SaaSpocalypse: What’s next for Europe’s SaaS scaleups and investors?

0:02Anne Sraders:Hello and welcome to the Sifted podcast. This week we're tackling the so-called SaaS apocalypse. Joining me, your host Amy Lewin, to talk through just how dire the outlook for VC-backed SaaS giants and the VCs who've heavily backed them is, I have Sifted senior reporters Anne Sraders and Freya Pratty. Recently, they've been speaking with investors and analysts to gauge what impact the rise of AI native startups is having on more traditional SaaS companies.

0:33Amy Lewin:So Anne, hello. Freya, hello.

0:35Freya Pratty:How are we doing? Hello. Doing well, Amy. Thanks for having me back.

0:39Anne Sraders:The sun is finally shining in London, so I'm in a very good mood. Let's get into it. So VCs have long loved software as a service or SaaS companies because they could become very valuable pretty quickly thanks to sticky subscriptions, which saw revenue roll in year after year with minimal extra costs per user added. But that all looks set to change, doesn't it?

1:07Amy Lewin:It does. I think fundamentally the moment we're in is people are questioning whether the functions these older SaaS companies have sold to customers can be done much more cheaply, better and quicker by the younger AI native startups. And if that's true, what edge does that leave the older companies with to make money from? This was really hammered home early this month when Anthropic, the US model maker, released a new Claude tool for the legal industry, which saw a sell-off in publicly listed software firms like Salesforce. One software ETF lost almost a trillion dollars in a week because of this fear that Claude's tool was going to come and take away the moat of these older SaaS companies that have delivered a similar service for a while.

1:55Freya Pratty:I think adding on to that, there's sort of a lot of concerns now around whether the traditional SaaS business models are kind of failing or going out of fashion. And a lot of SaaS companies charge, it's called per seat, meaning like per employee login to use their software products. And so I think with AI, there now seems to be this movement towards maybe something like a usage based pricing model where, you know, it's less fixed. It's maybe less dependable. It's more variable, but it's sort of more geared towards this new era. So I think a lot of companies are having to rethink their business model and that's making people a bit nervous.

2:29But the big, if you speak to some of the bigger companies, they're not actually too worried about the anthropics and open AIs, are they?

2:39Anne Sraders:I mean, I've spoken to one of the legal tech unicorns, Harvey. It's a US-based company, but it's pushing hard into Europe this year about that. And I feel like the defense from them and other companies, their big competitor in Europe is a Swedish company called Lagora. Freya, you were speaking to Thomson Reuters, the big content news legal company. And they all say the same thing, which is basically these big model makers don't have the depth of sort of content on this specific vertical, this specific industry, these specific niches, which means that they're never going to be as good. They're never going to be as accurate.

3:21Anne Sraders:It might superficially look good to stock market investors, et cetera. But if you actually get a lawyer or whoever to use this, it won't be as good. Do we buy that, Freya?

3:34Amy Lewin:Yeah, this was, as you said, I spoke to the CEO of Thompson Reuters, which is one of the firms that had seen its share price really fall after the Anthropic News. Steve Hasker is his name. He was very confident that their product can withstand these younger companies because, as you said, they have, in his eyes, a depth of data to train models on should they move further into AI, which is something they're already doing uh and he said he put it very well he said so their customers are people like uh as well as their news arm it's like the tax accounting and legal industry he said to me that if you ask someone to file their tax return and they get it like nine your tax return and they get it 97 right that can still land you in jail if the three percent is is major so i think in these kind of uh very kind of regulated industries there's the thinking is that a model would have to be so well trained on such a depth of data and so accurate this is something that would be hard for like a generalized model like Claude to replace and the other thing that he brought up which a lot of people talk about is like security over data like do law firms want to hand over confidential information to a generalized model maker I think that's where companies like Thomson Reuters will see the edge and we hear that a lot don't we am from investors I feel at least I speak to a lot who say they're very keen on vertical AI companies or vertical

4:56Anne Sraders:software companies, meaning companies that are going after, for example, the legal industry or the healthcare industry or the finance industry. And they've also said to me that they're much more keen on the ones in regulated industries because sort of once the logic goes, once you're bedded in, you're much sort of stickier, you know, a healthcare provider or government or whoever is much less likely to take out that software or that tool once it's working. Again, Anne, do you buy that or do you think that's what the industry is telling us to defend the decisions they've already made?

5:35Freya Pratty:Yeah, I think that's right, Amy. I think, you know, we're certainly hearing the argument that all of these sort of very compliance-heavy, regulated types of industries, like some of the ones we mentioned earlier, are very important to get it completely right. It's very high risk. And I think people are still unwilling to completely trust AI with a lot of that stuff. I think, you know, we've certainly seen AI improve massively in the last year or two, but there's still, you know, hallucinations and there's still things we have to worry about, about not performing perfectly when you need that for certain areas.

