as the global startup market consumes a changing valuation environment and climate for venture investments, not every sector is equally damaged. One actually does 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 absorb a slowdown in private market investment.
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You might be surprised to learn that SaaS startups still manage to accumulate material venture capital aggregates unlike other industries or business types. After all, this column has covered the SaaS valuation plateau in Q3 2021 and the SaaS sell-off from late 2021 through the category’s endless warning signs to begin 2022. This one is the collection of startups that investors still find most comfortable?
Yes. But it makes sense, as we’ll explore shortly. Before we get into the numbers, keep in mind that it’s been a little over a week since The Exchange asked if the SaaS sale is over, so there’s some evidence that we may be hitting a local minimum when it comes to SaaS. -ratings.
We think that could keep the SaaS-is-good trend going for a while. Anyway, why might SaaS companies outperform other cohorts? Their dullness is now a strength; their predictability is now an asset. And with SaaS valuations perhaps bottoming out, why shouldn’t investors still on dry powder turn to startups pursuing a model that has generated a huge chunk of tech wealth over the past decade?
SaaS slows down, but much less than competitors
As we reported yesterday, SaaS has weathered the slowdown better than we expected when it comes to venture capital raised.
According to data from Carta, SaaS startups using the platform have raised a total of $1.04 billion in Series A deals, just 38% less than in Q4 2021 ($1.70 billion). By comparison, Series A funding for health technology fell 64%, from $1.03 billion to $370 million.
The drop is even less pronounced for seed-stage SaaS deals, which “only” fell 18% quarter over quarter. The volume of biotech seed deals fell 72% over the same period, demonstrating that SaaS is resisting the slowdown relatively well, in a segment that typically reveals quite a bit about what’s to come.
The data is even more telling when you consider that there were only 68 SaaS seed rounds on Carta in the last quarter, down from 149 in the fourth quarter of 2021. In other words, there was only a slight drop in dollar volume despite a much lower number of deals – a hint at valuations more than holding up at that stage.
However, it is in later stages that we should expect the faster impact of the problems in public markets. Do early-stage SaaS startups just enjoy a grace period before the fix seeps through? Could be. But data from Silicon Valley Bank suggests that their later-stage counterparts may also be spared the worst damage from the changing market.