By Ivan Nikkhoo
When SaaS first came onto the scene, it was transformative for the software industry because it shifted how software was sold, delivered and priced. The era of licenses and maintenance ended. The software companies that did not adapt ceased to exist. This dynamic has been relatively unchanged and unchallenged for more than two decades.
But now, with AI emerging as a dominant force — and billions in venture capital moving from SaaS to AI platforms and startups — founders, investors and customers are finally propelling the segment into a new wave of innovation.
The age of steady, incremental software improvements is over. Only the most agile and adaptive SaaS companies that will be AI first will survive the transition. The rest will go the way of Novell and DEC.
Incumbents vs. challengers
When you think of SaaS, a few software giants inevitably come to mind, companies like Microsoft, Salesforce 1 and Oracle.
Traditional SaaS companies are like icebergs and tend to fall behind technology and innovation due to systemic issues and delayed decision-making. Internal teams are then invented to threaten old ones, even while existing sales teams continue to push what they already sell.
Ultimately, the successful incumbents manage to change these internal incentives and embrace innovation; the others fall by the wayside and fade into irrelevance.
Challengers, by contrast, often build better products. But better doesn’t always win. Large enterprise client deals take years to close, and incumbents have both a proven track record of success and the patience to ride out the sales cycle.
Enterprise clients won’t make a bet unless the vendor is credible, capitalized and clearly solving a priority problem.
It can be exceedingly difficult for SaaS startups to have the financial wherewithal to survive until they realize big deals. And big deals are what investors want to see.
Why startups must go on the offensive
At a moment when AI is challenging convention left, right and center, startups should be hot on the heels of those SaaS vendors whose technologies and products are becoming obsolete. The choice is stark: either replace them, or get bought by them.
The opportunistic big SaaS players have M&A teams that are — unlike their product teams — constantly looking to stay on top of the game. AI SaaS vendors who have a great product, but who can’t sell to big customers, will be eaten.
Parallel markets
But there’s a second dynamic at play — one that’s arguably more exciting. AI is creating an entirely new category of SaaS, one that looks beyond productivity gains to reimagine vertical industry-specific workflows.
AI brings about so many new possible use cases, especially in vertical markets like healthcare, and we are still at the very early stages of imagining just what those will be. Healthcare alone is growing quickly (projected to reach $74.74 billion by 2030), and startups offering products that enable healthcare companies to harness their own data will reap the biggest financial rewards.
Large vertical enterprises are sitting on mountains of data. AI SaaS startups that help them harness this data in novel and transformative ways will unlock outsized value and be very difficult to unseat. The same applies to other verticals — legal, financial services, supply chain — where legacy systems and poor data infrastructure have traditionally held back innovation.
What happens next
So where do we go from here?
What companies like Microsoft, Salesforce and Oracle have on their side is that they are the system of record for most of the corporate world. Are they going to be replaced? No, they have the data. As a first step, newer players will need to come in and sit on top of those platforms and provide better capabilities. The smart incumbents will look to buy them out immediately.
However, the smaller existing SaaS players that are not a system of record will be replaced. A new wave of category leaders will emerge in AI-driven vertical SaaS, solving hard problems in industries where traditional software has barely scratched the surface.
What we call “SaaS” today will survive, but in a radically different form. In some sectors, it will evolve. In others, it will be unrecognizable. It will be less expensive, easier to onboard, upgrade and use.
Ivan Nikkhoo is managing partner at Navigate Ventures. He has more than 41 years of C-level global experience in the tech sector as a seasoned investor, entrepreneur, board member and educator focused on helping teams prepare for rapid growth, scaling and liquidation events.
Illustration: Dom Guzman
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