The software-as-a-service (SaaS) market has been growing since the early 2000s, becoming ingrained in the ways many companies conduct business successfully. But as the global economy teeters on the brink of a recession, will SaaS companies thrive — or even survive? While they once commanded grand valuations, these ventures have not navigated a full-on recession yet — but that could soon change.
One common metric used when evaluating SaaS is the “rule of 40” — if a company’s growth and profitability combine to exceed 40%, the business is sustainable, and investors are more likely to view it favorably. However, recent data suggests that the importance of growth far outweighs profit margins, especially for surviving an economic downturn. Also, because of the uncertainty behind the SaaS industry’s first potential recession, executives should make long-term investment decisions.
The mispricing of acquisition targets can also lead to significant losses in shareholder value, especially in the private market. To best navigate the economic downturn, SaaS companies need to think against conventional wisdom when developing new products, recalibrating existing ones, and acquiring new ventures. Reverting to the strategies that initially made SaaS a popular option could prove disastrous.