next gen workers changing, there will just be less of them. We’ll be facing a real shortage of skilled industrial workers who want to become elevator technicians, fix sewer pipes, and more. So that means we need remaining workers to be 100x more productive by leveraging the power of generative AI.

While it’s possible, it won’t be without its challenges to overcome including:

    1. Updating regulations, for example, a mandate to do onsite inspections of elevators 2x per month even if there’s no issue, even if remote monitoring can be done as effectively.
    2. Building buy-in and trust in unionized environments where worker productivity needs are changing.

For Startups

Collaborate with Larger Companies

A number of mature companies have formalized ways to work with Digital Industrial startups after they have found product-market fit. Hexagon’s Milan Kocic founded the Hexagon Sixth Sense platform where startups bring energy and enthusiasm and help Hexagon get closer to their customers. In exchange, startups, generally post Series A or B stage, get a much larger market for their products and access to the scale and infrastructure a large company like Hexagon has.

Innovate in the AI Application Layer

Andrew Ng, co-founder and CEO of Landing AI, co-founder and Chairman of Coursera, and Founder and Lead, Google Brain (Deep Learning) project sees the application layer in the AI stack as the best one for startups to innovate in. Hardware, Infrastructure, and even Developer Tools have large incumbents and competing will be a challenge.

But there is ample room to innovate in the Application layer as Andrew sees it, solving the long tail of $5M problems as he calls them that weren’t cost effective to solve for previously. Things like food inspection, wheat harvesting, material grading, and more.

Consider Co-Innovation in AI

Looking to co-innovate in AI: Andrew outlined the process they use at Landing AI to build AI startups. Landing AI knows AI, then they recruit a Founder in Residence who is a deep domain expert to co-build with them. They look for concrete, well defined use cases and problems to solve for. One example is Bearing.ai where they worked with Dylan Keil. Dylan knew the large container shipping process deeply, and realized that the pen and paper and spreadsheet systems in place today were ripe for disruption. That said, he wasn’t an AI expert, so that’s where LandingAI’s expertise came in.

At the end of the Symposium, I was left energized about the growth trajectory of Industrial SaaS, the power of AI to help solve important industrial challenges that weren’t cost-effective to solve for before, and perhaps most importantly, the fact that leaders of the largest and most disruptive Industrial Software companies on the planet are demonstrating that sustainability equals profitability.

About McRock Capital

About SaaSCan

SaaSCan provides Customer Success and Customer Experience advisory services to help SaaS companies optimize their recurring revenue. SaaSCan also conducts SaaS metrics research and benchmarking. https://saascan.ca/

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