Why SaaS is bucking the venture slowdown

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 startup land. 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.

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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.

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.