VC Trends for SaaS

Today, we’re talking about the changing trends in venture capital investment in SaaS. Let’s take a look at the state of play for SaaS investments. While 2022 saw an 82% YOY drop in capital invested, is there a positive outlook for 2023? Listen in while Ryan Draving, Head of Strategy at The Moving Company, shares his research and next-steps for SaaS.

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Hi, I'm Ryan Draving, your B2B growth advisor, taking a biking break to share some ideas with you. Today we'll talk about the changing trends in venture capital investment in SaaS. Venture capital firms have invested heavily in SaaS in the last decade. However, 2022 marked a significant change. The valuations plummeted, leading to a hard pullback from VC firms. Initial data on Q1 2023 investment totals will be available soon.

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But for now, let's take a look at the state of play for SaaS investments, based on what we already know. Investors logged 316 deals and invested 4.3 billion in SaaS, according to the Carta platform in Q4 2022, representing an 82% year over year drop in capital invested and a 61% year over year drop in deal count for the sector.

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Moreover, it was the fourth consecutive quarterly decline in total rounds and in capital invested for SaaS companies, based on Carta's data. The Federal Reserve's interest rate hikes in 2022 prompted many SaaS companies to focus on reducing cash burn to stave off the need for another round of equity financing until venture fundraising rebounds. VC firms are now urging founders to be more cautious about chasing annual recurring revenue, or ARR, while ignoring burn rates regardless of the portfolio companies’ stage.

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Janelle Tang, VP of Bessemer Venture Partners, said, “We've been encouraging our founders to be introspective around the concept of efficient growth, which is growth at optimal costs, and contextualizing the trade offs between growth and burn.” SaaS companies derive a greater portion of their valuations from future earnings, and the less hospitable venture fundraising environment is particularly problematic for them.

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However, Tang, who specializes in growth stage deals in the cloud software industry, still sees a possible resurgence in SaaS IPOs in late 2023. The slowdown has seeped into the seed stages, with early stage VCs pushing portfolio companies to become profitable from the outset. That's a tall order for SaaS leaders operating inefficiently for the sake of rapid growth is a very hard thing for a company founder to unlearn.

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And companies that can generate positive cash flow now can attract interest from late stage investors. This is much different than the environment when it used to be all about what is the speed of your growth, how fast you growing year over year. Now it's about how faster you're growing while still having sustainable positive cash flow so the investor doesn't have to worry about their investment going belly up.

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In conclusion. Venture capital investment trends in SaaS are shifting and companies have to focus on efficient growth while being cautious about chasing annual recurring revenue while ignoring burn rates. What we do at the moving company helps our clients to be more efficient with their spend, more effective with every dollar that they're using and to achieve faster growth while remaining profitable.

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From my bike to your business, let's keep moving through this tricky environment together.