The SaaSpocalypse and the Avenir Future of SaaS Report

Live from Schenectady, New York, it's the Metrics Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, EIR at Balderton Capital, independent consultant, and the author of Kelblog.

And together we are the Metrics Brothers.

And we go together like growth at all costs and the end of easy money.

Wait, the era of easy money is over for SaaS companies, Dave.

Ah, ah, afraid so, Ray. Inflation crashed the party and the Fed took away the punch bowl.

Ah, and that's what drove everyone from that growth at any cost to the Rule of 40, my favorite metric.

Yes, sir, Ray. I know it's one of your favorites. And on a different note, a time for another day, a time for another day, a day for another episode. We need to talk about how the Rule of 40 is going to become, in my opinion, the Rule of 60.

You know, we could actually call that episode The Rule of 40 Strikes Back.

Ah, the sequel. Indeed. Indeed we can. But to hear, Ray, we're here to talk more broadly about the future of the industry, not the future of one metric. Today, we want to talk about the future of SaaS.

Does SaaS even have a future?

Ray, Ray, Ray, Ray, don't be negative. You wouldn't think so from the stock market lately. But in today, we're going to do 2 things in kind of an extended episode. We're going to first talk about the SaaSpocalypse. I don't know how we can't. And then second, we're going to talk about a timely new report from Avenir called The Future of SaaS: A Fork in the Road.

I love it. It's timely. It's data-driven. It's something that I'm very passionate about. But before we do, let's hear a word from our sponsor. The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Groth Wright have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave at Kellogg and Ray on LinkedIn at Ray Reich. Thank you so much for listening to the Metrics Brothers podcast.

So let me start today's episode with a disclaimer because we're going to be talking about stocks and the stock market, and we need to remind you first, we don't give financial advice. This is not a financial podcast. Second, if we did, you shouldn't listen to it. And third, please listen to our entertaining and fact-filled trailer for more information. So with that said, let's jump in. Ray, we need to talk about SaaSacre 2.0 or the SaaSpocalypse, whatever you want to call it. For today's episode, it's in my mind, it's the elephant in the room. How can we talk about the future of SaaS without talking about the SaaSpocalypse? So I think you know what I mean when I say that, right? Like a trillion dollars in value has been destroyed since the start of the year in SaaS companies. What do you think, Ray, about the SaaS-pocalypse?

Well, first of all, I would say that we all know that axiom that the stock market is driven by 2 emotions, fear and greed. And I think there's the fear of what's the future of SaaS and the greed about, hey, I want to get on the ground floor and invest in AI-first type companies and infrastructure. And then, Dave, you and I have talked about this, you know, stock market stands on its own. The stock market is not the economy and the stock market is not the health of a business.

Correct. Correct. I think there's a second type of greed you may have missed, which is the greed to try and buy some of these stocks at on-sale prices. Right. So, but there's clearly greed around AI. But I think there's also greed in the what's often called catching a falling knife camp of trying to catch some of these, which are great companies at kind of real discount prices as a result of the SaaSpocalypse. But let me echo, Ray, that yeah, the stock market is not the economy. Just like people say that the stock market is not the health of your business. Stock price is not a measure of current business health, right? It's a measure of future expectations. And that said, since we're a metrics podcast, all financial metrics are effectively trailing, right? Public companies release them once a quarter. And they tell you about last quarter and the last year. Oh, they give guidance. But so there's a little bit like 2 or 3 data points of future-looking stuff. But stock price is all about the future, which is why it's so sensitive to guidance and about those expectations. To me, it's a rugby scrum of information, everything you could possibly know. And out pops a number called the price by a mechanism that Benjamin Graham himself called Mr. Market. So the stock price and the stock market in general are about the future. Thoughts, Ray?

You know, we've talked about this before, but that was supposed to be a beautiful thing about SaaS and ARR, annual recurring revenue, because we book it and then it becomes revenue over the next 12 months or so. That was supposed to be all about the future too.

Yeah, it was. And look, SaaS revenues were clearly more predictable than on-prem revenues, which is the ultimate argument for why SaaS companies traded at a higher multiple than on-premises companies, right? That was the answer. Why, why are these things traded at a higher multiple? And the answer was because they're worth more. Why? Because we have more visibility into revenue. But note that that still didn't change stock price volatility because then everyone just looked at billings or guidance, right? And this is the mechanism we've talked about because the software industry wanted to come back and say, we've solved the revenue predictability problem. And they wanted all the volatility to go away. And it's like, no, Wall Street's too smart for that. They're going to be great. Your revenue is now more predictable. But let's talk about bookings or billings or RPO or all these other indicators that will tell us about the future. So, in any case, that's the mechanism of the stock market. It's a rugby scrum of information. Mr. Market, sorry for the gendered language, but it was probably 1930-something when Benjamin Graham wrote that. And it's a great concept that there's this giant machine and all known information pops in. This is super relevant today because of Polymarket. And like, how much information is supposed to be known? Can you bet on somebody to run on the field at the Super Bowl and then run on the field yourself?

