SaaS in, SaaS out: Here’s what’s driving SaaSpocalypse

One day not long ago, a founder texted his investor with an update: he was replacing his entire customer service team with Claude Code, an AI tool that could write and deploy software on its own. For Lex Chow, an investor at One Way Ventures, the message signaled something bigger — the moment when companies like Salesforce stopped being the automatic default company.

“The barriers to entry into building software are now so low thanks to code agents that the build versus buy decision is shifting toward building in many cases,” Zhao told TechCrunch.

The shift in build versus buy is only part of the problem. The whole idea of ​​using AI agents instead of people to perform work calls into question the SaaS business model itself. SaaS companies currently price their software per seat, that is, by the number of employees who log in to use it. “SaaS has long been considered one of the most attractive business models due to its highly predictable recurring revenue, massive scalability, and 70-90% gross margins,” Abdul Rahman, an investor at investment firm F-Prime, told TechCrunch.

When one or a group of AI agents can do this work — when employees simply ask the AI ​​of their choice to pull data from the system — the per-seat model begins to break down.

The rapid pace of AI development also means that new tools, such as OpenAI’s Claude Code or Codex, can replicate not only the core functionality of SaaS products but also additional tools that a SaaS vendor sells to drive revenue from existing customers.

What’s more, customers now have the ultimate contract negotiation tool in their pocket: if they don’t like a SaaS vendor’s prices, they can, more easily than ever, build their own alternative. “Even if they don’t go the build route, this creates downward pressure on the contracts that SaaS vendors can secure during renewals,” Abdel-Rahman continued.

We saw this as early as late 2024, when Klarna announced it was abandoning Salesforce’s flagship CRM product in favor of its own home-grown AI system. The realization that a growing number of other companies could do the same is spooking public markets, as the stock prices of SaaS giants like Salesforce and Workday have fallen. In early February, investor selling wiped out nearly $1 trillion from the market value of software and services stocks, followed by another billion later in the month.

Experts call it a SaaSpocalypse, and one analyst calls it a FOBO — or fear of going out of style — investment.

However, venture investors TechCrunch spoke with believe these concerns are only temporary. “This is not the death of SaaS,” Aaron Holiday, managing partner at 645 Ventures, told TechCrunch. He said it was the beginning of an old snake shedding its skin.

Move fast, break SaaS

The overall market pattern is best illustrated by Anthropic’s recent product launches. The company issued a cybersecurity cloud code, and related stocks fell. It issued legal tools at Claude Cowork AI, and the stock price of the iShares Expanded Tech-Software Sector ETF — a basket of publicly traded software companies that includes companies like LegalZoom and RELX — also fell.

Investors said this was expected in some ways, since SaaS companies have long been overvalued. What also doesn’t help is that these companies did the bulk of their growth during the era of zero interest rates, which has since ended. The cost of doing business rises when the cost of borrowing money increases.

Public market investors typically price SaaS companies by estimating future revenues. But there’s no telling whether anyone will be using SaaS products in a year or five years to the extent they did before. That’s why, every time a new advanced AI tool is released, SaaS stocks feel the jolt.

“This may be the first time in history that the ultimate value of software is fundamentally called into question, reshaping how SaaS companies underwrite going forward,” Abdel-Rahman said.

This is because adding AI features to existing SaaS products may not be enough. The number of AI startups is growing at a record pace, having completely redefined what it means to be a software company.

Building software is now easier and cheaper, which means it’s easier to replicate, Yoni Richtman, partner at Slow Ventures, told TechCrunch.

This is good news for the next generation of startups, but bad news for established companies that have spent years building their technology stacks.

On the other hand, the market also lacks enough time and evidence to prove that any new business model that emerges in the wake of SaaS will be worthwhile. AI companies sometimes price their models based on consumption, meaning customers pay based on how much AI they use, which is measured in tokens (which each model provider defines slightly differently).

Others are working on “results-based pricing,” where fees are charged based on how well the AI ​​actually works. Ironically, this is the current approach taken by former Salesforce CEO Bret Taylor’s AI startup Sierra, a quasi-competitor of Salesforce that offers customer service agents.

This approach seems to be working so far. In November, Sierra achieved $100 million in annual recurring revenue in less than two years.

There was also the idea that cloud software like SaaS that they sell would never depreciate in value and that they could last for decades. This is still true in some ways compared to what came before – on-premises software, which companies had to install and maintain on their own servers.

But being in the cloud doesn’t protect SaaS vendors from a brand new technology rising to the competition: artificial intelligence.

Investors are nervous, rightfully so, as AI-driven companies emerge, adapt, adopt, and build technology much faster than a traditional SaaS company can move. After all, SaaS companies are incumbents, having replaced old-school on-premises vendors in the recent era of disruption.

This SaaSpocalypse calls to mind Taylor Swift’s lyric about what happens when “someone else lights up the room” because “people love creative people.”

“The most important thing to understand about the SaaS pullback is that it simultaneously represents a real structural shift and perhaps an overreaction in the market,” Abdel-Rahman said, adding that investors typically “sell first and ask questions later.”

SaaS IPOs are on hold

Public market SaaS companies aren’t the only ones getting cold feet from investors.

A Crunchbase report released on Wednesday showed that although the IPO market appears to be thawing for some sectors, there have not been — nor are expected to be — any venture-backed SaaS filings on the horizon.

This may be because there is significant pressure on large, private, late-stage SaaS companies like Canva and Rippling given the disruptive IPO window, high expectations driven by AI developments, and the unstable stock price of already public SaaS companies, Holiday said.

Some of these companies, including mid-sized SaaS companies, have struggled to raise expansion rounds in the private market, due to the same concerns that public investors have, Holiday said.

“No one wants to be exposed to the volatility of public markets when sentiment can send companies into a bearish tailspin,” Richtman said, adding that he expects companies like these to remain private for much longer.

Meanwhile, the public market is waiting to get a closer look at the financial health of the first indigenous AI companies hoping to go public. scuttlebutt says both OpenAI and Anthropic are considering an IPO, perhaps even later this year.

The most likely outcome is something that weaves old and new together, as is always the case with technological disruption.

Holiday said that most of the new features businesses are using these days “won’t stick around” and that organizations will always need software that meets compliance regulations, supports audits, manages workflow, and provides durability.

“LTV for shareholders is not built on hype,” he continued. “It’s built on fundamentals, retention, margins, real budgets, and defensibility.”