Growth has not come about as easily in 2023 for software-as-a-service (SaaS) firms compared to years past, but according to research from venture firm, OpenView, and payments infrastructure provider, Paddle, there has still been some resilience.
The 2023 OpenView SaaS Benchmarks Report investigates thousands of companies worldwide to understand the state of the cloud industry and the priorities of its leaders. Notably, the emergence of AI has impacted the growth of companies. Specifically, those that are monetising the space. Simply positioning yourself as ‘AI’ does not.
The report first sets the scene, looking at the stagnation of the sector. Overall, the sector’s growth dropped by seven per cent between 2022 and 2023 from 28 per cent to 21 per cent. Some individual firms were hit harder though. The report identifies Snowflake and Datadog as two companies whose growth rates have plummeted between Q2’22 and Q2’23: 98 per cent to 60 per cent and 79 per cent to 39 per cent respectively.
Furthermore, it shows how smaller SaaS providers have been hardest hit. In fact, the biggest fall in median YoY revenue growth recorded was for private companies with between $5-20m ARR. This group saw growth fall 26 percentage points (from 61 per cent in 2022 to 35 per cent in 2023). For bigger firms with $20-50million ARR it fell by 16 percentage points (from 40 per cent to 24 per cent).
Commenting on the launch of the report, Paddle chief marketing officer Andrew Davies, said: “2023 has undoubtedly been a challenging year to scale a software business. Especially as revenue growth rates for SaaS firms fell from 60 per cent in 2022 to just 8.4 per cent in September 2023.
“The good news however is that the industry is still growing, and we’re seeing pockets of resilience from firms who share some notable traits. Today’s outliers are those that focus on monetising the benefits of AI, increasing operational efficiency, and driving product-led expansion revenue while managing their burn rate.
Light at the end of the tunnel
Despite stagnation, 27 per cent of firms said they were growing faster now than they were last year. This group of firms profiting during these times, the outliers, revealed five main trends:
- AI adoption
- High productivity standards
- Product-led growth
- Expansion
- Changing operations
AI had a huge impact on growth, as AI-native companies were over three times more likely to be an outlier.
Simply adding AI wasn’t enough though. It had to be monetised and only 15 per cent had actually done so. Nonetheless, 77 per cent of SaaS companies surveyed had either launched AI features or had AI on their product roadmap in 2023, showing promising signs for potential growth in the future.
However, the biggest factor impacting growth for outliers was having a certain vertical. Companies that targeted a specific industry vertical that was underserved by technology represented 49 per cent of outliers.
Does a higher head count mean greater productivity?
The tough economic situation of the past year resulted in many people losing their jobs. However, the companies that weren’t made bankrupt as a result of the economy were able to become more resilient. As such, the metric to judge productivity has become the annual recurring revenue (ARR) per full-time employee (FTE). It shows whether a high headcount impacts productivity.
SaaS startups are expected to hit $200k-$250k ARR per FTE when they reach scale. The report found that for firms with a team of 450 with over $50million ARR, this stood at $250k – indicating that productivity remains strong post-layoffs.
Product-led growth (PLG) remains an important part of growing a business too. However, this was especially the case for AI companies. Discussing this and the impact of a higher headcount, Davies said: “Companies must move away from the growth-at-all-costs mentality of the last few years. Instead, they must prioritise scaling in a smart and sustainable way. In doing so, they can continue to thrive and grow in a way that outpaces the market.”
Expansion
Previously, “growth-at-all-costs” involved buying out the competition or doing anything to ensure customer headcount, and in turn spend, grew at any cost. However, the mindset has now changed. Despite the fact expansion revenue is harder than ever to come by, leaders cannot give up on it. The report suggests multiple ways to improve this revenue: running a multi-product strategy and creating an add-on feature or service are just a couple of examples.
A change at the core
Many SaaS startups as a result of a rough economic climate have found to make the best of a bad situation. The capabilities of different technologies, especially AI, are key factors in ensuring efficiency. As a result, many firms are automating manual work.
However, they have also revisited their pricing models. Over half the respondents said they had changed their pricing and packaging to improve their net dollar retention, while only 22 per cent made no changes. The primary factor that impacted change in Europe was localised pricing. Meanwhile, in the US, it was based on a willingness-to-pay.
Prices were not the only changes though. Payment methods were also adjusted and added to cater to the growing desire for alternative payment methods. In Germany, PayPal was the most preferred payment option – but only 13 per cent of our US respondents offered it.
Kyle Poyar, Partner at OpenView, said: “Last year, the SaaS industry was still growing rapidly, and ambitious companies in the space had plenty of cash runway from recent financings. But, as our new report shows, 2023 has been quite different. Sales have dried up as businesses large and small have delayed purchases, lengthened deal timelines, and scrutinised their cloud spend.
“Venture funding has also slowed down. Furthermore, a third of founders are now concerned about burning too much cash – compared to just 13 per cent in 2022. However, software remains mission critical as enterprises continue to accelerate their digital transformation. As our report demonstrates – there are still growth opportunities for firms that keep efficiency and sustainable growth top of mind.”
Francis Bignell
