SaaS is battling the financing winter in technology

From the 100X peak levels of 2021, SaaS valuation multiples are now stabilizing at roughly 5X of revenue in the growth stage. Early-stage formulae have now altered from valuing companies at $15 million for $100,000 of recurring annual sales to valuing them at $5 million for $500,000 of recurring yearly revenue.

Venture capitalists (VCs) are showing more interest in SaaS (software as a service) companies as they are perceived to be running leaner businesses than subsidy-heavy segments like consumer tech and fintech, according to industry insiders, at a time when startup funding is losing steam and a focus on profitability has emerged.

At a time when startup funding is losing steam and a focus on profitability has emerged, venture capitalists (VCs) are taking more interest in SaaS (software as a service) companies as they are seen to be running leaner businesses than subsidy-heavy segments like consumer tech and fintech, say, industry insiders.

“A lot of the crossover funds are looking at SaaS as a hard asset. Big bets across all tech segments are not happening. But when it comes to SaaS, investors are at least ready to seriously consider a $100-million cheque even now,” said an investment banker.
“And these are people who were primarily interested in themes like consumer tech, edtech, and fintech just some time ago,” he added.

“The thing about SaaS is there is no fooling around about traction and cutting costs is relatively easier. The revenues start coming in early and that is what validates your product-market fit at an early stage,” said an analyst at one of the most prolific SaaS investors in the country.

“As such, I am seeing that investors who got over-indexed on a lot of edtech and D2C ideas last year are suddenly showing up to SaaS cap tables. They don’t necessarily understand SaaS well, but entrepreneurs are playing ball as a level of funding scarcity has kicked in,” he added.

Given that it saw 140 agreements in the first six months of the year, from January to June, the SaaS sector is already in the lead this year.