Year in Review: Vertical SaaS in Public Markets
These days it seems like optimism about the future of tech is the rarest of commodities. But the gloominess about the collapse of tech valuations — and SaaS valuations in particular — only makes sense if you look at the performance over the past 12 months. When you zoom out, you’ll find that the SaaS industry is still demonstrating incredible strength, especially software companies focused on industry-specific products.
The strength of vertical SaaS companies in the public market reflects a broader trend in the digitization of every industry, which shows no signs of slowing. US corporate spend on cloud services is expected to grow 56% through 2024, and vertical SaaS companies will be a major beneficiary of this secular trend. As for the drawdown in public SaaS companies, when you take the long view, it’s evident that this is just a reversion to the mean.
The wild exuberance for tech investments between 2020 and 2021 had pumped public and private SaaS valuations to unsustainable levels. A correction was inevitable and — ultimately — a healthy development for the industry. Nevertheless, the top quartile of private enterprise software companies are still valued at multiples in excess of 30x, reflecting the enduring strength of this category. As Silicon Valley Bank noted in a recent report, companies in the “operations software” subsector, which includes vertical SaaS, continue to have among the highest multiples in the tech industry.
The Fractal Vertical SaaS Index: By the Numbers
The Fractal Vertical SaaS Index is a basket of 18 public companies that derive most of their revenue from industry workflow software. All but four of the companies in the index IPO’d after 2000 and more than half of the companies in the index have IPO’d since 2014. The index and analysis does not include data from public vertical SaaS companies that were subsequently taken private (e.g., Mindbody).
Since the last State of Vertical SaaS report was published in October 2021, only a single company has been added to the Fractal Vertical SaaS Index. On December 7, 2021, Vacasa, a software platform for vacation rental management, went public via a Special Purpose Acquisition Company at a valuation of roughly $4B. The downturn in IPO activity over the past 12 months is not unique to vertical SaaS companies. According to Dealogic, approximately 87% of companies that went public in the US in 2021 are trading below their offering prices and are down more than 49% on average. This weak performance has caused many companies to postpone their planned IPOs, including ServiceTitan, the field services software provider, which had reportedly filed for an IPO in January at an $18B valuation — nearly twice the valuation of its most recent round in 2021 at $9.5B.
Since January 2020, the total market cap of the Vertical SaaS Index has grown by 30% and Fractal’s vertical SaaS index remains above its pre-pandemic highs. Over the past 2 years, the total LTM revenue of the companies in the index has doubled from $14.9B to $29.5B. Roughly 11% of that revenue growth can be attributed to companies already in the index prior to 2020 with the remainder accounted for by the addition of six new companies to the index in the interim.
Of the 12 companies that existed in the Vertical SaaS Index in January 2020, only 3 have seen a decline in market capitalization as of November 29, 2022. Of the companies whose market cap increased during this time period, the median increase in market cap was 27%. This gives us immense confidence in the resilience of vertical SaaS as an industry and continued growth of public vertical SaaS companies in the years ahead.
To learn more about the state of vertical SaaS in public markets or download the Fractal Vertical SaaS Index, visit our website.
