Work software is seeing significant investments from VCs, reflecting the continued trend toward digital transformation and remote work.
In its Road to Next report released Tuesday, Deloitte found that even though overall investment in work software companies is down from the lofty heights it reached in 2021, the segment still accounted for 15% of total expansion-stage deal value in 2022 (per PitchBook). Venture-growth work software deals remained steady, barely dipping from $35.4 million in 2021 to $35 million in 2022.
“As market trends remain relatively dynamic, qualitative data shows the appetite for innovation among workforces is strong,” the Deloitte co-authors wrote.
The drivers of the resilience are “numerous,” according to the co-authors, but they highlight a few of the major ones in the report.
First, VCs haven’t given up on the idea, right or wrong, that work software can enhance productivity to increase overall return on investment — an attractive prospect during a period of economic malaise.
Second, poor macroeconomics — plus destabilizing recent events like the Silicon Valley Bank collapse — have encouraged VCs to turn toward more sustainable “growth trajectories,” which tend to be found among longer-lasting, ironclad business-to-business contracts for software tool suites.
There’s truth to that second point.
In an IDC poll earlier this year, 62% of corporate tech managers in the U.S. said that tech spending at their companies would be the same or increase compared with 2022. That’s despite the fact that 82% of them said that they expected a recession this year.
Gartner presented similar findings in a January forecast. The firm projected that worldwide enterprise spending on software would grow 9.3%, reaching nearly $1 trillion by the end of the year.
Tellingly, 2022 saw the most completed work software startup-related rounds in the $5 million to $10 million range in history, according to PitchBook (cited by Deloitte). And the median exit size via acquisition for work software companies in 2022 was $100 million.
“Work software providers are revamping their product and service offerings and reorganizing along novel lines that may turn out to be the workplace, workforce, organizational structure and operating models better suited for the future, thus enhancing overall productivity and well-being,” the Deloitte co-authors wrote.
But while the overall work software market remains strong, not every category is performing equally well.
According to recent data from Carta, in Q4 2022, investors logged 316 deals and invested $4.3 billion in SaaS deals on the Carta platform. That represented an 82% year-over-year drop in capital invested and a 61% year-over-year drop in deal count for the sector. It was also the fourth consecutive quarterly decline in total rounds and capital invested for SaaS companies on Carta.
The depression in SaaS investments might be related to the realization that businesses are wasting or underutilizing their SaaS licenses and are, accordingly, beginning to make cuts.
Zylo’s SaaS Management Index Report, which was released last week, suggests that the average organization wastes $17 million in unused SaaS licenses every year. The report goes on to say that enterprises — companies with over 10,000 employees — spend more than $224 million on SaaS but only use half of their SaaS licenses.
In a sign of bright news, SaaS valuations don’t appear to have shifted dramatically over the past few months, according to the aforementioned Carta data. The average pre-money valuation for a seed SaaS deal in Q4 2022 was $13 million, down just $1 million (-7.7%) year over year.
So what about the other subcategories of work software?
HR software — which can be, but doesn’t necessarily have to be, SaaS — appears to be doing exceptionally well. According to one source, funding for HR tech hit $14.2 billion across 387 deals, which equates to an average deal size of $41 million.
Given the perennial demand for onboarding solutions, that’s not terribly surprising. Companies responding to a January poll from WorkTech, commissioned by Greenhouse, said that they planned to increase their hiring work tech budgets by about 47%, with 94% expecting to increase headcount significantly.
That’s not to suggest it’s all sunshine and rainbows in the work software space. The Deloitte report co-authors warn that there’s plenty in the way of uncertainty ahead. “Much like in recessions past, should a recession hit hard, dealmaking will likely plummet, even for firms with sound business footing,” according to the report.
But they end on a hopeful note:
“Any period of downturn, particularly for companies at the growth stage, also poses opportunities for change. At the confluence of work software, current teams, and the pipeline of talent that companies are looking to hire, change is omnipresent.”