So it’s strange times in SaaS. On the one hand, many top leaders are growing at epic rates at scale:
- Databricks is growing 60% at $2.4 Billion in ARR
- Canva is growing 40% at $2.3 Billion in ARR.
- Klaviyo is growing 39% at almost $1 Billion in ARR
Been a rough week in SaaS. But not everyone is having such a tough time:
Canva growing 40% at $2.3B
Toast growing 32% at $1.3B
Samsara growing 39% at $1.1B
Klaviyo growing 42% at $750m
Monday growing 34% at $900m
Zscaler growing 32% at $2.2B— Jason ✨👾SaaStr.AI Sept 10-12✨ Lemkin (@jasonlk) June 1, 2024
But overall, SaaS is in a bit of a rut. The average public SaaS company is predicting growth below 20% for the first time, ever. And Salesforce is predicting single-digit growth going forward. Despite Gartner predicting overall, SaaS spend will grow 20% this year.
What’s going on? It may not be as clear as Twitter / LinkedIn think it is, but a few things are clearly happening:
- Tech customers remain in a cut, cut cycle. They are still looking to cut seats, cut spend, and still cut vendors in SaaS. Non-tech customers are as well, but it seems particularly acute with classic tech “B2B2B” buyers. Even after several rounds of cuts, they are still looking to cut more. I would have though we’d be past this by now, but we aren’t. Salesforce, Asana, ZoomInfo, and other leaders are clear it isn’t getting any easier for them yet. Salesforce has been clear even there, customers are looking to downsize spend.
- Budget being repurposed for AI. AI spend has to come from somewhere. It’s coming from even more cuts — to free up budget.
- Price increases and inflation eating up budgets. Existing vendors aggressively raised prices in 2023 and into 2024. This eats up budget.
- Post-ZIRP and high interest rates — maybe. To some extent. Does the downfall in SaaS multiples correlate with the rise of interest rates? For sure. But does this truly account for the stress in spend? Maybe. That’s not as clear. Nor is it magically clear that eventual cuts to interest rates will automatically lead to more spend.
- Deployment fatigue. Many enterprise are still clearly trying to just digest and deploy all the apps they bought from 2020-2022, often at unprecedented rates.
So a lot is going on.
But for years, SaaS and Cloud had at least one big thing going for it, even before the Covid-fueled boom: it traded at a premium to Nasdaq overall for years, especially from 2018 to early 2022.
You can see the premium here … and how SaaS and Cloud flipped to a discount to Nasdaq overall in Q2 of 2023 (QQQ tracks the Nasdaq 100):
The “SaaS Premium” made a lot of things easier. The job of VCs, as well as IPOs in general, is to beat Nasdaq. After all, if you can’t beat Nasdaq — then it’s far simpler to just invest in Nasdaq than invest in startups, scale-ups and IPOs.
And for years, you beat Nasdaq in SaaS. By a lot. So simply put, if you just invested in the best SaaS companies, then overall — you won. You could beat Nasdaq by 20% or even far more.
Now, it’s inverted. The average public SaaS and Cloud companies is underperforming Nasdaq overall. Some of this is the deceleration in growth discussed above. Some of it is the AI Boom fueling Nasdaq, especially Microsoft and Nvidia.
But at some level, it doesn’t matter why. If VCs can’t reliably beat Nasdaq, then their own investor, the Limited Partners, won’t give them more money past a certain point. They can just put it into Nasdaq.
So the SaaS Arbitrage for now at least, appears to be gone. It’s harder to win big investing in SaaS today than just investing in tech leaders. So be it. It’s a game of outliers in the end, anyway.
But realize the game on the field has changed. Just being even as good as the average SaaS public company isn’t good enough anymore, at least not to generate venture-type returns. You have to be materially better than the average public SaaS company.
That’s just a bigger hill to climb.
It’s Now Year 3 of the Venture Downturn. But In Some Ways, Investing is Back to Normal.
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Jason Lemkin, Khareem Sudlow
