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Original article
SaaS Isn’t Dead (Yet) and AI Could Make it Bigger ‒ Meritech Capital
Key takeaway
- For entrepreneurs: Despite AI's disruptive potential, SaaS isn't dead; there's still significant opportunity to build market-leading SaaS companies by innovating and integrating AI into your offerings.
- For investors: Market-leading SaaS companies are more valuable and efficient than ever, with AI potentially expanding their TAMs and creating new investment opportunities.
Summary
The article argues that while AI presents a significant disruption to the SaaS industry, it doesn't spell the end for SaaS. Instead, it could potentially make the industry even bigger. The author analyzes the top 10 public SaaS companies over the past decade, showing that these market leaders are larger, more valuable, and more efficient than ever before. The piece suggests that companies that successfully integrate AI into their offerings could see dramatic growth, similar to how some companies benefited from the shift to cloud computing.
Insights
- AI could disrupt traditional SaaS workflow software business models and even core systems of record.
- The best SaaS companies still maintain high structural retention and upsell capabilities.
- Market-leading SaaS companies have seen their median market cap rise from ~$4B 10 years ago to ~$43B today.
- Investors are willing to pay more for a unit of growth in SaaS companies today than in the 2014-2019 period, despite higher interest rates.
- The median top 10 SaaS company in 2024 has almost ~$2.3B in ARR, growing 26% YoY, and is a Rule of ~50 company.
- SaaS companies are showing improved efficiency, with increased gross margins and ARR per FTE.
- Companies that don't integrate or innovate with AI in their stack may be disrupted, while those that do could see their TAMs expand dramatically.
Implications
- Entrepreneurs need to focus on integrating AI into their SaaS offerings to remain competitive and potentially expand their market opportunities.
- Investors should look for SaaS companies that are successfully leveraging AI to enhance their products and expand their markets.
- The SaaS industry may see a divide between companies that successfully integrate AI and those that don't, potentially leading to a new wave of market leaders.