Early-stage SaaS boasts best expected exit success rate for VCs

SaaS is the bread and butter of venture, offering capital-lite business models with high profit margins.

VC’s preoccupation with SaaS isn’t a coincidence. Historically, it has been one of the most lucrative areas for investors. And new research from PitchBook, developed using the machine learning-enabled VC Exit Predictor, shows that the expected future returns for SaaS far outpace other venture tech verticals.

PitchBook’s VC Emerging Opportunities report calculated that the annualized expected returns for early-stage SaaS companies was 5.5% higher than the average of 10 VC tech verticals. That advantage has grown in recent years, up from 3.2% in 2017.

External factors like interest rates, capital availability and recessionary cycles all affect returns for VC investments writ large. But by looking at relative expected returns, it’s possible to standardize for those outside forces, according to the report.

There’s still variability inherent to any model predicting expected returns. Especially for the verticals that fall in the middle—where the simulator didn’t project outsized overperformance or underperformance—such as the fintech vertical and AI and machine learning vertical. For these, how relative returns will shake out is much less obvious.

The expected rate of a successful exit for today’s early-stage SaaS companies is 78.2%. That’s more than 13 percentage points higher than the second-ranked vertical, cybersecurity.

The analysis estimates that 75% of the 3,000 SaaS companies in the exit predictor dataset will successfully exit through an M&A deal, and just over 3% will exit with a public listing.

Though Databricks has yet to announce any IPO plans, SaaS investors are closely watching the data analytics company’s movements, as one of the most-anticipated IPO candidates of 2024. Other prominent SaaS IPO candidates include fintech giants Stripe and Ramp, cybersecurity startup Coalition and HR tech platform Gusto.

Despite the fall in exit confidence caused by failed deals like the proposed Adobe-Figma acquisition, PitchBook analysts predict a strong year for software M&A.

M&A tends to be the target outcome for a vast chunk of SaaS companies. There is a huge number of strategic acquirers with the motivation and capital to ingest enterprise software companies, especially when compared to verticals like foodtech and agtech where potential acquirers for venture-scale businesses are few and far between.

Not all trends are positive for software startups. Flat rounds and down rounds were par for the course in early-stage SaaS in 2023: Pre-money valuations fell 20.3% relative to the average. Capital invested in SaaS was down 7.9% on a relative basis last year.

But those trends don’t appear to be putting off venture investors or hiring managers. SaaS was the second-highest-ranked vertical by payroll growth in 2023, and top-ranked investors still participated in SaaS deals at about the same rate as in 2022.