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SaaS (software as a service) continues to play a key role in driving efficiency, cost-cutting and greater speed in a wide range of industries. Rather than installingand maintaining software on personal or company computers, SaaS applications allow users to access web-based software on a SaaS provider’s servers. In this industry report, our investment team at Bure Valley Group examines the SaaS landscape as we enter 2023, where the industry has travelled and some key trends, opportunities and risks for investors to be mindful of.
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The SaaS landscape in 2023
The global SaaS market was estimated at US$ 96760 million in the year 2022. Over the next 5 years, this figure is expected to grow by a CAGR (compound annual growth rate) of 15.9% – i.e. reaching US$ 234900 million by 2028. Market capitalisation estimates do vary, however, due to the wide net that SaaS casts over many different companies, business models and solutions.
For instance, two broad types of SaaS have emerged in recent years – horizontal SaaS and vertical SaaS. The former is popularised by companies such as Salesforce, Microsoft, Slack and Hubspot, catering to a wide customer base and “bundling up” offerings. The latter, conversely, targets specific niches (e.g. insurance or trade).
SaaS companies might also be divided into B2B and B2C propositions. The former might target specific business functions – such as human resources (HR) or sales (e.g. customer relationship management system and accounting). Customer SaaS solutions encompass a wide range of products and services including personal apps for health monitoring and budgeting.
Key trends going in 2023
The Ukraine War has had a noticeable impact on supply chains and prices for energy and food (e.g. due to sanctions imposed on Russia). However, it has also affected the global software and IT sectors. In particular, the conflict has exacerbated cyber security threats and tech-talent migration. Prior to the invasion, Ukraine was a favoured location for global tech companies (e.g. EPAM, Softserve, GlobalLocic and Luxoft) due to low living costs and abundant availability of skilled talent resources. Russian IT specialists – of which there are 100,000s – are now harder to access by global companies due to Russia’s increasing international isolation. As a result, other locations may become more popular sources of SaaS talent for large businesses in 2023, such as India and Argentina.
Other global trends are likely to play a key role in 2022. The development of artificial intelligence (AI) continues to break new ground, improving support services like chatbots and augmenting security breach identification. It is also bringing more hyper-personalization to the table, such as dynamic pricing and advanced user guidance. Integrations – which were unheard of in the early days of SaaS – are allowing more services to merge with third-party solutions. Zapier is a great example of how SaaS applications can be seamlessly automated and synergised.
Strategic considerations for investors
Whilst the global SaaS market continues to thrive and innovate, the landscape is also facing greater competition and saturation than ever before. It is harder for SaaS startups to stand out and carve a space for themselves as they seek customer attention and loyalty. This could lead to increasing numbers of “micro SaaS” products in 2023, where companies focus on narrower customer groups and niches. Recent examples include Everhour (a time-tracking app), Mealime (a meal-planning app), and Complice (a planning app). Investors need should be mindful of the cluttered SaaS landscape when conducting due diligence on SaaS startups, to identify those with a sustainable competitive advantage.
Two other trends are likely to drive customer preferences for SaaS solutions. The first is mobile domination. Whilst SaaS products will still need to be compatible with desktop computers for some time, the world is heading in a “mobile-first” direction and SaaS solutions need to follow. This can bring many challenges and investors should be confident that SaaS companies can address them – e.g. design interfaces that accommodate senior users or those with impairments to hearing or sight. The second is the global drive towards “low-code” (or “no-code”) apps. Here, SaaS products can become more accessible to the average person by not requiring vast coding knowledge to use them. “Drag and drop” features might be used instead, allowing users to build their own integrations and workflows. SaaS companies which have been leading the way in this area include Zapier, Airtable, Webflow, and Typeform.
Conclusion & invitation
SaaS will undoubtedly play a key role in the global economy – and in many investors’ portfolios – in 2023. However, there is a paradigm shift occurring and SaaS companies need to be flexible to accommodate new customer needs, expectations and behaviours.
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