SaaS

Not-For-Profit SaaS Research Report



By Catalyst Research Team

Background

This research note follows previous Catalyst experience with SaaS and digital marketing businesses and a handful of recent opportunities to invest in the not-for-profit software ecosystem. It highlights the business models of prominent providers of software produced for not-for-profit organizations.

The Market

  • The not-for-profit (“NFP”) sector represents the third largest workforce in the United States (following retail and manufacturing), spread across over one million U.S. organizations that received $373 billion in charitable contributions in 2015
    • 65k new U.S. NFP organizations launched in 2015
    • 3 million NFP organizations worldwide
    • Reporting public U.S. charities produced $1.7 trillion in revenue and $1.6 trillion in expenses in 2013 (latest data available) according to the Urban Institute
    • NFP revenue sources include fees for goods and services (47.5%), government including Medicare and Medicaid (32.5%), private charitable giving (13.3%), investments (4.8%), and other income (1.9%)

Total U.S. Giving

 ($ in Billions) 

  • NFP organizations suffer reduced productivity in fundraising and operations from using manual methods or software not tailored to NFP-specific needs, which include:
    • Seeking donations and managing donor relationships
    • Communicating mission and tracking impact
    • Complying with NFP-specific tax and compliance requirements
  • NFP software companies provide a wide range of NFP-tailored software, including:
    • Digital marketing, CRM, fundraising, ERP, financial software, payments, and analytics
  • In addition to charitable service organizations, software vendors target giving bodies such as foundations and corporate social responsibility departments
  • From a size perspective, the leader/elephant in the room is Blackbaud (NasdaqGS:BLKB), providing a broad range of software products focused primarily on enterprise NFP clients
    • 35k customers including nonprofits, private K-12 and higher ed institutions, healthcare organizations, foundations, and corporations
    • Significant greenfield opportunity remains within target verticals
      • The company estimates the market opportunity for its software and services to be $6.3 billion
    • 2017E revenue and EBITDA of $794.9 million (8.8% growth) and $189.9 million
    • $3.9 billion enterprise value, 4.9x 2017E revenue and 20.5x 2017E EBITDA
    • Highly acquisitive, spending over $650 million across five acquisitions since 2012

Blackbaud TAM and Penetration

 Source: Blackbaud company filings.

Selected Software Solutions

The below product types represent selected functions delivered by software vendors in the NFP ecosystem. Providers typically offer a combination of several of the below, such as CRM vendors offering email marketing and/or donations processing. Most provide analytics and reporting as part of a bundled product or as an upsell. See Blackbaud TAM and Penetration above for relative revenue opportunity by function.


Key Verticals
 

  • Arts & Culture – Museums and performing arts organizations; vertical-specific software manages patrons and donors appropriately and may offer ticketing and payment processing
    • $33.6 billion 2013 Arts & Culture revenue in the U.S. across 29k publicly reporting U.S. charitable organizations
    • Account for 9.9% of U.S. public reporting charitable organizations, 1.9% of revenues and 1.9% of expenses

Arts & Culture Donor Lifecycle

  • Healthcare Organizations – Hospitals, primary care facilities and others
    • Account for 12.9% of reporting public charities, but 59.1% of public charity revenues and 60.1% of expenses
  • K-12 & Higher Education – Private higher education institutions and K-12 schools; tailored solutions offer grant proposal automation and alumni engagement
    • 1% percent of public charity revenue and 16.6% percent of expenses
  • Religious Organizations – Churches, synagogues, temples, mosques, etc.
    • Account for 0.9% of public charity revenue and 0.8% of expenses
  • Other verticals include Human Services (12.4% of U.S. public charity revenues), International & Foreign Affairs (1.9%), Public & Social Benefit (5.8%), and Environment & Animals (1.0%)

Industry Trends

  • Adoption of SaaS tools to replace paper- and Excel-based solutions
    • A 2016 survey sponsored by Microsoft Philanthropies showed 100% of respondents use at least two cloud services, versus 80% in 2011
      • High levels of recent adoption and evaluations for constituent databases, project management, accounting, and data analysis
    • Blackbaud estimates that it is only ~10% penetrated in its target markets (see Blackbaud TAM and Penetration above) 
  • Rise of social media producing new funding sources and specific software demand
  • Online donations remain a small fraction of total donations (~10%) but are growing rapidly

Investment Thesis

We are looking for businesses with differentiated software offerings enabling NFP clients to more effectively raise money and execute their missions. Given the large number of solutions available, there may also be an opportunity to enhance a platform’s value proposition via combinations involving companies with complimentary offerings.

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