Software-as-a-service (SAAS) companies have been seeing a decline in their valuations. In the first quarter of 2018, for instance, the average SAAS company valuation fell to $184 million from $211 million in the fourth quarter of 2017. This drop was across all sectors and regions, but software companies with marketplaces or subscription models saw a greater decline. If you’re thinking of starting an SAAS business, this is probably the right time to do so. People are shifting towards online services and away from packaged software. That’s why savvy investors are increasingly willing to fund SAAS startups with smaller valuations. As you plan your own SAAS venture, here are three reasons why you should take advantage of this moment:
More people are using subscription-based services
The use of subscription-based or recurring revenue models is increasing. In the past, software was mostly sold on an upfront basis, but now companies are also offering subscriptions. The increased acceptance of subscription-based services is largely due to their cost-effectiveness. Companies incur low start-up and running costs, and can scale up their operations quickly. They can also maintain their operations with a smaller workforce, since there are no capital-intensive investments – like buying the infrastructure required to host. subscription-based services are also helpful in the event of a recession, when the number of software sales usually falls. For these reasons, subscription-based services are a good fit for companies in the B2B sector, which experiences lower growth rates than B2C sectors. That’s why we’re seeing an increase in subscription-based services overall, but a higher number of these in the B2B sector.
Investors are more cautious and selective
Investors are generally being more cautious and selective with their funding decisions. That’s because the number of startups looking for funding has increased. More entrepreneurs are now turning to the venture capital (VC) funding route, expecting larger returns for investors. To get their share of the pie, investors are increasingly being more selective with the startups they fund. As a result, the average valuation of a startup has dipped, with some even declining to the level of Angel funding. That’s because Angel investors are now applying a more conservative approach to funding startups, seeking more returns from later-stage funding rounds. Not only are investors being more selective, but they’re also being more cautious with the amount of funds they’re willing to invest. This is because they’re aware of the high level of risk in investing in startups. They’ve seen the number of startups failing increase in recent years, with the number of exits decreasing.
Limited availability of quality SAAS startups
We’ve already seen the average valuation of startups decline. At the same time, we’ve also seen the number of startups raising funding increase. That’s because a greater number of entrepreneurs are choosing to start their businesses as SAAS ventures. They’re seeing the value of making their business online and as a subscription-based service. When the demand for funding increases, the availability of it also decreases. This is due to a number of factors, including an increase in the number of startups and investors being more cautious and selective with the startups they fund. As more startups raise funds, the supply of funds also increases. That’s why the average valuation of startups has declined. It’s also why we’ve seen the number of startups raising funding increase. That’s because investors are willing to fund more startups with lower valuations.
Conclusion
The number of SAAS startups has increased in recent years, while the average valuation of these startups has declined. That’s because investors are being more cautious and selective with their funding decisions and the number of startups looking for funding has increased. At the same time, investors have been willing to fund more startups with lower valuations to keep up with the increased demand for funding. The increased adoption of subscription-based services is also a factor. If you’re thinking of starting an SAAS business, this is probably the right time to do so.
