The global market for software is growing rapidly. According to Gartner data, software spending is the fastest growing form of IT spending, and the pace of growth has accelerated in recent years. If Gartner's predictions come true, the software portion of the world's IT spending could reach $1 trillion in 2024.
Startups primarily develop software. And the change in subscription business models has become more of a historical fact than a new trend, with many startups today approaching the market with a Software-as-a-Service (SaaS) model. Therefore, SaaS startups are not category specialized and share a business model approach rather than focusing on a specific industry. Among his myriad SaaS startups, startups that focus on selling to enterprise customers (a group often referred to as enterprise SaaS) attract venture capital.
At least, that was the case until the last venture and startup boom broke out. Since then, investment in enterprise SaaS startups has slowed. But new data from PitchBook shows that despite the mostly downward trend in recent charts, there is a silver lining for founders looking to raise capital to build the next great enterprise software company. ing.
green bud
Last year saw another downturn in venture investment in enterprise SaaS. According to global data from PitchBook, the number of enterprise SaaS venture deals fell 32% to 2,764 last year, and the value of those deals fell 33.3% to $72.9 billion. To make matters worse, enterprise SaaS startups' 2023 performance was lower than the market recorded in 2022 ($109.2 billion on 4,052 deals), but below the 2021 performance ($1,360 on 4,773 deals). billions of dollars).
Enterprise SaaS startups raised $21.9 billion, $45 billion, $55.1 billion, and $58.3 billion in 2017, 2018, 2019, and 2020, respectively. His more than $70 billion in investments in the startup space last year look pale in comparison.
More importantly, while enterprise SaaS volumes continued to decline through the end of 2023, the total amount invested in it soared in the fourth quarter. The increase is modest, but not so slight that it escapes attention. In the third quarter of 2023, PitchBook counted his $12.5 billion worth of enterprise SaaS deals, but this figure expanded to $14 billion in the fourth quarter. This is a 12% increase in his single quarter over the holiday period. That's no mean feat.
Since Q4 2021, the only quarter to record an increase in total enterprise SaaS investment was Q1 2023, but this quarter was so heavily influenced by the Microsoft-OpenAI deal that it was almost discounted. I want to put it away. Q4 2023 was almost unique in that it reversed the steady decline in capital paid out to enterprise SaaS companies after the previous venture boom and bust.
So who is financing it and what is it building? The answer surprised us, but there are some nuances to unravel.
Wow, these categories are amazing.
If you were asked which categories would trend upward in the final months of 2023, customer relationship management probably wouldn't be at the top of the list. However, PitchBook reported that CRM is his leading growth category for enterprise SaaS in Q4 2023.
Among the segments, customer relationship management (CRM) stood out, showing the fastest quarter-on-quarter growth (up 72.5%) compared to the overall enterprise SaaS average (up 11.9%). Other notable results included supply chain management (SCM), which grew 44.8% quarter-over-quarter, and knowledge management systems (KMS), which grew 31.6% quarter-over-quarter.
In its purest form, CRM, which holds a database of customer information, seems like a long-solved problem for the most part. Salesforce is one of the earliest enterprise SaaS companies, and arguably the most successful, dominating its market. That doesn't mean they can't be disrupted like all incumbents, but CRM databases haven't changed much in the 25 years since Salesforce opened its doors and brought the SaaS model into the mainstream of business.
But instead of purely tracking customer data, PitchBook defines CRM a little more freely, including marketing automation, sales enablement, customer service, and e-commerce. From that perspective, CRM makes a little more sense.
But if you had asked us (and no one did), we would have pointed to data applications, software that helps businesses track, understand, and manage large amounts of data within their enterprise. I would have. This category, which PitchBook tracks under “analytics platforms,” has become especially important given the importance of data to AI and large-scale language models, which require large amounts of data to train.
So while CRM, supply chain management, and knowledge management led the way, data and AI-related investments ranked high in the report, although PitchBook's data did not match our admittedly anecdotal data. There was very little mention of what went wrong and even that was a surprise. Here are the numbers for this quarter.
Stocks, Ventures, and How to Build in Today's Markets
Aside from category-specific inquiries, there are several possible reasons why software investment is rebounding. The pursuit of “efficiency” in cloud spending appears to be fading, according to earnings reports from several publicly traded software companies. This means that many software companies' net retention rates are likely to be improving after being pummeled, thanks to customer frugality and efforts to squeeze expenses out of the business in a high interest rate environment. do.
Add to that the fact that the stock market itself is recovering, with the tech-heavy Nasdaq closing at an all-time high last month. As a result, startups are more likely to exit at a price favored by venture investors, potentially loosening their wallets.
But the average revenue multiple of public software companies remains an uninvited guest, and startups are far from out of the woods yet. Some macroeconomic relief and a clearer exit path would be great, but building a venture-backed software startup if you're staring at high single digits or very low double digit multiples during exit time Much more difficult. While venture capital is certainly expensive from an equity perspective, the venture model also encourages high spending to drive growth. When that growth becomes less valuable, the entire calculation of external financing and spending changes. It's much easier to calculate a venture by 20x than it is to multiply revenue by 10x or even 8x.
Start-up companies are not out of the woods yet. Perhaps a rate cut or two and a strong enterprise IPO will be the tonic needed to really reignite venture investment in enterprise SaaS. But there are some reasons to be more optimistic today than just a few quarters ago. This is welcome news for founders waiting for better times to return.