Why SaaS is bucking the venture slowdown

Investors like predictability, it turns out

As the global startup market digests a changing valuation environment and climate for venture investment, not every sector is taking the same amount of damage. One is indeed faring better than the rest.

It’s not the flashiest sector in startupland. Instead, it’s the tried-and-true software-as-a-service (SaaS) category that appears to be in the best shape to fend off a slowdown in private-market investment.


The Exchange explores startups, markets and money.

Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.


That SaaS startups are still managing to collect material venture capital totals in contrast to other sectors or business types may surprise you. After all, this column has covered the Q3 2021 SaaS valuation plateau and the late-2021 SaaS selloff all the way through the endless warning signs from the category to kick off 2022. This is the collection of startups that investors are still perhaps most comfortable backing?

Yep. But it makes some sense, as we’ll explore shortly. Before we get into the numbers, note that it was just over a week ago that The Exchange asked if the SaaS selloff is over, so there’s some indication that we could be reaching a local minimum when it comes to SaaS valuations.

Subscribe to TechCrunch+

That could keep the SaaS-is-fine trend afoot for some time, we reckon. Regardless, why are SaaS companies perhaps performing better than other cohorts? Their boringness is now a strength; their predictability is now an asset. And with SaaS valuations perhaps finding their trough, why wouldn’t investors still sitting on dry powder turn toward startups pursuing a model that generated a huge portion of technology wealth in the last decade?

SaaS slows, but far less than peers

As we reported yesterday, SaaS has resisted the slowdown better than we’d have expected when it comes to venture capital raised.

According to Carta data, SaaS startups using the platform raised a total of $1.04 billion in Series A deals, only 38% less than in Q4 2021 ($1.70 billion). For comparison, health tech Series A funding was down 64%, falling from $1.03 billion to $370 million.

The decline is even less pronounced for seed-stage SaaS deal-making, which “only” fell by 18% quarter on quarter. Seed deal volume for biotech was down 72% over the same period, which shows that SaaS is comparatively resisting the slowdown quite well, in a segment that is typically quite revealing of things to come.

The data is even more telling if you take into account that there were only 68 SaaS seed rounds on Carta last quarter, down from 149 in Q4 2021. In other words, there was only a slight dip in dollar volume despite a much lower number of deals — hinting at valuations that were more than holding up at that stage.

However, it is in later stages that we’d expect to see the faster impact of public markets woes. Are early-stage SaaS startups simply enjoying a grace period before the correction trickles down? Maybe. But data from Silicon Valley Bank suggests that their late-stage peers may also be spared the worst of the changing market’s damage.

Hybrid investors still around

There’s a data point that we found particularly relevant in SVB’s recent SaaS report. It is about hybrid investors — the likes of Accel, Coatue, D1, Insight and Tiger, which can invest at any stage, and both in private and public companies. According to SVB, several of them have used that flexibility to do fewer late-stage investments than previously — but not in SaaS.

Overall, SVB writes, “the share of Series D+ deals for hybrid investors has fallen more than 10 percentage points in 2022.” That means that as Tiger et al. surveyed their options, they mostly landed below Series C-level investments so far in 2022 — or pivoted back to investments in public concerns. However, an SVB chart shows that when looking only at SaaS, the share of late-stage deals (Series D and beyond) corresponding to hybrid investors has remained stable year on year.

Why is SaaS holding up?

At this juncture, it would be tempting to make a joke along the lines of “well, SaaS is boring and formulaic, just like VCs,” but that would be childish of us, so we’ll refrain.

Instead, let’s consider what SaaS really does have going for it: anticipated growth rates, predictable upsells and net churn, and a proven ability to handle market downturns. So, in short, SaaS is unsurprising. Mix in the fact that SaaS creates high-margin revenues, and it’s a recipe for continued venture capital interest when riskier — and more exciting — bets are less enticing.

Thinking more broadly, there is often a flight to quality among investors during periods of heightened market uncertainty. That means that when economic turbulence picks up, investors like to put their capital into duller, less risky, better-understood assets. What’s the startup equivalent of that? SaaS!

SaaS companies have been metricized to death over the years, allowing investors to check the vital signs of a possible investment with near-forensic accuracy. That level of precision breeds confidence, which, in turn, leads to higher invested dollar volume, we reckon.

SVB agrees, noting that SaaS companies, “due to strong enterprise demand and multi-year contracted revenues,” are partially insulated “from volatility.” Yep.