A new report* from venture firm OpenView and payments infrastructure provider Paddle revealed that 2023 has been marked by a slowdown in growth for both public and private software providers as their customers scrutinise cloud spend and delay purchases.
Anyways, the study reveals how players in the space are remaining resilient – the ‘Outlier’ companies – as well as the shifting priorities of SaaS founders.
Software-as-a-service (SaaS) companies saw their annual revenue growth rate fall to 8.4% in September 2023 – down from 60% in Q1 2022 – according to a new study. Leveraging data from thousands of companies worldwide, the 2023 OpenView SaaS Benchmarks Report charts the state of the cloud industry and the priorities of its leaders, revealing a significant industry slowdown but also areas of resilience. The study also highlights what SaaS firms are doing to remain competitive during this period.
Breakthroughs in AI have restored confidence in software, buoying public SaaS valuations – the top software giants have added $2.4trn in market cap over the last year – and driving huge VC investment, with funding for AI startups passing $14 billion in Q2 2023 alone. Yet at the same time, SaaS customers of all sizes have continued to tighten budgets and reduce spending, making growth harder to come by for both established and smaller providers.
Smaller SaaS providers have been hardest hit with the biggest fall in median YoY revenue growth recorded was for private companies with between $5-20m ARR. This group saw growth fall 26 percentage points (from 61% in 2022 to 35% in 2023); and for bigger firms with $20-50m ARR it fell by 16 percentage points (from 40% to 24%).
Anyways, public companies are also impacted. Public software firms with product-led growth (PLG) strategies have also seen their revenue growth from the last 12 months drop by 16 percentage points (from 45% to 29%) when comparing Q2 2023 to Q2 2022.
Finally, overall growth has fallen hard with compound annual growth rate for all SaaS companies stood at 8.4% as of September 2023, a huge drop from 60% in Q1 2022.
The study also reveals founder anxieties amid the current economic climate and shifting business priorities of SaaS leaders:
- When asked to list the top three issues worrying them, 73% of SaaS founders listed GTM execution, 50% listed product execution, and 32% listed burning too much cash. By comparison, only 59% of founders were worried about GTM in 2021, and only 13% were concerned about cash flow. Moreover, despite rising industry emphasis on forming AI strategies, the average SaaS founder is yet to consider AI a top three priority in 2023.
- SaaS companies are increasingly focusing on profitability over a ‘growth at all costs’ mentality. While PLG SaaS companies have seen their revenue growth over the last 12 months fall, their profitability has increased by 10 percentage points over the same period – indicative of the new mindset of many SaaS leaders.
- SaaS fundraising has focused on seed stage companies: for SaaS companies at the seed stage, 30% of their funding rounds occurred in the last 6 months. However, later stage businesses have not been raising at the same frequency: 55% of Series B companies last raised 1-2 years ago while 38% of Series C rounds were over 2 years ago.
The study also identified four traits that agile SaaS businesses are doing to remain resilient despite low demand:
- Using AI to generate revenue. Despite the rush to deploy AI, only a minority of firms have been able to monetise AI-powered functionality.
o AI-native companies are 230% more likely to be in the “growing faster” bucket than their peers – but they are only represented in 10% of ‘Outlier’ companies.
o This is because most firms are yet to monetise their AI capabilities. Nearly half (46%) of companies added AI to their product in the last year, but only 15% of respondents – called Outliers – launched and monetised AI features.
- Managing burn. Slowing revenue growth and reduced access to venture funds have made managing burn crucial, and many firms have cut down costs.
- The median number of employees for firms with over $50m ARR dropped to 450 in 2023 from 876 in 2022. This fall has helped many ‘Outliers’ get in control of their burn rate and build more resilient businesses.
- When it comes to ARR per full time employee (FTE) – a common indicator of productivity – SaaS startups are expected to hit $200k-$250k ARR per FTE when they reach scale. The report found that for firms with a team of 450 with over $50m ARR, this stood at $250k – indicating that productivity remains strong post-layoffs.
- Operational efficiency. SaaS startups are learning to do more with less, automating manual work and optimising processes:
- The tougher market has forced companies to revisit their pricing. Over half the respondents said they had changed their pricing and packaging to improve their net dollar retention.
- Offering more payment methods is also crucial for securing conversions internationally. For example, in Germany, PayPal is the most preferred payment option – but only 13% of our US respondents offer it.
- A quarter of respondents said finance, tax and compliance cost them between 5-9% of ARR. Worryingly, 27% said they didn’t know or didn’t track these as a cost at all.
- Focusing on product-led expansion revenue, which has become more important than ever in the current macroeconomic environment.
- Self-serve onboarding and freemium models have become king in recent years, and these models see 90% of their revenue as product-influenced (paying customers who use the product before ever talking to a human salesperson) for SaaS companies that take advantage of them.
*This report is based on qualitative and quantitative research into the global SaaS market. The report combines over 3,500 respondents’ results aggregated across seven years of surveying private SaaS businesses on their finance and operating metrics.