SaaS is not dead, and anyone who makes such a statement in our view doesn’t understand what enterprise SaaS is, or what AI has evolved into. Before you read further you should know that Blossom Street is a venture fund that invests in classic B2B enterprise SaaS, so this may be the barber telling you that you need a haircut. That said, it looks like we’re in good company: Nvidia Chief Executive Jensen Huang also warned that the recent software selloff was overhyped. At a conference earlier this week he said “There’s a whole bunch of software companies whose stock prices are under a lot of pressure because somehow AI is going to replace them,” Huang said late Tuesday at an event hosted by Cisco . “It is the most illogical thing in the world.”
First let’s consider what AI has become and what enterprise SaaS really is. AI in its current form and direction creates things. These things can be outputs such as a blog, or actual products such as productivity software. That’s great and has wonderful value. Enterprise SaaS however is neither of those things. Enterprise SaaS specifically manages data, manages workflows and protocols, and integrates a broader system of other SaaS products to become the infrastructure and backbone on which all corporations rely. So AI and enterprise SaaS are not the same thing, hence one really cannot replace the other. An AI bull might say, “well AI can now create enterprise SaaS products.” That’s true, but that makes the erroneous assumption that enterprise SaaS is just code. Enterprise SaaS is way more than that: it’s the CS teams that help the customer, the sales teams that work through a 6 month sales cycle, the product and engineering teams that build future product, and the leadership teams that envision what that next iteration of product is. In other words, enterprise corporations do not spend $50k+ a year on code. They spend it on enterprise SaaS solutions that solve business problems. As one analyst put it, “organizations aren’t going to leave huge, enterprise-level software for something somebody vibe-coded in a backroom in Oakland.”
We recognize the argument has shifted from ‘new companies will vibe code SaaS products in their garages’ to ‘companies will just have a developer code up internal software for their own use.’ That argument is as old as time. For instance Facebook built a Snapchat clone in 14 days. The initial version of Twitter was built inside of a week. Spinning up software products has never been hard. It’s running the companies that sell, manage, maintain, and improve upon the products that is the challenge. Enterprise SaaS has always been threatened by home-made, internal tools, and that threat never knocks off great enterprise products for all the reasons in the paragraph above. It is very hard to build, maintain, and improve enterprise SaaS products, so the idea of corporations now building their own versions of Salesforce, Adobe, or any other enterprise product and then continuing to improve on that product is naive.
So what will happen to enterprise SaaS companies? We think they stand to be the biggest beneficiaries of AI. If you think SaaS leaders are just standing by and not integrating AI into their own products, you’re in for a surprise. Incumbent SaaS companies have the edge because they have the customers, know the business case problems, have the sales and CS teams to sell and service new offerings, and the engineering and product teams to build them. Series A+ companies have the additional edge of lacking bureaucracy, so they can move quickly. For instance, we have multiple companies in our portfolio coming out with AI offerings this year that will supplement and enhance their enterprise products.
Finally there is one question no one is talking about: why is Anthropic releasing basic productivity tools? Their legal offering that sparked this downturn is great, but that’s not the initial promise of AI. Could they be pivoting into offering a bunch of point solutions for productivity? If so, we’d argue that AI is not playing out the way we all thought and you won’t be getting your AI robot any time soon. Indeed Meta Platforms Chief Financial Officer Susan Li told investors last week that the company has seen a 30% year-over-year increase in output per engineer driven by AI coding tools. To that we say “that’s all?” A 30% increase is great, but again it points to the fact that AI is becoming a productivity driver and not the infrastructure that enterprise SaaS is.
To all the SaaS founders, we say keep building great products that actually solve your customer’s problems. The market is in a frenzy, in our view is irrational, and enterprise SaaS will regain the respect it has earned.
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.