Is Software as a Service (SaaS) a Safe Haven Investment?

The global software as a service (SaaS) market is projected to reach over $700 billion by 2030. Are all SaaS companies a good bet for investors during economic downturns? 

The SaaS model is seen by most investors as more resilient to a recession than other industries because of its stable revenue.

“Unlike B2C companies, such as e-commerce, B2B are less vulnerable to market fluctuations,” believes Aleksandr Kuraksin, co-founder at Prospective Technologies Ventures (PTV), a new fund focusing on IT infrastructure and supply chain automation. “As soon as the software company has at least a cash flow of $1 million and a strong unit economics, it’s very unlikely to close even in the worst of times.”

Market data for the past 15 years confirms Kuraksin’s opinion. Over 80% of companies continued to grow after the mid-2008 crash, according to SaaS Capital research. These businesses were able to achieve profitability in a fairly short period of time, and none became insolvent or declared bankruptcy. But a recession could substantially slow the growth of the average SaaS company, believes Rob Belcher, managing director at SaaS Capital.

“In the 2008 recession, the growth rate for arguably the best SaaS companies in the world fell from 40% to 10%,” Belcher said. “Some of this decline follows the natural growth curve of a maturing SaaS business; however, the recession essentially put a kink in that curve which then rebounded to a more normal level of 30% a few years after the recession ended.”

What SaaS companies are recession-proof?

The best bet during an economic downturn are those SaaS companies offering software that automates and increases the efficiency of supply chain and manufacturing, says Kuraksin. PTV chose a risk averse approach, focusing on firms with revenue and strong unit economics.

“Automating processes can reduce the human factor, decrease costs, prevent many errors, and ensure supply chain security,” Kuraksin said. “For example, inventory management solutions using robotics or drones could help warehouse operators to optimize their workforce.” 

Labor shortages in U.S. warehouses are worse than ever, according to recent reports. Over 70% of operators can’t find enough workers, so Kuraksin believes SaaS companies can provide a solution. Other industries where demand is high include transportation, construction, and even software development.    

“The competition for IT talent is high globally,” Kuraksin said. “SaaS solutions for IT teams could help increase the speed of software development. For example, one of our portfolio companies dramatically increases the speed of quality assurance (QA) testing.”

Kuraksin believes that SaaS solutions helping businesses to optimize, reduce production costs, and increase their competitive advantages will be in demand in years to come. 

The future of SaaS

The economic downturn and fears of recession have already impacted the SaaS market. In Q2, VCs had almost 30% fewer SaaS deals, according to Pitchbook. And stock prices of fast-growing software companies have plummeted on average about 60% over recent 12-month highs. 

But companies still need business-oriented SaaS platforms that encode corporate policies, rules, and processes. With the rise in the number of mobile users in offices, SaaS solutions could “help employees perform better,” Allied Market Research said in a statement. 

New software could improve corporate efficiency, and allow companies to discover new revenue-generating market opportunities. 

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