In the last two months, public SaaS companies have shed 20%+ of their value. The median growth rate of SaaS companies is down by more than half, and as a result, so are revenue multiples. You don’t have to look far to find folks heralding the end of SaaS entirely.
But it’s easy to say that SaaS is dead when the top level signals are there - growth is down, multiples are down, stock prices are down. It’s also easy for bystanders with no skin in the game to talk a mean game about how this is the end of the SaaS era.
We took a look at what growth focused investors are thinking, to better understand where the SaaS market may be stalled forever and where the market may be expecting a rebound.
The picture isn’t pretty: growth capital is fleeing SaaS
Company valuations are a function of performance and perception. Performance is based on all the financial metrics you’re used to seeing. Perception is a function of analyst short- and long-term expectations and a company’s investor base.
A company’s investor base is an often underrated aspect of managing and operating a public company. There are different types of institutional investors that hold public equities and those investors have very different risk and upside expectations:
Growth investors - willing to tolerate and often advocate for meaningful risk in the near-term to generate growth in the long-term, often in the form of meaningful operational and capital intensive investments
Passive investors / value investors - these investors are not looking for huge growth that drives valuation up significantly, and will push (often forcefully) management to be much more conservative with investments
Other investors - these investors can span hedge funds / quant firms, insiders & founders, and many more
For our purposes, we can use growth investor ownership as a proxy for where the market sees outsized upside. Not only does strong growth investor ownership (or increasing ownership) suggest a company may have more upside, but that growth investor base is also more likely to allow and push for significant investments (read: cash burn) that can drive outsized growth.
But the picture isn’t pretty.
This graph charts the change in growth investor ownership against the change in stock price over the last 12 months. Each quadrant tells a different story:
Q1 (top right - 2% of public SaaS companies): Stock prices are up and growth investors are increasing their exposure.
Q2 (top left, 29% of public SaaS companies): Stock prices are down, but growth investors are buying into the upside opportunity.
Q3 (bottom left, 62% of public SaaS companies): Stock prices are down AND growth investors are shedding ownership.
Q4 (bottom right, 7% of public SaaS companies): Stock price is up but growth investors see less potential in the long-term for this stock.
For 62% of SaaS companies, the market isn’t just repricing, it’s abandoning them. Companies in the third quadrant have traded down as historical or forecasted performance lags (in most cases) and growth investors are shrinking their ownership exposure. This does not invite optimism about these businesses entering the next phase of software, and also may present structural challenges as a more value-focused & risk-averse investor base may react negatively to aggressive investments in growth-focused initiatives at these companies.
What’s fascinating is that these businesses aren’t limited to flimsy point solutions or wildly outdated technology either. There are scaled vertically and horizontally integrated businesses in this category like Axon, Salesforce, ServiceNow, and Crowdstrike. ServiceNow is already driving $600M in annualized revenue from their AI products, and all four have made strategic acquisitions in AI (e.g., Axon acquired Prepared911, ServiceNow acquired MoveWorks, Crowdstrike acquired SNGL).
In fact, if we look by category, the only area that is seeing any sort of aggregate positive sentiment from growth investors is payment and communications infrastructure. This generally seems reasonable as many believe that we are rapidly heading to a world where agentic commerce and inter-agent communication is increasingly prevalent.
Outside of that, all other categories are struggling to convince investors that their growth prospects will return.
A moat is not enough
Lots of these companies have incredibly strong moats, but it isn’t enough:
Salesforce has deep data integrations (Mulesoft now doing $1B+ in revenue moving customer data into Salesforce’s cloud) with customers and a host of 3rd party applications and consultancies built on top of their ecosystem
Crowdstrike has one of the best endpoint agents deployed across millions of devices in enterprise settings
ServiceNow is the critical ticketing backbone for entire fortune 500 companies and is engrained in use cases across IT, HR, and ops functions
Axon has tightly integrated hardware and software offerings for public services
Investors are increasingly saying that it isn’t enough to have a moat. Investors want to see a strong AI story for your own 1st party products & surrounding AI ecosystem - even for the “systems of record” like Salesforce and ServiceNow that the market has promoted to-date.
