The global software market is expanding rapidly. According to data provided by Gartner, software spending is the most rapidly expanding area of IT and has seen a significant increase in its growth rate in recent years. If Gartner's predictions are correct, by 2024 the share of software in global IT spending could reach $XNUMX trillion.
Most startups produce software. And many startups today are approaching the market with the software-as-a-service (SaaS) model because the shift to the subscription business model is now a historical fact rather than an emerging trend. Therefore, SaaS startups do not fall into a specific category; instead, they share a business model approach rather than an industrial one. Venture capital is attracted by the many SaaS startups that focus on selling to enterprise customers, a group commonly known as enterprise SaaS.
Or at least they were until the latest explosion of companies and startups. Investment in SaaS startups has declined since then. However, the latest data from PitchBook suggests that although the trends shown in the charts have declined significantly of late, there are some positive signs for founders looking to raise funds to establish the next big enterprise software company.
Optimistic signs
Another tough year for enterprise SaaS venture investing. The number of enterprise SaaS venture deals fell 32% to 2.764 last year, while the value of those deals fell 33,3% to $72.900 billion, according to PitchBook global data. Even worse, SaaS startup results in 2023 were less than what the market saw in 2022 ($109.200 billion across 4.052 deals), but still more than what we saw in 2021 ($136.000 billion across 4.773 deals). ).
In the years 2017, 2018, 2019, and 2020, SaaS startups raised $21.900 billion, $45.000 billion, $55.100 billion, and $58.300 billion, respectively. This makes last year's $70+ billion investment in startups look positive by comparison.
Even more importantly, even though the number of commercial SaaS deals continued to decline through the end of 2023, the total dollars invested in them increased in the fourth quarter. Although the advances are minimal, they are not so significant as to be ignored. PitchBook Registered SaaS Enterprise Deals worth $12.500 billion in the third quarter of 2023, which increased to $14.000 billion in the fourth quarter of that same year. That represents a significant increase of 12% over a quarter during the holidays.
Q2023 2021 was the only quarter since Q2023 XNUMX that saw a gain in total enterprise SaaS investment; However, that quarter was so affected by the Microsoft-OpenAI deal that it's almost better to write it off. The fourth quarter of XNUMX is virtually unique after the latest venture boom and bust to reverse steady declines in capital paid out to SaaS companies.
Who increased that investment and what are they building now? Although the answer may surprise you, there are some nuances to examine.
Unexpected categories
Customer relationship management probably wouldn't be the most popular category in the final months of 2023. However, according to PitchBook, in the fourth quarter of 2023, CRM was the fastest growing SaaS business category:
Compared to the overall enterprise SaaS average, which increased 11,9%, customer relationship management (CRM) stood out with a strong quarter-over-quarter increase (up 72,5%). Supply chain management (SCM), with a 44,8% quarter-on-quarter increase, and knowledge management systems (KMS), with a 31,6% quarter-on-quarter increase, were other notable positives.
In CRM in its purest form, maintaining a database of customer information seems almost solved. That market is controlled by Salesforce, one of the first and certainly the most successful enterprise SaaS companies. Although this does not mean that it cannot be affected in the same way as all conventional operators, the CRM database has not changed much in the last 25 years since Salesforce launched its platform and introduced the SaaS model to the business world.
However, PitchBook's definition of CRM is a little broader than simply tracking customer data, including e-commerce, customer service, sales enablement, and marketing automation. From that point of view, CRM has a little more meaning.
But data applications could also be included, which are software that helps companies track, understand and manage large amounts of data. Given the importance of data for AI and large language models, which require large amounts of data to train them, this category, which PitchBook tracks under the name "analytics platforms«, has become especially crucial.
Therefore, although the PitchBook data does not match other sources, it is still surprising that AI-related data and investments did not fare better in the report, barely being mentioned, while supply chain management, management Knowledge and CRM led the figures for this quarter.
Actions, risks and strategies to build in the current market
Questions about specific categories aside, there are several likely reasons why software investment is picking up. According to several earnings reports from public software companies, the great quest for "efficiency" in cloud spending appears to be fading. That means that after losing, many software companies' net retention is likely improving due to customer parsimony and seeking to reduce operating expenses in a higher interest rate environment.
Last month, the Nasdaq, closed at a record level, indicating a recovery in the stock market. This increases the likelihood that startups will be sold at a price that venture investors like, which could affect their finances.
But with average revenue multiples of public software companies left as an unwelcome guest, startups are still in danger. If you stick to high single-digit or very low double-digit multiples when it comes time to exit, it's much harder to build a venture-backed software startup. Although venture capital is expensive in terms of capital, the venture model also encourages high spending to foster economic growth. When the value of that growth decreases, the entire process of raising and spending external funds is altered. It's much easier to make the risk math work when revenue is 20x than 10x or even 8x.
Startups are still in danger. To revive venture investing in enterprise SaaS, some rate cuts and a large initial public offering may be needed. However, today there are multiple reasons to show a more optimistic attitude than a few months ago. It's good news for founders hoping the good times will return.
