With the rapid development of SaaS in recent years, more and more SaaS companies have gone public. SaaS, which used to be just a startup and unproven business model for selling software and providing services, has become an established business model suitable for both startups and mature companies. Although SaaS is no longer something new, its potential market size and room for growth still surprise investors. This article reviews the current state of the SaaS market to answer three questions: Why are there so many SaaS companies? How are today’s SaaS companies different from those 10 years ago? Where are the investment opportunities in the SaaS field in the next 10 years?
The market size of SaaS will reach $7800 billion in 2030 with a 21% CAGR
According to estimates, the total revenue of SaaS companies reached $100 billion in 2019, accounting for 25% of the enterprise software market. We expect SaaS to have a 21% CAGR from 2019 to 2030, reaching $7800 billion in scale and accounting for 81% of the enterprise software market. The number of newly listed enterprise software companies will far exceed that of consumer tech companies. From 2009 to 2019, 98 enterprise software companies went public, four times that of consumer tech companies (24). 80% of the newly listed enterprise software companies are SaaS companies. During the same 10 years, the annual compound return rate of listed enterprise software companies was 23%, almost three times that of consumer tech companies (8%).
SaaS companies are increasingly using viral and self-propagating customer acquisition strategies
Some SaaS companies have developed more self-growing and cost-effective customer acquisition strategies in recent years. For example, Twilio positions itself for programmers within companies rather than CIOs or IT departments. This self-service sales model allows Twilio to reduce sales and marketing expenses to only 24% of revenue, half that of similar companies. Other SaaS companies like Slack, Dropbox, and Zoom utilize network effects from consumers and social media to drive viral growth. By turning consumers into sales agents, viral SaaS companies reduce customer acquisition costs. Our research shows that the sales and marketing payback period is shortened from 2 years for the first generation of SaaS companies to just 8 months for the new generation, allowing them to invest more aggressively in growth.
SaaS companies are promoting AI to differentiate product services
With breakthroughs in AI, SaaS applications have evolved from workflow orchestration to data analytics and prediction. As the hub for storing and organizing data, they can leverage machine learning frameworks to infer and predict based on file, image and video data. For example, Salesforce Einstein provides predictive leads, forecast outcomes and next best actions. Box applies AI to help customers categorize files, images and texts. Hosted or connected SaaS applications can instantly record user data, observe usage patterns, infer behavioral patterns with AI, and in turn drive product design based on new features and monetization opportunities.
The pandemic accelerates the shift towards remote work software
The COVID-19 pandemic in early 2020 forced countless companies, governments and schools to shift towards remote work. Working from home requires software that can run from anywhere and utilizes collaboration tools. Overnight, cloud software transitioned from nice-to-have to almost mandatory. The necessity for remote work solutions mainly came from two verticals, which also happened to be the biggest beneficiaries of the change in demand: collaboration and security. Daily active users of Microsoft Teams surged from 20 million to 70 million in Q1 2020, an increase of 3 times. Similar growth was observed for Zscaler.
In summary, we believe SaaS will achieve a 21% CAGR over the next 10 years, reaching $7800 billion in revenue scale by 2030 and accounting for 80% of the enterprise software market, presenting great investment potential.