Why does it seem like every startup is a SaaS company?

By Alex Wilhelm – June 29, 2023

A version of this article was first published on TechCrunch

If you read enough startup coverage, you’ve noticed that no matter the part of the economy that an upstart tech company is attacking, there’s a pretty darn good chance that it is doing so through software. Software that the startup hosts and charges a recurring fee for customers to access or lever. Software as a service, in other words, or SaaS.

The reasons for this are manifold, but important to grok. First, software empowers. Workers can do more and more quickly with software than they could with pre-digital tools. Second, software is nearly impossibly flexible. It can fit everywhere all at once, solving myriad issues and improving output more generally wherever it lands. And third, software tends to have very attractive economics. This is doubly true for SaaS companies, which not only feature software-styled gross margins, but have recurring revenue to boot.

That makes SaaS startups valuable in the abstract, as their core output — recurring revenue — is very valuable. Naturally, then, investors that want the most bang for their buck, and founders that want to dent the world with as much gusto as possible, tend to gravitate towards funding and building SaaS startups.

It’s not boring, we promise! To prove that to you, here is a smattering of recent coverage of the wide world of SaaS from TechCrunch+ from the last few weeks. (You can snag TechCrunch+ access here if you still need it!)

• Snowflake and Databricks are massive SaaS business, one private and one public. Sure, they do not fit precisely into the Salesforce-style SaaS model of yore, but they offer software as a service and are also battling it out today to build the most fit-for-market enterprise LLM stack. And they are growing at a nearly bonkers clip as well. A great pairing to watch if you care about super-late startups in general.
• SaaS startups are not all multi-billion dollar behemoths. Some are quite small. One such startup is Rubber Ducky Labs, which is building tech to help other companies improve their recommender systems. This isn’t tech that you would purchase as a consumer, but Rubber Ducky really does want to affect consumer purchases.
• Broadening our lens a bit, let’s talk about vertical SaaS. The idea is simple: Find a particular business category, and build a tailored software solution for those companies. By picking a particular market segment, startups can go deep and build something that resonates. Some folks think that vertical AI is the “next logical iteration of vertical SaaS,” which is both an interesting hypothesis, and one that we agree with.

There’s so much more. Gusto is now doing more than a half-billion dollars in annual revenue while the HRtech space is itself maturing into a massive market. And all the while, the value of software revenue is slowly rebounding, rebuilding confidence in the SaaS model for startups once again.

It’s not all sunshine and roses, mind. During the 2021 tech and venture boom, a number of private-market investors overpaid for startup equity leading to some tough decisions in recent weeks. If it’s tough time for some venture players, it’s a tougher time for certain founders.

But one thing is clear: Even if SaaS evolves into a more on-demand model of selling, managed software services are going nowhere but into more places of our economy. And onto more venture capital betting books.