It’s hard to believe we are only eight months into 2025, given the sheer number of macro and market developments shaping the investment landscape. Fiscal policy uncertainty, a shifting US administration, resilient equity markets, and the relentless march of AI have all been at the forefront of investors ' minds. One of the most telling sectors for these trends is Software-as-a-Service (SaaS), which has become both a barometer of capital availability and a test case for how markets reward (or punish) growth in a tighter funding environment.

Slowing Growth, Rising Maturity

SaaS businesses remain fundamentally strong, but revenue growth is slowing. According to the SaaS Capital Index, median public company growth has slipped to 14% as of July 2025 – the lowest level since the Covid-19 Era boom. Context matters here: the median company is now much larger, and maturity naturally tempers growth rates. Still, the slowdown reinforces reality investors are increasingly recognising – sustainable expansion, rather than breakneck top-line growth, will be the defining success factor for the next generation of SaaS leaders.

Liquidity Still Tight

Venture capital fundraising tells its own story. In 2021, more than 4,200 firms raised over $400 billion. By 2024, the number had fallen to just 1,415 firms, securing $160 billion. The result is a leaner funding environment where capital is deployed selectively, and the competition for equity is intense. For entrepreneurs, this means higher scrutiny, tougher terms, and a greater focus on profitability as a measure of resilience.

This liquidity constraint has also reshaped exit dynamics. M&A activity has slowed, and while IPOs are re-emerging – with Figma’s listing a standout success – the pipeline remains narrow. Notably, when M&A transactions do occur, they are typically driven by strategic buyers rather than financial sponsors. That underscores a new reality: only companies delivering genuine strategic value will command meaningful exits.

The AI Factor

I don't think there's any discussion of SaaS in 2025 without mentioning AI. The sector is the epicentre of investor attention, with more than 30% of all VC dollars this year funnelled into just three AI companies. While enthusiasm remains high, valuations are increasingly “priced for perfection.” For founders, this creates a paradox: AI integration is becoming table stakes for SaaS growth stories, yet the risk of investor disappointment rises if execution falters. For investors, it demands sharper diligence – distinguishing genuine competitive advantage from hype-driven multiples.

Valuation Bifurcation

Valuations for public SaaS companies are holding steady in the 6–7x revenue multiple range, comparable to those seen in 2016–2018. But beneath the surface, dispersion is widening. Winners with top-tier growth or compelling AI integration command premiums well above the median, while others languish at deep discounts. This “K-shaped” dynamic is just as pronounced in the private market, where later-stage capital is concentrated in fewer, larger players.

For investors, the lesson is clear: broad-based bets will underperform. The opportunity lies in carefully selecting businesses that can either maintain elite growth rates or demonstrate a disciplined march towards profitability. For management teams, it is about buying time – extending runway, balancing growth and efficiency, and using debt intelligently to preserve optionality until market conditions improve.

Outlook

Looking forward, the SaaS sector will continue to be shaped by bifurcation – between the haves and the have-nots, between those with privileged access to capital and those forced to bootstrap their way to sustainability. Equity markets are rewarding execution at the company level, not the sector level. That makes this a stock-picker’s and founder-operator’s market rather than a tide that lifts all boats.

A significant easing of financial conditions or a broad-based economic acceleration could shift the narrative. Until then, we can expect a disciplined and selective market where fundamentals will trump momentum.

For investors, this means patience, conviction, and the willingness to underwrite volatility in pursuit of long-term structural winners. For entrepreneurs, it is about resilience, adaptability, and keeping control of the levers you can influence – capital efficiency, customer retention, and genuine product differentiation.

SaaS remains one of the most compelling long-term investment arenas. But as 2025 makes clear, we are entering a new phase – one that rewards discipline over exuberance and sharpens the divide between leaders and laggards.

Have a great week!