Companies like Samsara, Twilio, Cloudflare, and Snowflake all have clear advantages in the new AI world order, particularly in two key aspects:
They have very logical and strategic AI products that can be built on top of their data AND have already released some products into the market (e.g., Samsara layers computer vision & predictive models on fleet & IoT data)
They provide an ecosystem for 3rd party builders to create AI applications on top of them that increase their functionality (e.g., Twilio’s services and Cloudflare’s workers enable AI-native services and agents that can interact with the world)
The defining companies of the next software generation do more than automate end-to-end workflows to drive “outcomes”.
The defining companies of our generation will actively enable new AI-based functionality to be built on top of their platforms to drive incremental usage, functionality, and ROI for the customer (and in turn, stickiness). At Gradient, we aspire to invest in companies like that:
Lambda, Sapiom, and Linkup provide fundamental infrastructure to run AI agents that have access to the right context and take valuable actions on behalf of users
Writer is building an intelligent agent studio where customers and 3rd parties can construct complex agents that drive business outcomes
Stack AI’s automation platform is built entirely to allow business users of all types to design and scale complex automations that complete end-to-end tasks
Even vertical focused solutions like Enzo Health and BackOps allow for complex AI workflows built on top of core systems of record.
SaaS isn’t dead, it’s just decaying
multiples are down 50% from 7.8x pre-covid to 3.6x today as median growth has fallen to 15% compared to the 35% pre-covid running average (Altimeter, Meritech). Unfortunately, many SaaS companies have also struggled to improve FCF margins and profitability as growth slowed, further shaking investor confidence in the value of these assets.
With all that said, SaaS isn’t dead. SaaS revenue is still some of the most durable and valuable revenue due to its high margin nature. But it certainly seems like a lot of SaaS is decaying, and growth capital is being concentrated where the “healthy bodies” are - the businesses with clear opportunities to accelerate because of AI that have already started to prove that thesis out.
Admittedly, there is still a lot of confusion in the market on this. Growth investor sentiment should not be mistaken for a factual representation of how good or bad a company is. However, it is useful as we try to estimate where growth may come from in the future.
What This Means for Founders
Despite all this, there has never been a better time to start a software company.
Cathie Wood’s ARK Invest thinks it’s possible we could see a $7T software market by 2030 in their accelerated AI adoption scenario. Today’s market is roughly $1.25T. That implies $5.75T in incremental software spending over the next five years, and incumbents have less claim to that incremental dollar than they’ve ever had.
But founders need to build with this landscape in mind:
Have a real AI product and ecosystem strategy. You need a clear plan for how AI improves your product’s value proposition, pricing and packaging, and feature set AND a strong vision for how the AI products of the future increase your value proposition (vs. disrupt it).
Beware (and take advantage) of the impending M&A boom. A 50% reduction in revenue multiples means companies need to grow roughly 2x as large to achieve the same valuation they would have gotten three years ago. That math is going to force a massive wave of strategic M&A as public SaaS companies deploy their cash flows to acquire AI talent and products that can shift their growth narrative. Build something worth acquiring, but don’t build for acquisition. My prediction is that we will see at least one of the fastest scaling AI companies like Harvey, Legora, Sierra, Decagon, etc. acquired by the end of 2026.
Prepare for incumbents to increase their level of aggression. When revenue growth and multiples are plummeting, large companies are freed from the innovator’s dilemma. They have less to lose by disrupting their own products if investors don’t value the revenue from those products anymore. Expect more aggressive internal builds and compensation packages designed to poach your best people. The talent war is about to intensify, and founders need a recruiting story that money alone can’t beat.
There are literally trillions of dollars in revenue opportunity for AI native companies to claim. For founders building AI-native products, the window is wide open - and so are Gradient’s doors. Reach out if you’re building!