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Last week, Oxx Partner Bob Thomas opened SaaSiest Digital with a keynote that set the stage for the day's discussions, focusing on the "New Era of SaaS." While it's no exaggeration to say that the start of the 2020s has been tumultuous on a macro and tech industry level, we are heading into what might be the most exciting era in decades in terms of technological development. In the keynote, Bob spoke about the current market, why SaaS businesses are built to survive tough times, and how to thrive in the new AI paradigm we're entering.
Setting the scene: The state of the market
The B2B SaaS industry has undergone a significant transformation in the past five years. Following a period of remarkable growth in valuations in 2020 and 2021, the SaaS index has recently fallen by 60%. Financing has become scarce, particularly in the IPO market, which was highly active until early 2022 but has since dwindled.
Rising interest rates have shifted investor preferences towards quicker returns and less cash-burning, lower-growth businesses, causing challenges for SaaS companies with high burn rates. Venture funds are focusing on deploying capital to protect their top-performing assets, making it increasingly challenging for early-stage SaaS businesses to secure funding. Even if funding is secured, businesses face a challenging path ahead with scarce financing and hesitant business customers. In other words, winter is here – but SaaS businesses are better positioned to handle it than other industries.
Why SaaS Businesses Are Built to Survive Tough Times
The power of SaaS is, to some extent, the power of compounding. In the same way that small incremental habit changes can make a huge difference in the long term, B2B SaaS businesses can achieve exponential growth by incrementally adding and upselling customers who remain loyal over time - a power that most consumer businesses do not have.
SaaS companies benefit from contractual terms that suit building customer habits, which means the business shouldn’t need to reacquire customers from period to period as the habit grows. This gives SaaS a solid foundation and the exponential growth potential that operators and investors love.
Entering New Paradigms – Shifting the Rock You Sit On
While SaaS businesses are resilient in tough times, paradigm shifts in technology can pose significant challenges. These paradigm shifts are infrequent but highly disruptive, with the potential to reshape the entire industry.
Previous examples include the transition to cloud computing and then to microservices, but now, the discussion centers on the emerging paradigm of artificial intelligence. Each paradigm has ushered in a number of new technologies to the market, technologies that have become industry standards in a short space of time - the foundations for a new generation of applications and businesses. The new AI paradigm will be the same.
Characteristics of the New AI Paradigm
Two critical elements are already emerging from the new paradigm that will impact the landscape: natural language interfaces and AI-driven agents.
Natural language interfaces - the LLM driven technologies that ChatGPT and others have already made familiar globally - make technology both more conversational and accessible, while autonomous agents excel in automating complex tasks, offering efficiency and accuracy, in addition to an ability to handle “vagueness” better than previous generations of automation software (e.g. RPA).
Winning in the New SaaS Era
So, how do you ensure you win or stay relevant in the new paradigm?
It is clear that the integration of AI will become a fundamental requirement for most—it's no longer a matter of choice, but a necessity to stay competitive. However, the key to success will lie in going beyond mere AI adoption. Winning companies will distinguish themselves by integrating intelligence into their existing workflows and products, leveraging AI to enhance their product-market fit. Control over input data and avoiding dependency on specific proprietary models are also critical for long-term success.
Given the regulatory uncertainties and potential risks associated with AI, maintaining agility is also crucial. In such a fast-moving environment, experimentation becomes key. Fortunately, many powerful open-source AI tools are readily available, making exploration and development accessible to businesses of all sizes. Encouraging cross-functional collaboration and fostering an experimental mindset are the paths to thrive in this high-potential but uncertain landscape.
