Welcome back to the SaaS bear market

Anton Ioffe - October 30th 2023 - 5 minutes read

As the murmurings of a SaaS bear market become a prevalent topic, the focus on business fundamentals suddenly comes into sharp contrast. As we meander through some unmistakable patterns, the role of economic uncertainties, and the tug-of-war between growth and sustainable profitability, this article will delve into creating an understanding of the present SaaS dynamics from various vantage points. Finally, with a lens into the venture capitalist's perspective, we bring you the silver lining of the bear market - hidden opportunities and significant shifts in investment strategies. So, let's welcome you to the advent of a new era in SaaS investing and valuation.

Trends in the SaaS Bear Market

The SaaS market has experienced significant shifts in investor preferences in the current bear phase. Traditionally, driven by formidable growth rates and high valuations, especially among B2C SaaS companies, the focus has lately started shifting towards tangible business models and key performance indicators. The recurring revenue model of SaaS businesses is being evaluated under a more pragmatic lens, indicating a return to emphasis on solid business fundamentals.

An examination of recent investment patterns reveals that the software sector, particularly post the SaaS boom around 2010/11, has consistently attracted a substantial portion of venture capital since 2012. This sector-wide appeal can be attributed to the enhanced opportunities SaaS offered to a diverse range of companies, spanning varied sectors. In this challenging phase, however, a select few SaaS companies have emerged triumphant, standing out for their resilient market trends routed in stronger core business metrics.

Enterprise SaaS has been deemed with an "antifragile" character, a concept introduced by Nassim Taleb, where the system benefits from shocks rather than merely resisting them. Inherent to the SaaS model is recurring revenue generation through subscriptions for services. Enterprise SaaS, due to its mission-critical nature, exhibits a higher level of antifragility. With companies hinging on these services for their core operations, this recurring revenue model underscores their capability to emerge stronger in the SaaS bear market.

The Influence of Economic Uncertainty

Economic uncertainties, such as looming recessions and fluctuating stock markets, undeniably cast a long shadow over the Tech sector. Yet, contrary to popular belief, the SaaS companies are far from sinking. In fact, many have disproved disaster predictions by not just surviving but thriving in these tumultuous times. They met and exceeded revenue goals, in a more discerning, metrics-driven environment, successfully navigating the financial tightrope.

During gloomy economic periods, SaaS businesses are well-positioned to attract top-drawer tech talent. In a volatile job market, the stable and promising future of SaaS companies becomes a beacon of hope for skilled professionals seeking promising avenues. Furthermore, the shifting scenario compels employees and company stakeholders to become more resourceful. Survival is not about extravagant spending; instead, it's about making calculated investments for heightened efficiency and productivity.

The tides of economic change bring about an urgent need for discipline within SaaS companies. Periods of unchecked growth often lead to complacency, but difficulties associated with cautious economic environments rejuvenate the competitive spirit. Initiatives are evaluated under a stricter, more scrutinizing lens, ensuring only the most profitable and effective solutions see the light of day. This might seem constricting at first glance, yet spiral into better quality products and services. The resilience of SaaS companies, therefore, is not stifled by the uncertainties of the bear market, but essentially driven by it.

Long-term Valuation Impact of Profitability in SaaS Companies

The impact of profitability on the long-term valuation of SaaS companies cannot be overstated. Profitability has emerged as a critical consideration for SaaS companies, especially in the face of a bear market. Even though not all early-stage SaaS companies are profitable immediately, there is a growing importance for these startups to demonstrate not just the right growth levers but also the potential for future profitability. A notion underscored by statements from industry leaders such as Klarna’s CEO Sebastian Siemiatkowski, who recently emphasized investor focus on core business fundamentals, notably profitability.

Among the variances that one can notice in company valuations, divergence is often observed between firms showing sustainable profitability against their counterparts that are yet to turn a profit. Bear markets particularly accentuate this deviation. Although SaaS businesses have attracted significant shares of VC capital, most of them are still far from profitable. As a result, the profitable ones tend to significantly outperform their peers. These firms are proving more resilient, even amid market downturns, including the Global Financial Crisis, Covid-19, and the recent economic events.

When discussing long-term valuations, the inherent nature of SaaS businesses is essential. SaaS firms are renowned for their high gross margins, delivering their software over the Internet, incurring little cost. This high-margin revenue has made them incredibly valuable to both private and public investors. However, in a bear market context, the attractiveness of these firms can hinge on their ability to showcase sustainable profitability. It’s a recalibration of valuation expectations, emphasizing equally on profitability and growth instead of just growth. For any SaaS business aiming at enduring value, the pathway lies in demonstrating a sustainable, profitable business model.

Opportunities in the SaaS Bear Market: A VC Perspective

In spite of the challenges posed by the continuing bear market in SaaS, perceptive Venture Capitalists can uncover diverse opportunities. Even amid economic instability, the potential profitability and robustness of SaaS companies present a compelling proposition for astute investors. Investing in start-ups that demonstrate improved efficiency, high gross margins, and strong fundamental metrics can be key to unlocking value amidst market turbulence. In the current market landscape, VCs need to adopt a more discerning investment approach, favoring SaaS companies that underscore sustainability and operational efficiency in their business model.

Investor focus during this bear market is noticeably shifting towards the enterprise SaaS sub-sector, seen as a potential stronghold of resilience and sustainability. Particularly appealing is the concept of 'antifragility', a characteristic not just signifying survival in the face of shocks but thriving because of them. B2B SaaS companies, exhibiting identified antifragile traits, could well be a safer and more lucrative investment, adding an intriguing twist in these uncertain market conditions. This inclination towards antifragility is reinforced by the inherent recurring revenue model of SaaS businesses, providing some degree of insulation against the unpredictable economic environment.

Patience may indeed become the most valuable asset for venture capitalists during the SaaS bear market. Rather than rushing into deals, carefully considering start-ups that demonstrate sustainability, adaptability, and most importantly, the potential for antifragility, could be a rewarding strategy. As the market eventually stabilizes, the strongest players in the SaaS industry will rise to the surface. This will pave the way for worthwhile investments for discerning VCs.


The article discusses the current state of the SaaS bear market and its impact on investor preferences. It highlights the shift towards focusing on solid business fundamentals and profitability, rather than just growth. Economic uncertainties have actually benefited SaaS companies by attracting top tech talent and promoting discipline within the industry. Profitability is becoming increasingly important for long-term valuation, with profitable SaaS companies outperforming their peers. Despite the challenges, there are opportunities for venture capitalists in the enterprise SaaS sector, which exhibits antifragile traits and a recurring revenue model. Patience and careful consideration of sustainable and adaptable startups will lead to worthwhile investments in the future.

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