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% over the 2019-22 period, exceeding USD 138 billion in 2022. Low capital investment, recurring revenue model, and high gross margins (which often range between 60% to 80%) increase SaaS appeal to investors.
The U.S. dominates SaaS investments
Note: The analysis covers 2,539 deals, with deal values exceeding USD 5 million, from July 2019–December 2020
SaaS investments outperform major indices
Despite some degree of heightened selling of SaaS stocks in early 2020, over 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% year-to-date (YTD) growth in stock price performance.
SEG SaaS Index outperformed major indices in 2020
Our analysis of the 18 months ending December 2020, also revealed that there was little variation in deal activity pre and post COVID-19 (considering March 2020 as the start of the pandemic) – an average number of deals per month of 145 against 143, and an average deal size of USD 80 million against USD 74 million.
Five tech verticals account for nearly half the SaaS deals
Looking at tech verticals, the top five – Artificial Intelligence (AI) & Machine Learning, Big Data, Cloud Tech & Dev Ops, Cybersecurity and FinTech – accounted for 49% of the number of deals and 48% of total deal value. High long-term growth potential seems to be the primary factor driving investments into these verticals.
For instance, the 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% between 2020 and 2027 to reach USD 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 & Dev Ops sub-segment too has strong growth prospects, with the industry expected to record a CAGR of 18.6% from 2020–2027. The story is similar for Big Data, with the industry anticipated recording a CAGR of 14.0% from 2019–2027. As enterprises continue to wake up to the value of data-driven analytics, the importance of Big Data SaaS players will continue to rise to attract more investors and larger valuations. The Cybersecurity segment is also estimated to expand at a CAGR of 10.0% 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, the 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 months 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, except for Cryptocurrency/Blockchain which recorded a total of 16 deals over the analyzed period.
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