6:06Freya Pratty:And so I think that's a good point. I think the other point too is the data that they're training these models on as well. A lot of it for these more niche cases is kind of proprietary, which gives them maybe a bit of an edge. But I think in general, that's one of the things that VCs point out is potentially a big moat protector, I suppose, for companies in that particular niche.

6:25Anne Sraders:But there still remains, doesn't there, a big question over lots of these SaaS companies, these software companies that were invested in very heavily, especially through COVID. A lot of those businesses were the ones that saw their valuations increase really, really quickly. A lot of those companies haven't raised any money since then. Some of them have announced that they're profitable. Some of them have started acquiring other businesses, all of which would indicate that they're in a healthy place. But there are some that have just sort of gone quiet. And I guess a question that people have started raising is you know a lot of vcs in europe and elsewhere are still perhaps valuing previous funds and the portfolios of previous funds at these valuations that they had before ai came along and what when these sas you know unicorns or sas giants eventually get revalued by you know a new serve private investors or because they get acquired or because they choose to list, what will happen to them?

7:33Anne Sraders:And then does all of these European investors who are saying, oh, our last fund had this amazing DPI or is looking like it's going to give these amazing returns to their investors, actually all kind of the bottom falls out of that. Do we think that's likely? I guess that's part of this apocalypse that people are talking about for ZAS or is it that also a little bit overblown.

7:57Freya Pratty:Yeah, I mean, I think that, you know, clearly VCs are really eager to see their companies like successfully pivot in this AI age, because right now, I think what's really key in the equation is that the appetite for software IPOs has dwindled, despite like, as you talked about, Amy, huge backlog. And so, you know, I was speaking with an IPO strategist recently who told me that, you know, AI has kind of been a risk for these software companies for a while, but it's, of course, even bigger now and that, you know, software IPOs will need to really present a very clear case that they can't be disrupted by like a Claude, for example, if they want to woo these stock investors.

8:32Freya Pratty:And so I think, you know, there's also been a disconnect between the public and the private valuations and software over the last few years. And so I think, you know, as the strategist was saying, this doesn't really, you know, bridge the gap that much right now with what's happening in the market. And so I think that is certainly a big concern that VCs are having. And I think we're seeing a lot of them also kind of continuing to hold on to these companies for longer. We're seeing a lot of funds doing continuation funds. So essentially being able to hold on to stocks for longer, potentially hoping they'll be able to pivot and kind of find a new growth avenue here or maybe eventually go public.

9:06Freya Pratty:But I think this is definitely on the minds of a lot of VCs at the moment. The other dynamic is VCs want to hand

9:12Amy Lewin:over software firms to PE firms. As we know, there's Anne's talked about the IPO market not being as active PE has been the exit route there's a lot of talk at the moment about how those PE firms also hold portfolios of older SaaS companies where can they hand them on to and therefore the whole chain is disrupted so that avenue might also kind of close up because they're also affected by the SaaS dynamic at the moment.

9:36Anne Sraders:I was also speaking to some some lawyers yesterday who've worked with I won't name which law firm it is but they work with a lot of the very buzzy companies the likes of um lovable and some of the the biggest vcs like avantik and they were saying wait a second don't write off the sas businesses just yet that lots of them and we hear this from vcs as well um have done a good job of sort of rewiring their business for the for the ai age um one of our colleagues anna kelly recently went on a jog with uh eleanor crespo who's the founder of pigment um which is a french um software company and uh he'd spoken to some of their customers and they they'd said they do believe that they're an example of a company that has sort of rewired well to ai so then you have a double advantage you have both you know the ability to use the efficiency gains etc of ai plus you're already a software company that has raised a certain amount of money and has a bunch of customers.

10:40Anne Sraders:So I guess there's basically a lot of different categories of companies that we're talking about here. And I think it makes a big difference whether it's a SaaS company that has successfully adopted AI or rewired the business such that it becomes more sort of AI native or not. And equally, the lawyers were saying to me, we're still very early in the world of uh ai and who's to say that the valuations of those companies are also not going to hugely change at some point in the future so there's a lot of unanswered questions for all of us i guess for a while still yeah that's right i think you know as you mentioned

11:22Freya Pratty:pigment there's also a berlin-based startup choco which was building software for food suppliers and restaurants to essentially digitize order processing. And they were also telling my former colleague, Miriam Partington, in December that, you know, they've undergone a lot of changes with AI and that they have a new AI-powered ordering agent, which has actually become their biggest revenue driver. So I think, as you said, Amy, definitely possible for companies to kind of do this pivot. I think it's just becoming an imperative that they actually do that now. I was talking to another VC who essentially said, you know, SaaS was all about enabling the productivity of human workers.