Right?

These are all kind of Mr. Market questions. But in any case, back to our world with SaaS, stock prices are down. They were down 37% since the end of 3Q25 per Emeritech post we're going to talk about in this episode. And $1 trillion has been lost in value since the start of the year. And more of these numbers are going to come out. in part 2 of this episode where we really look at the Avenir report itself. But part 1 is here to talk about the SaaSpocalypse and part 2 will bring out the data. Thoughts, Ray?

You know, the one thing I would say, I mean, I look at the stock market gyration here and to me, this happens a lot of times when a maturing industry kind of meets the potential for innovation and hypergrowth, which is AI. So I think the stock market is just reflecting that, hey, SaaS is maturing. It's not growing as fast. And this AI thing could change the world.

Sure. So let's talk about what is driving this then, because I think Ray's given us a macro explanation, which is just kind of a macro disruptive cycle taking place. Software is maturing as AI is taking off. And what will the interaction between the two be? Let's talk first though, Ray, about what's not driving this. Because it's not generally being driven by weak earnings announcements, missing expectations, slowing growth. That's actually not the problem. That's usually the reason SaaS stocks get creamed. But today I'm going to pick one example, ServiceNow, like a bellwether of bellwethers, right, for SaaS. They IPO'd in 2012 at $2.7 billion market cap. They've been up 65x since then, trading in January at $240 billion market cap. I mean, this is the steady eddy of the SaaS business. It's done a great systematic expansion strategy from internal trouble ticketing to, well, basically from IT trouble ticketing to generalized internal trouble ticketing and now external trouble ticketing and case management. Let's just look at their Q4 '25. They first, they beat expectations. Second, they came in with $3.6 billion in revenue, up 21% year over year. At that scale, Pretty good growth rate, right? $2 billion in free cash flow. They are a Rule of 56 company. So well above the Rule of 40. The stock is down 30% over the past month. And basically the king, right? In my mind, kind of the king of enterprise software is now valued at 7x ARR. Thoughts, Ray?

Yeah. You know, the thing that keeps popping up in my mind, even though ServiceNow is not a baby, is throwing the baby out with the bathwater. Yeah, maybe the SaaS industry has got some dirt around it in that bathwater, but there are some really good ones and ServiceNow is one, Salesforce is another. There's some good ones in here.

Yeah, there are some great companies in here. And that's why personally, Ray, I'm a bottom fisher. But the whole reason I use the catch a falling knife metaphor is that when you try to do that, you can lose fingers because I'm kind of a value shopper myself and I have lost fingers on this. I bought WCloud and then sold it on the way down. 'Cause it was like, uh-oh, I went too early. So timing bottoms, timing troughs is as hard as timing peaks. But I agree with you, there's some great companies out there. ServiceNow trading at 7 times revenue or 7 times ARR, that's a pretty good deal. That's looking like a blue light special. So if this is not being driven by the businesses themselves being in trouble and missing earnings and growing, you know, missing growth targets, What is it being driven by? 3 things. One, AI fear. In general, I would summarize that as FOBO, the fear of being obsolete, which— so FOBO is the new FOMO. That's in general driven by the cost of coding converging to zero, right? They're saying, hey, the cost of generating content on the marketing side is effectively zero with generative AI. The cost of coding is converging to zero with generative AI, quote unquote, vibe coding.

Right.

So to me, we have this whole revenge of build, right? It's always been a build versus buy thing. But really for the last 25 years, people have said, you know what? You know that meme like, no thanks on the build, I'm going to buy, where people are saying, hey, this may change. In specific, it's about the OpenAI Frontier announcement and the Anthropic Claude co-work plugins. Those were good for another 8% or something on top of the existing carnage. on the theory that these demote SaaS applications to kind of mere systems of record. So there's 3 things driving this. The first is AI fear. We'll call it FOBO. The second is regression to the mean. We'll come back to this, but this is basically quote unquote multiple compression, i.e., revenue multiples used to be around 15. Now they're around 5. And when that happens, it means the stock price is going to drop by 2/3, right? That's just what it means when you compress EV to R or enterprise value to revenue multiples. And we're going to discuss that in Avenir because they bring some data to the party. And before I make the last point, Ray, let me hear from you on the first 2.

