SaaS investment space is a lead indicator of next wave technologies

The Software as a Service (SaaS) space appears to be heating up further, as investors continue to funnel substantial amounts of investments into the rapidly growing industry. Even amidst the COVID-19 pandemic, investors continue to be bullish on the industry’s prospects. 

Gartner estimates that SaaS market revenue will increase by an estimated 35.5 percent over the 2019-22 period, exceeding US $ 138 billion in 2022. Low capital investment, recurring revenue model and high gross margins (which often range between 60 percent to 80 percent), increase SaaS appeal to investors.  

US dominates SaaS investments
According to deal database Pitchbook, 2,539 deals (of more than US $ 5 million each) were made in the SaaS space, across the globe for the 18-month period ending December 2020. By region (defined as target’s home country), nearly 54 percent of all deals came from North America, followed by Europe (33 percent) and Asia (13 percent). 

At a country level, US accounted for nearly 60 percent of the deal volume and 52 percent of total deal value, followed by China and Great Britain (8 percent and 7 percent, respectively). Lion’s share of SaaS investments was below the US $ 50 million mark and were executed by venture capitalists (VC).

SaaS investments outperforms major indices
Despite some degree of heightened selling of SaaS stocks in early 2020, over the course of the year, SaaS stocks outperformed major indices for 2020. The SEG SaaS Index (which tracks 140 public SaaS companies) significantly outperformed the Dow Jones, S&P 500 and NASDAQ, finishing 2020 with a 66.4 percent year-to-date (YTD) growth in stock price performance.

Our analysis of 18-month period ending December 2020, also revealed that there was little variation in deal activity pre and post COVID-19 (considering March 2020 as start of the pandemic) – average number of deals per month of 145 against 143 and average deal size of US $ 80 million against US $ 74million.

Looking at tech verticals, the top five – artificial intelligence (AI) and machine learning, big data, cloud tech and dev ops, cybersecurity and fintech – accounted 49 percent of the number of deals and 48 percent of total deal value. High long-term growth potential seems to be the primary factor driving investments into these verticals. 

For instance, global market revenue of the AI and machine learning market (the most active SaaS vertical during 2020) is expected to expand at a compound annual growth rate (CAGR) of 42.2 percent between 2020 and 2027 to reach US $ 733.7 billion by 2027. Given that AI is now clearly a global phenomenon, not limited to a few countries or industries, the high investor interest is not surprising.

The cloud tech and dev ops sub-segment too has strong growth prospects, with the industry expected to record a CAGR of 18.6 percent from 2020–2027. The story is similar for big data, with the industry anticipated to record a CAGR of 14.0 percent from 2019-2027. As enterprises continue to wake up to the value of data-driven analytics, importance of big data SaaS players will continue to rise attracting more investors and larger valuations.

 
The cybersecurity segment is also estimated to expand at a CAGR of 10.0 percent from 2020-2027. Especially post COVID-19, with remote working becoming the norm, data security and protection against online threats is becoming increasingly important. Similarly, already hot fintech sub-segment has also got a further boost from the widespread adoption of digital payments, driven by the pandemic-infused spike in e-commerce.

Other emerging technologies
From a deal volume perspective, several others are ‘mid-tier’, recording a moderate number of deals ranging from 50 to 80 over the 18-month period ending December 2020. They include verticals such as healthcare, industrial and education, as well as horizontals such as marketing, advertising and human resources (HR).
Nascent technologies such as augmented reality, 3D printing, robotics climate tech, foodtech and eSports are ‘bottom-tier’ recording single-digit deal volume, with the exception of cryptocurrency/blockchain, which recorded a total of 16 deals over the analysed period.