The past three years have been pretty bleak for the SaaS market.
Growth is slowing, margins are taking a haircut, AI is forcing companies to rethink their business models...
And now predictions from top voices are casting some serious doubts on the future of SaaS in the near-term:
A little grim to start the year.
But let's dive deeper.
We pulled data from 74 public SaaS companies to break down the past three years, from 2022 to 2024.
You can download the complete spreadsheet here.
This chart compares the performance of our own SaaS Index against major benchmarks, the S&P 500 and Nasdaq NDXT.
2022 was tough. The market started to slightly pick up in 2023, largely driven by AI and the release of ChatGPT at the end of 2022.
2024 on the other hand, has left the space a lot more worried.
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Coatue recently highlighted that some SaaS unicorns were performing almost as poorly as smaller unprofitable tech companies, both falling far away from their COVID highs.
Beyond the speculation, the financial metrics aren't looking so great either.
From the 74 public SaaS companies we've analyzed, the average revenue growth dropped from 31.6% (2022) to 10.2% (TTM), with similar trends for the median.
The rule of 40 is also slipping. With both average and median metrics having declined, SaaS companies are giving up more profit to maintain growth.
A handful of performers have achieved a combined score above 40% and most of them haven't sustained it over the period.
Profitability pressure is also reflected in cash flow margins, falling from an average of 16.3% (2022) to 3.8% (TTM).
Overall, companies with steady free cash flow are more likely to attract investors in this current market.
On another note, SaaS companies were trading at about 10 times revenue or a 9.5x Price-to-Sale ratio (P/S ratio) in 2024, down from 13.2x in 2021.
The 2023 AI hype has clearly faded in 2024 and isn’t a major driver in the market right now, investors want to see AI improve operational efficiency and create innovative features for customers.
AI's long-term value is difficult to factor into short-term predictions. But it seems to be one of the key components that could shift the current SaaS growth trajectory over the next few years.
If we look at revenue per employee, we can get a better picture of how SaaS categories are converting operations into actual revenue.
Of course, these charts don't account for differences in cost structures, market sizes, pricing power etc. depending on the sector you're looking at.
But it's still a good indicator of the overall operational health across these industries.
The 2022 SaaS recession forced a lot of cost-cutting in Sales and Marketing, with GTM teams looking for smarter ways to drive revenue and lower their CAC.
On average, SG&A as a percentage of revenue is down 6.78% from 2022 to 2024 with the median dropping 8.15%.
The Sales & Marketing efficiency ratio shows how much revenue is generated for every dollar spent on sales and marketing.
And we can see SG&A efficiency going up following sales and marketing cost-cutting from 2022 to 2024.
We're seeing some improvement in venture deals with activity getting back to pre-pandemic levels.
Despite obvious challenges in the space the software category still represents the largest slice of the VC pie in 2024, making up over 40% of total deal counts.
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But startups and venture funds are still stuck with limited liquidity.
Without public markets or M&A opening up, the pressure on VC funding isn't going anywhere.
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In terms of performance metrics, the new report from High Alpha shows that growth rates are dropping significantly in 2024 with YOY rates dropping by 5-10% across the board.
Cost-cutting is ubiquitous with hiring slowing across all stages, S&M spend dropping by 3-6%, and R&D spend down by 6-13%.
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As we can see in the chart below, the Rule of 40 shows clear disparities between quartiles. Smaller firms have the potential for rapid growth while larger companies are trading off growth for stability.
ARR per employee across private startups has been trending up overall since 2022. The biggest bumps are happening in the early stages between <$1M and $5M ARR although we're seeing a dip for companies over $50M ARR.
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Startups seem to be spending less on GTM efforts in 2024. Early-stage businesses (<$1M ARR) have cut back S&M budgets by 3% on the median and larger businesses (> $50M ARR) by a significant 6% from 2023.
On the other hand, those transitioning into the scaling phase ($5-20M ARR) are ramping up S&M spending by 4%.
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Interesting to note that the $20-50M ARR range have kept their GTM spend flat, likely to preserve their valuation and position themselves for the next funding round.
The word on the street is SaaS companies are cutting spend to allocate more budget toward AI.
And after reading through a lot of recent material about Gen-AI, most sources agree that pretty much every software category will need an overhaul. The ones that hold off too long will eventually face pressure from customers looking for better options.
Time to pull out the crystal ball.
McKinsey sees Gen-AI (generative AI) driving massive growth in software with investments reaching $175 billion to $250 billion by 2027.
Here's what they think is most likely to happen:
Growth is expected to come naturally from new use cases. Natural language interfaces, automated workflows, and smarter data handling being some of the most popular examples.
The two most active users of Gen-AI according to McKinsey are IT, with assisted code creation and testing automation, and Customer Support with tools like chatbots and script analysis. They estimate that IT will account for nearly 40% of AI-related software spending with Customer Support making up about 15%.
Other areas like marketing, sales, legal, and HR are slower to adapt but they’re likely to catch up as the technology matures.
Looking at the High Alpha SaaS report, the growth rates of the AI-Native and Vertical SaaS categories are outpacing horizontal SaaS by nearly twice as much in the $5-20M ARR stages.
Speaking of Vertical SaaS, A16Z has recently published a post on a new opportunity they've called the long tail of Vertical SaaS.
The idea is that small and overlooked markets can now tap into new business opportunities that couldn't be unlocked before AI.
You can read more about it here:
The public and private SaaS markets are still looking fragile in 2025.
Growth is stalling waiting for signs of innovation to offset 3 years of decline while there's still a massive backlog of liquidity events stuck in limbo.
Overall, the lesson is pretty simple. If you're a SaaS startup:
The easy money days are gone, and if your startup was born in the ZIRP era, you'll likely got a lot more to prove now.
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