Is SaaS dead?
Glorious days
SaaS has been a favorite of many investors for a long time. The simple reason was that growth was guaranteed and the valuation of the companies was relatively simple to compute. This helped the investors get more bang for the buck and thus investments poured into this category.
To justify the investments, SaaS companies invested in marketing and acquiring customers at a heavy cost. One of the assumptions when it comes to SaaS companies is that the acquisition cost will be overshadowed by the revenues over a period of a few months or even years. But the customer has to keep paying for that period to break even. And most B2B customers do not change their SaaS vendors easily. This has a lock mechanism in place which will create more revenue for the company.
Looking forward
Covid boosted the revenues of some companies while it negatively impacted other companies. One clear example would be Zoom, which had a blast over the Covid period. Other B2B software companies saw a decline in their growth rates. This raised the question of whether the SaaS glory days are over. Investments have indeed decreased in SaaS companies when compared to yesteryears. But not all are at a loss.
Demands vs Supply
The demand for the Saas software is still hugely high though the growth rate has decreased considerably. Many public companies have reported a decrease in their NRR (net retention rates) compared to the last year. NRR is the measure of how much of the revenue is sustained by each customer. 100% would mean that the customer pays the same amount for the current year compared to the previous. 110% would mean that the customer has increased paying 10% more compared to the last year. You get the gist. It is usually said that 110% NRR is optimal for SaaS companies which means that there is an upsell or cross-sell that is happening year on year.
The demand we could say (from the data), has decreased but it has not gone in the negative. So there is a growth but not the growth that was expected. And this is seen across the majority of public companies.
Reasons
The reasons could be multi-fold. For one, fear of recession is driving down budgets for software purchases. Another important reason could be that companies have finally found out that building things internally could solve a lot of their actual issues better than bringing in a vendor. This fact could be seen with many GCCs being set up in India which were earlier customers of the IT services big-wigs. This applies to generic B2B software SaaS companies as well.
Is it dead?
Of course not. SaaS is not dead. But SaaS is not a baby as well. There's some more growth to be had, but we think that SaaS has crossed over into the awkward teenager period where growth is less but there are more heartaches and rebellions.