I like that fear of being obsolete, which is why you see so many SaaS companies talking all about their AI add-ons or the AI plugins, not selling anything significant there. And by the way, when Anthropic Claude announced not only Codework, but also their legal product, We saw what happened to companies like LegalZoom. Their stock went down like 40%. And of course, the regression to the mean, that's going to happen all the time as an industry becomes more mature. So I totally agree with that.

Yeah. And to me, it's actually not what's driving it. I think those are different things. To me, regression to the mean is just a phenomenon where you end up trading at high multiples over time, kind of regardless of reason, you're going to end up back at normal ones. I mean, there's always a reason for why they're higher, why they're low, but the phenomenon is Either something has structurally changed and that there's a new mean, right? So you're actually not above it, or it hasn't and you're riding above the mean for some reason and you're going to converge back to it. And by the way, typically that involves crashing through it, hitting something below it, right? The reason it's a median is you spend half the time below it and then come back up. So agree with you there. Thoughts?

You know, I think there's a third thing, Dave, and I kind of wanted to talk about that. And there is a changing valuation methodology going on right now because of the maturity. And the first question is, it's a multiple of what? Is it revenue or profit? And historically, we'll see it at high-growth companies. And of course, at the early stage of an industry like the SaaS industry, you know, the companies are valued on revenue. But as it matures and you stabilize the growth and it comes down a little bit, And especially lower growth companies, they're valued on a multiple of profit. Maybe that's a multiple of EBITDA or multiple of actually the earnings per share. And I know we're going to discuss more of that in Avenue as it relates to what's been happening with the SaaS stocks.

Got it. So you're correct, Ray. And that's why people say the most dangerous time to own a stock is when a growth company becomes a value company. And by the way, it's hard for companies to realize this happens, right? Because they still think of themselves as a high-growth startup, but they're actually at $50 million and growing 10%. And like, bad news, pal, you're not a high-growth startup anymore. You're just a medium-sized business. So, and that's hard for companies to realize. It's difficult for investors because look, if you're a $50 million company that thinks of itself as high growth, you may have very low profit. So, 15 times profit might be zero, which means the company's worth zero on a profit multiple.

Yeah.

And you think it should be worth, you know, 8 times revenue. But the market goes, no, you're no longer a high-growth company. You don't get to be valued on revenue. We're going to value you on profit. And bad news, you don't have any. And that's why it's a dangerous time to own a stock. So, I'm going to net out the 3 things we just said there. We think there's 3 things driving this kind of SaaSpocalypse. One, AI fear. Second, regression to the mean. And third, changing valuation methodology, basically, which is when you're not high growth anymore, Wall Street's going to look at you and PE acquirers are going to look at you potentially on a profit multiple, not a revenue multiple. And depending on how profitable you are, that could be a very bad thing if you're running at roughly breakeven. So, Any thoughts, Ray, before we move here? Oh, actually, LeBotte, I want to go first and then come back to you. So, what are the messages being sent to SaaS companies at this time? Just by the market, by the VCs, by the blogosphere, what are they hearing? And they're hearing similar messages. Like, and people say it differently. They're saying slightly different things. Maritech's, the title of the Maritech report is Grow Fast or Vanish, right? Kind of, this is what it means, right? Either grow fast and command a revenue multiple or get a profit multiple, but you're not profitable. So, you might just vanish, right? So, you know, slow growth and no profit. What's it, Animal House? Fat, drunk, and stupid is no way to go through life, right? Like, slow growth and no profit is no way to go through life. It's kind of the Maritech message. And then, Avenir's message is financialize or embrace AI. But what the markets are telling SaaS companies are, look, you've got a choice, right? Here's the thing they all agree on. They differ slightly on what the choice is. But they're like, you've got a choice. There's a fork in the road. You can go left or right. And basically, grow fast or be profitable. So, some variances in that. But we are at this fork in the road. We're going to come back to that in a minute. But I know, Ray, you'd like to tell a story from your past before we do that.

