SaaS Strikes Back: Early-Stage VC Investment Snaps Years-Long Cold Streak

Venture investment in software-as-a-service companies worldwide is (mostly) back to 2015 levels across many measures.

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In late 2017, Crunchbase News quantified the “crash” in venture capital investment into companies with SaaS business models. At the time, there was a notable contraction in early-stage dealmaking across all sectors, particularly in North America. However, in the most recent quarter, early-stage venture investment has mostly recovered in North America and the world as a whole. It appears that broader recovery has extended to early-stage private SaaS companies as well.

Return Of The SaaS

The first half of 2018 saw a big jump in VC investment into SaaS companies across seed and early-stage rounds. Using Crunchbase’s SaaS category as a proxy, we charted venture investment data from over 9,400 venture rounds raised between the beginning of 2010 and the end of June 2018.

The chart below shows aggregate deal counts and dollar volume (in native and as-converted USD) for early-stage SaaS rounds around the world. Keep in mind that early and seed-stage private market financial data is subject to reporting delays which may extend back several quarters. Let’s see what’s going on with Series A and Series B deals.

Reported deal volume in the first half of 2018 is not quite back to H1 2016 levels, but it’s on the upswing. And reported dollar volume was up by approximately 56 percent compared to H2 2017, just shy of $2 billion. Actual figures are going to be higher due to reporting delays and missing dollar volume data for some rounds.

Relative to H2 2017, seed and late-stage SaaS activity also intensified.

The chart below shows seed-stage SaaS investment deal-making. It includes rounds labeled as seed and angel rounds, as well as smaller sums raised via convertible notes and equity crowdfunding rounds.

Reported seed-stage data—the most susceptible to reporting delays—suggests that dollar volume into SaaS startups grew by 47 percent, and reported seed volume is up by 6.5 percent. And what about late-stage?

The chart below shows VC investment activity into late-stage deals, which mostly consists of Series C, Series D, Series E, and later rounds.

Late-stage dollar volume for H1 2018 is up 33.5 percent (to $2.78 billion) from H2 2017, and deal volume is down by six percent.

Why The SaaS Comeback?

The rise in capital deployed into early-stage SaaS companies is notable, but not surprising. Public companies in the SaaS space have performed strongly in recent quarters, building a narrative that high-margin recurring revenue is in demand.

Public market investors have consistently bid up the value of annual recurring revenue (ARR), as the Bessemer Venture Partners Cloud Index details. The rising value of public SaaS ARR helps startups by raising their valuations. If public market ARR is rising in value, private market ARR built by startups is worth more, too. Private investors, like venture capitalists, are known to travel in packs, and operated under the influence of public markets.

What’s perhaps more surprising than the H1 2018 rise in early-stage SaaS investment is the H2 2017 local minimum. What caused private investors to so quickly rotate out of the sector? One simple explanation that is too tantalizing to ignore is crypto. The second half of 2017 was the six months in which Silicon Valley and the broader technology sector went crypto-crazy.

Perhaps investors woke up from their token reverie and started to invest once again in things simple enough for them to understand.

Illustration: Li-Anne Dias