VCs will learn to love franchises

If McDonalds were a software company it could take over the world

Now that tech-enabled service is dead and unfundable, VCs will learn to love franchises.

Tech-enabled services didn’t work in the last cycle because the businesses were too hard, complex, and expensive to run. Too many things have to go right and even then they didn’t out-earn the traditional incumbents (usually they did much worse!)

The managed marketplaces also didn’t work because of the whole “management” issue. Supporting massive customer support and supply-side recruitment teams makes it impossible to be wildly profitable. That’s just gussied up tech-enabled services.

The consensus answer is to sell vertical SaaS to those categories instead. But vertical SaaS often has structural issues selling into many categories and is increasingly going after thinly sliced, small end markets unlikely to produce venture outcomes. 

The obvious solution is franchising: McDonald’s sells inventory, demand, and operating capacity to its franchisees.

They don’t need to run all the locations or manage the staff. McDonald’s just needs to optimize the “McDonalds Platform.” 

And McD’s does it with >50% gross and >25% net margins!

Imagine a similar setup that replaces fries with software. 

For startup founders able to develop operating playbooks and demand generation, franchising will be a consistently better business model in more categories than pure play vertical SaaS.

Most vertical SaaS businesses can’t monetize well enough to create big outcomes in small markets. Vertical SaaS companies usually enter the market monetizing at ≈1-3% of their customers’ gross receipts.

Franchises on the other hand start at an industry standard 5% of GMV. And a more software focused franchisor can roll all the same ACV-expanding menu of products like charge cards, expense management, lending, payroll processing, etc.

This is how venture-backed startups will finally break into categories like professional services, home services, four-walls retail, etc. with true software margins.