SaaS Capital’s 2024 year in review and look to 2025

Below are our reflections on the past year and our predictions for the year ahead.?Overall, SaaS Capital did a pretty great job of predicting how 2024 would go. From our year-end wrap-up email last year:

• We expect valuations to remain in their current range of 6.0x to 9.0x current run-rate ARR for most of 2024. The SaaS Capital Index moved broadly sideways all year, starting 2024 at 7.0x, dipping to 5.7x in June and hitting 7.3x in November after a post-election market pop.?
• Profitability will be the focus over growth. Yes. Almost all management teams, boards, and investors we spoke with in 2024 were focused on quarters-to-profitability first, and growth rate second – a big reversal from the recent past.
• IPO and M&A markets remain tight. There were only a small handful of B2B SaaS IPOs this year, with Rubrik and OneStream being the most notable. In private M&A, SaaS Capital had only five portfolio liquidity events in 2024. And perhaps most interesting, all five of those were sales to strategic acquirers. For the first time since our founding, there were zero venture capital rounds or private equity deals in the portfolio.
• Capital markets constipation will have upstream effects on Limited Partner (investor) liquidity and VC/PE ability to raise subsequent funds. We wish we weren’t so spot-on with this one, because we periodically raise funds from LPs ourselves. The last two years haven’t just been a slow tech liquidity environment; persistent higher interest rates have hamstrung real estate and other private assets. Limited Partners are lacking liquidity across all asset classes.?

SaaS Capital’s thoughts on 2025:

• Economic uncertainty: Going into 2025, economic uncertainty is the watch phrase. The direction and magnitude of economic impacts from inflation, interest rates, proposed US tax?and policy changes, among other drivers, are highly uncertain at the moment.?
• Accelerating SaaS M&A and IPOs:?The Fed has indicated it is in a rate-cutting cycle and, traditionally, lower interest rates spur growth and economic activity. We estimate that SaaS M&A and IPO activity will gradually accelerate in 2025 – yesterday’s very successful ServiceTitan IPO shows potential green shoots here.?
• But Series A venture deals are still a ways off: In 2024 we saw VCs prioritize later-stage, larger dollar rounds, in a move toward?less risky deals. ?Bona fide Series A deals are scarce at the moment, and likely not returning until the aforementioned upstream capital markets components move to “risk on” mode: lower rates drive more M&A and IPOs, which leads to Limited Partner liquidity, which will flow back into new VC and PE funds, who then invest those funds in Seed and Series A investments. This process will take time; early-stage venture may not thaw until 2026 at the earliest.?
• Valuations between 5.5x and 8.0x ARR: That all said, we expect public SaaS valuations to remain in their current band of 5.5x to 8x current run-rate ARR, with possible upside potential later in the year.?
• A shift towards growth vs. profitability: As we’ve shown in our research, SaaS companies’ decisions to emphasize growth vs. profitability are well correlated with changes in interest rates. If rates drift downward, expect companies to begin to re-emphasize growth. Should rates remain elevated or rise further, expect profitability to remain a priority. See the chart below. ?Growth rates (blue line, right axis) trend?downward whenever profitability (orange line, left axis) is above zero, and profitability stays high when rates (grey dashed line, left axis) are on the uptick.

• Artificial Intelligence is most impactful in content generation: AI in 2025 will be most seen in text, image, and video creation: “Generative AI.” Companies reliant on content marketing and SEO will run into mass-produced AI “slop” issues increasingly in 2025. AI could threaten a SaaS business if it produces content, sells to content creators, or provides a customer support product (e.g. chatbots). But we generally think B2B systems of record SaaS platforms are immune from the current version of AI. You can read more on our thoughts on AI + SaaS here.?
• 2025 will be another good year to run a SaaS business! Despite generationally high interest rates, the prior two years were excellent periods to use debt for SaaS growth. We think this will continue in 2025 as equity remains expensive and/or limited.?

Thank you to all of our borrowers, Limited Partners, and industry partners (investment bankers, VCs, PEs, and service providers) for another very successful year. We are the original pioneer of MRR-based lending and continue to be the most active alternative lender to SaaS companies. We could not do it without you all!

As a reminder, SaaS Capital lends $2M to $15M to B2B SaaS companies with $3M in ARR and up, registered and banked in the US, Canada, Ireland, or the UK. Companies do not need to be venture-backed, nor do they need to be profitable. If that describes you or a SaaS company you know, please don’t hesitate to reach out.