Just like how software companies have a unique set of potential benefits, they also have a unique set of potential risks that you need to keep in mind 🥊

1️⃣ Because of the explosion in software over the last 25 years, there’s an app or website for basically anything you can think of.

New entrants face tough competition from Day 1 🌐

2️⃣ In order to build high quality software, software companies need to hire lots of engineers & designers, which can get really expensive as these are some of the highest paid professions 🤑

Even though COGS is generally low for software companies, the cost of actually building software can get really high, and companies might never make a profit if their payroll is too high 📊

3️⃣ SaaS companies are quite cyclical

In economic downturns, both businesses and consumers cut costs, and their first action item is often to reduce spending on software 📉

And as you learned earlier, market conditions can greatly affect SaaS companies' valuations, and therefore your investment value 😲

4️⃣ Lastly, as you might have imagined, for early-stage, unprofitable software companies, turning rapid growth into long-term profitability is a major challenge. 🌱

If you’re considering investing in an unprofitable SaaS, even if they’re growing fast, make sure you understand how they can eventually become profitable in the future.

As you evaluate SaaS companies as potential investments, it’s important to keep these risks in mind.

Good luck investing! 💰