Public SaaS companies are navigating a new post-pandemic equilibrium where sustainable profitability is preferred to the low-margin, high-growth environment of the pandemic market boom.
The New SaaS Valuation Landscape
Public SaaS stocks have undergone a dramatic rerating since their peak in late 2021. Data from FirstRate Data indicates that for the SaaS Capital Index of SaaS stocks, valuation multiples of revenue are at approximately 7, down from over 14 in late 2021. This represents a return to the pre-pandemic environment where software multiples were usually below 10 for even high-growth high-margin companies.
Stock Performance: A Tale of Two Markets
The broad metrics mask a divergence in individual stock performances, with the market exhibiting a strong preference for companies being able to balance growth with profitability, and stocks with low profitability metrics. To mid-2025, the upper quartile of the SaaS Capital Index appreciated over 25%, on par with the broader tech-heavy NASDAQ 100 index. By contrast, the lowest quartile suffered a 10% depreciation with investors shunning stocks of companies unable to deliver sustainable profits.
The Profitability Imperative
Revenue Growth Deceleration
The most consistent feature across public SaaS companies is the consistent deceleration of revenue growth. Data from QuantQuote shows that during the pandemic boom of 2020–21, average growth rates of the best-performing Saas stocks were often in the 30–50% range, and some far in excess of 100% (Zoom's revenue growth in 2021 was over 300%).
Since then, SaaS revenue growth rates continued to decline, with the average Saas stock now posting a moderate 13% in Q1 2025 and forecast to decline further by the end of 2025. This marks a significant decline from pandemic-era highs when the median growth rate jumped by 11 percentage points to 31%.
Margin Expansion
The declining growth is due to decreased demand, but also partially attributable to lower marketing and sales spending. This, as well as price increases for most software products in the 2022–24 period, has resulted in improved net and gross margins. In 2021, the median net margin of public software stock was -11% as companies chased growth at the expense of profitability. By early 2025, this had improved to 6%, with over 70% of Saas stocks at breakeven or better.
Implications for SaaS Startups
1. The Growth-Profitability Balance
The data reveals a fundamental shift in investor preferences for software companies. Early-stage companies must now demonstrate a clear path to sustainable profitability earlier in their lifecycle. High-growth low-margin businesses that previously attracted an abundance of capital are no longer considered as viable investments.
In addition, investors are showing a preference for more capital-efficient startups that can grow to be public companies without consuming vast amounts of capital.
2. Valuation Expectations Reset
Private SaaS companies also need to recalibrate their valuation expectations to the current public market reality. This can be extremely painful in cases where prior funding rounds have been completed at elevated valuation multiples. If the average public company is trading at approximately 7 times revenue, high double-digit (and even triple-digit) multiples are unrealistic.
3. Funding Environment Changes
The explosive price performance of public Saas companies in the era to 2021 led many public market funds, such as Tiger Global, to begin focusing on private markets. Funds from these huge institutional investors flooded the private tech markets and caused many startups to assume that the abundant private capital would continue to sustain loss-making operations.
Since 2022, many of these investors have retreated from the private market, and funding has dramatically contracted for most tech sectors (with the notable exception of the AI space).
4. Quiet IPO Market
The tech IPO market has remained quiet since 2022, and is generally closed for all but the highest quality companies. This has meant that many mid-tier companies that were targeting exits post 2022 are now forced to consider other options to the public markets, primarily strategic acquisitions and private equity sales. Large strategic acquisitions of private companies are still a rare occurrence as many large tech companies are concerned with regulatory restrictions and prefer talent acquisitions. Thus, private equity sales are becoming an increasingly important source of exits. However, this mandates that the companies need to exhibit the characteristics of PE targets, which favours sustainable cash-generating businesses over high-growth companies that the public markets often favor.
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