It’s been a tumultuous period for the global SaaS market with the impact of AI triggering portents of doom and panic amongst investors and business owners alike. The subsequent ‘SaaS Apocalypse’ has led to a 25–26% sector drop and over $1 trillion in lost market cap, driven by a fundamental repricing of software business models.

AI has created significant upheaval and debate as to who will be the winners and losers - in what is looking increasingly like another tech bubble - has begun in earnest. AI-native platforms are in pole position, but what about the myriad of existing and legacy SaaS businesses?

The situation has been building for a while. The ‘Rule of 40’ (the traditional metric that combined annual revenue growth rate and profit margin to equal or exceed 40% as an investable business) has been under pressure since 2022 when near-zero interest rates ended abruptly, curtailing access to cheap capital and leading to the compression of listed tech valuations that in turn saw investors pivoting away from rewarding growth at any cost and back to pure profitability.

As AI has become a functional reality, investors are demanding evermore supercharged efficiency and growth. That Rule of 40 has, for example, been superseded by the ‘Rule of X’ which places greater emphasis on growth for later-stage companies.

Yet despite all this volatility, this is not the end of SaaS, it’s merely evolving. With any initial surge driven in part by panic there is always a receding tide, and a new calm will be achieved once the wave of fear has peaked. Nevertheless, there are safe havens within SaaS that will be able to attract funding, investment or buyers…

Vertical SaaS

Specialised Vertical SaaS solutions (cloud-based software designed for a particular industry) with regulatory, workflow, or data moats, is holding up better compared to more general Horizontal SaaS packages that are undoubtedly more susceptible to AI.

Why is it a safe-haven?

• AI can automate tasks, but it can’t easily replace industry‑specific compliance, integrations or proprietary datasets.

• Retention is less sensitive to feature replication.

• Regulatory and compliance expertise takes years to develop.

• Such rules-based industries create a moat because new entrants must climb the same regulatory learning curve and embedded mission‑critical processes.

Value‑Based Pricing Models with Proprietary Data Moats

SaaS companies with user‑based pricing are being directly attacked by AI automation as is feature‑based differentiation. What remains defensible is data and the value it delivers.

Why is it a safe-haven?

• API‑based consumption (eg data, analytics, AI inference).

• Transaction‑based pricing.

• Outcome‑based pricing (eg revenue share, cost savings share).

These models scale with value delivered, not by the number of employees which is crucial when AI reduces headcount or user seats. Where there is deep proprietary data (eg legal, financial, scientific) these are falling less sharply than generic workflow tools as are better protected due to being:

• Unique, hard‑to‑replicate datasets.

• Longitudinal data that improves model performance.

• Embedded data pipelines that make switching painful.

SaaS That Acts as Infrastructure, Not Applications

Infrastructure‑layer SaaS is proving more resilient than application‑layer SaaS. Examples include identity and access management, integration & interoperability, observability and monitoring, data governance and lineage and API management.

Why is it a safe-haven?

• AI agents still need orchestration, security, compliance, and data infrastructure.

• These layers are less exposed to feature‑level disruption.

In summary

For existing SaaS businesses it’s not all doom and gloom for those that have defensive verticals, deep domain value propositions and infrastructure provision - by incorporating AI they can remain highly attractive propositions for strategic trade buyers and equity investors but at tempered revenue multiples. For horizontal SaaS businesses, meanwhile, although product dominance and specific strategies can provide a level of protection, the risks are far more evident, as recent dramatic falls in market valuations have confirmed.

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Rob Starr is a Partner - M&A at Shaw & Co.

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