11:59Freya Pratty:And now it's about enabling or delegating tasks to AI agents. So it's a different perspective shift that's maybe happening. But I think, you know, companies that are getting on board and successfully doing that are definitely out and about.

12:11Anne Sraders:Freya, you've also been speaking to some quite SaaS focused investors, haven't you? Did they throw anything else into the mix?

12:20Amy Lewin:Yeah, I had a good chat with Henry Mason, who's a partner at Dawn Capital, which is a London-based firm which has invested in a lot of SaaS companies historically and Henry is yeah he's not too scared of a SaaSpocalypse. He thinks that the point Anne made earlier that we're failing to recognize that actually the edge older companies have is not a technical one or if it is that they can bring in the team to compete in that way. It's actually about relationships with customers that choosing a software provider is something that a customer will go through huge extensive checks and security run-throughs and customers don't switch like that and if they are going to switch they want to know that the company's going to be around for a while and that's something that perhaps the AI companies need to prove.

13:07Amy Lewin:So he thinks that that's a huge edge that actually if an older company brings out an AI product within an existing contract a buyer will take that off their hands away more easily than having to like rip up that whole contract and draw up a new one with a young player so those customer relationships I think are what will come to the fore which is what someone else was saying to me about D-PAL which has historically been a translation tool and is moving more into like wider agents and this person was saying to me they are much more strongly placed to do that than a new company coming in and trying to replicate those relationships they can go to a whole like contact book of existing customers and say we've got this product rather than having to go out and make the customer relationships from scratch so yes Henry from Dawn is not worried about the sasspocalypse because of that point and I feel like maybe our conclusion

13:58Anne Sraders:from this chat today is that it's all a bit unclear still and the sasspocalypse might be

14:05Amy Lewin:somewhat overblown would you agree yeah it's a it's a good word in a headline which is why I I think we've seen it across lots of the press recently. I think it does change. People have said to me that although we don't know which firms are going to be able to pivot and do best or which ones are going to come in and replace the old ones, what is clear is that it means investors are going to look at different criteria when they're assessing a company. So you don't just want to see subscriptions and sticky revenue. You want to see that the team can pivot and are really agile. And that's something that's come to the fore.

14:42Amy Lewin:in recent months, as opposed to kind of being a great team that can run this product that's been going for years and years. You want a nimble team that can move the product around really quickly. So I think that's one, the kind of underwriting and way investors are looking at businesses is definitely something that is guaranteed to change.

14:59Freya Pratty:Yeah, I think on that point as well, like it's, you know, it's sort of a moment where SaaS company, the more traditional state SaaS companies need to adapt to AI to grow faster because the growth rates between these sort of AI native younger companies and the older businesses is just very different. But also, I think the AI startups need to start proving themselves as well. I think this is a point some people made to me and Freya for our recent story is that, you know, a lot of the software companies, maybe they're not growing quite as fast, but they've had, you know, steady metrics and enduring growth.

15:30Freya Pratty:And as you mentioned, the brand as well, and the customer contacts. And these AI startups look very flashy and exciting. They're growing really quickly. But again, it's about that endurance. So I think they're sort of moving in different directions here where SaaS companies need to adapt to faster growth, but AI startups need to start proving themselves more sustainably, I suppose.

15:48Anne Sraders:Listeners, if you have anything to throw into the mix, please get in touch. I'm amy at sifted.eu. I don't think I've done a listener call out for a while, but we really love it when you get in touch. So please do. I'll repeat, it's amy at sifted.eu. Throw in your thoughts. Did you wildly disagree with anything we've shared today? Do you know of some companies that you think are doing either a fantastic or a terrible job of rewiring AI that you think it would be interesting for us to look at. And if you have any topics that you'd love us to discuss on a newsroom episode like this in the future, or that you'd like to see us cover on Sifted as well, please get in touch.

16:27Anne Sraders:Anne, Freya, it's been short but sweet. I feel like we've covered a lot of ground. Thank you very much for joining this episode of the podcast. Thank you for having us. And for more on the evolving strategies of Europe's VCs, please sign up to Anne's weekly newsletter, Upground. We'll drop a link in the episode description. We'll also drop a link to Freya and Anne's piece on the Sasspocalypse that we've been mentioning today. And as usual, please rate and review the podcast. It was produced, as always, by the wonderful Maya de Rampel-Hornby.