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Why SaaS valuations changed and why they aren’t going back
- Feb 6
- 5 min read
For a long time, public market multiples quietly set the expectations for what exits should look like. That mental model no longer explains what is happening.
What has changed since the last cycle is not just interest rates or risk appetite. According to recent long-range analysis of public SaaS outcomes, the category itself has crossed a threshold. SaaS has moved from a long phase of expansion into one of digestion, a phase where value comes less from capturing new economic ground and more from deciding which software genuinely earns its place, and this shift is structural rather than cyclical.
For roughly two decades, SaaS benefited from strong tailwinds: the digitisation of manual processes, the replacement of on-premise software, and an expanding share of economic output flowing into IT. That combination allowed growth to stand in for almost everything else. Scale was assumed to bring margins. Margins were assumed to bring cash. Cash was assumed to justify high future value.
That chain no longer holds for much of the category.
Most economically meaningful workflows are already software-mediated. Incremental SaaS growth increasingly comes from displacing other software rather than replacing labour. At the same time, IT spend has stopped expanding faster than the economy as a whole. In that environment, slower growth and capped margins are not anomalies; they are what maturity looks like.
This is why public SaaS repriced together. Not because markets overreacted, but because the old valuation bridge broke. When growth slowed and margin expansion failed to compensate, prices had to move toward what could actually be underwritten over the long term. Even after adjusting for growth, the market now pays less for SaaS than it did a few years ago.
For European founders, this shift has been felt earlier and more sharply. Smaller national markets, language boundaries, regulatory variation, and conservative buyers mean that growth slows sooner and margin ceilings arrive faster. Where scale can still blur these effects in the US, fragmentation exposes them in Europe. The result is that European SaaS businesses are priced on economic contribution earlier, not later.
It is worth pausing on the emotional side of this, because it matters. Many founders built good businesses (real customers, real revenue, real products) with an implicit expectation shaped by the last cycle. A €5–20m ARR vertical SaaS company in Europe is hard-won: long sales cycles, credibility-heavy buyers, deep domain expertise, and often a decade of compounding effort. It is reasonable that founders expected reaching that scale to unlock premium exit outcomes.
The repricing feels like the rules changed mid-game. In reality, the game ended and a new one began. This is not a judgement on execution quality. It is what happens when a category matures.
What the data does show very clearly is that valuation outcomes are becoming more polarised. Even after adjusting for growth, valuation support is concentrating in a shrinking subset of SaaS companies while the median continues to compress. The unavoidable conclusion is that the market no longer believes all SaaS deserves durable value.
Once that is accepted, the question is no longer whether a divide exists, but what actually separates the companies that retain valuation support from those that do not.
The most consistent explanation, and the one that fits both the data and buyer behaviour, is economic displacement. Software that primarily replaces other software, improves convenience, or competes at the feature-level is increasingly treated as substitutable. Software that takes responsibility for work by reducing human intervention, compressing cycle times, or eliminating specialist effort continues to command confidence even as the category matures.
This distinction matters disproportionately in Europe. Labour here is expensive, regulated, scarce, and politically protected. Software that meaningfully reduces reliance on specialist headcount or automates judgment-heavy work inside regulated workflows creates value that is difficult to replicate and hard to unwind. That value persists even when growth slows.
This is also where the idea of “systems of context” becomes important, not as a slogan but as a valuation boundary. Software that accumulates an understanding of how work actually happens, why actions are taken, and what consequences follow, becomes embedded in a way that survives interface changes, competitive pressure, and model commoditisation. Context compounds. Features do not.
Recent buyer research helps explain how this plays out in practice. Acquirers are no longer underwriting AI ambition or product breadth. They are underwriting whether software genuinely removes work. They look for evidence that human intervention falls over time, that outcomes are owned end-to-end inside workflows, and that autonomous behaviour can be audited, explained, and reversed. In effect, buyers are testing whether value comes from replacing labour rather than merely rearranging tools.
Read together, the picture is coherent. Macro data shows that valuation support is narrowing. Buyer behaviour shows how decisions are made about who remains inside that narrowing circle.
This also explains why exits still happen even as broad multiples remain capped. In Europe especially, IPOs are rare and unlikely to be the dominant path. But strategic and sponsor-led acquisitions continue where the asset replaces labour, owns context, and produces predictable cashflows. These are not the deals that trend on LinkedIn. They are the deals that close.
For founders, the implications are uncomfortable but clarifying. If growth stalled tomorrow, would the business still compound cash? If a large customer left, would meaningful, non-replicable context leave with them, or could a competitor rebuild the product quickly? Are you displacing spreadsheets and specialist headcount, or primarily competing with other vendors? When your software acts autonomously, can its behaviour be defended to an auditor, a regulator, or a buyer? These are the questions that now determine value in European vertical SaaS - not whether growth looks impressive in isolation.
The hardest truth to accept is also the most liberating. Most SaaS founders are no longer building businesses that will deserve premium, narrative-driven exits. Not because they failed, but because the category matured earlier here, under tighter constraints.
The opportunity that remains is narrower, but clearer: build software that replaces labour, accumulates irreplaceable context, generates durable cash, and can be trusted inside real, regulated workflows.
In Europe, that has always been the only kind of software that truly lasts. If you want to discuss your exit with Ishikawa Technologies, please request a call. I would be delighted to hear from you.
Sources and acknowledgements
This blog draws on recent publicly circulated research by Avenir on long-term
SaaS valuation dynamics, including work shared publicly by Avenir partners Jared Sleeper and Hannah Bao.
It also reflects buyer-side diligence perspectives from PitchBook research on enterprise software, AI systems, and M&A underwriting, including thematic work by PitchBook’s Emerging Technology and Enterprise Software research teams including Derek Hernandez.