Dave, we really haven't talked about this very much. But back at GE, I was fortunate enough to lead our manufacturing and supply chain business. And the largest vertical sector was the automotive industry. And my mentor and my boss gave me a book to read when I first took the role. And it was called The Reckoning by David Havelstam. And it was really a history of the automotive industry from really the 20th century. So, 1900 to about 1988 when the book was written. And the summarization basically was that The automotive manufacturers in the United States, the Big 3— Ford, GM, and Chrysler— by around the 1960s were taken over by professional business managers and finance men, while the Japanese auto industry— Nissan, Toyota, Honda— was still led by automotive product people. And there's a lot of similarities to what's going on in SaaS right now. to what has went on over the automotive industry. So a little bit of a memory lane here for everyone listening. So early on in the automotive industry, in the early 1900s, right, as we started getting beyond just the pure innovation, we saw in the 1910s and 1940s consolidation and combinations. There were 80 US auto manufacturers In the early 1900s, then GM bought Buick as their performance brand, Oldsmobile as their reliability brand, Cadillac for luxury, and Pontiac for the middle class. They wanted to form a car for every purpose company. Chrysler bought Dodge, which is a huge acquisition, and even some of the smaller players at the end merged to try to compete against the Big Three. So the AMC. The American Motor Car Corporation was a combination initially of Nash and Hudson. And then a lot of smaller point solutions like Duesenberg, Stutz, and Pierce-Arrow just went out of business. And then in the 1950s and '60s, the Big 3 said, we got to be more than a car company. We want to be a platform company for the automotive industry. So they created financing divisions, GMCC, Ford Capital, Chrysler Capital. Then they went vertical integration and formed parts, both manufacturing and distribution networks with ACDelco, Mopar. While the American car companies were financially engineering their business model, the Japanese automotive companies ran by product people, car people, continued to innovate. In fact, one of their biggest innovations in the late '60s, early '70s was something called the combustible vortex engine, the CVCC engine, basically a 4-cylinder engine. that could get 40 miles per gallon and eliminated the need for a catalytic converter. Now, what happened was this external inflection point of the oil crisis made it the perfect time for fuel-efficient cars based upon new innovation. And we know what happened for 20-plus years. The Japanese automotive companies really took a commanding lead in the United States for innovative, efficient, and high-quality cars. And it wasn't just the engine. It was things like the creation of the unibody to make a lighter frame, coupled with the manufacturing process was innovative. The just-in-time Kanban leading to lean manufacturing. Now, if you think about this, there's a lot of parallels to the SaaS industry. Think about the consolidation phase over the last 5 or so years. Salesforce acquired Slack, MuleSoft, and Informatica. to get the integration data layers, right? You see ServiceNow right now buying some great agentic AI companies. So there's so many similarities between what happened to our American automotive industry and the decision between financial engineering and technology innovation and product engineering. And I think that's what we're seeing today with SaaS versus AI. So, I'm going to throw it back to you, Dave.

Yeah. So, I heard a couple of things, Ray. One, basically, when an industry starts, you have a lot of point solutions. And somewhere in the evolution, I'd probably argue in Geoffrey Moore language, it's around like as you're getting into the mainstream market that you do consolidation to kind of build out the product line. That at some point, you kind of become a platform, kind of a full-suite platform, right? So, Salesforce started Just as SFA, then became CRM, right? Siebel did that before them. And then they've become like the customer platform, right? And you're saying in cars, we saw that same behavior. It's interesting. I've never seen this similarity before. And taking us up today, the most interesting thing you said to me was you started it by saying the finance guys running the car companies, like, i.e., they were finance guys, not car guys. And sorry for the language, but they were in fact guys. So, Yeah, and this is a little bit reminiscent of what happened recently with Workday, which is we had a sales guy or a business guy running Workday. And recently, we took the product guy, right? And not we, they took a product guy, Aneel Bhusri, founder, and put him back. Because in the case of SaaS, you have a major industry shift and you really don't want finance guys or business guys running the company when you're going into that kind of era. And I think to net out your story, the US auto industry was being run by finance people. They were focused on margins, financing, parts, not cars. And then an industry shock hit, the oil crisis, and all of a sudden all that innovation really, really mattered because people wanted 40 miles per gallon cars and GM couldn't make them.

That is a perfect analogy, and I think we can learn a lot from it. And I would encourage everyone, To read the book, The Reckoning.

Okay. The Reckoning by David Halberstam. Now, back to SaaS. So, one of the things that's interesting in the SaaS space is that this advice, grow fast or vanish, financialize or embrace AI, kind of presupposes the continuing existence of SaaS. And a lot of people are even challenging that. They're saying, is SaaS dying? And in order to answer that question, I want to break SaaS down a bit. And let's look at it kind of piece by piece. I want to argue, and I'm kind of going to exclude infrastructure as a service, and I'm going to exclude analytics where I grew up and just say SaaS business applications. There's 4 things to them. There's 4 models really. One, there's a delivery model, which is the cloud, which continues to be someone else's computer, my favorite definition of the cloud. Second, pricing model, per seat per year historically. The sales model, Sales-led sales and a functionality set that's around tracking and automation. So, for example, what do I mean by that? Tracking and automate what? Sales opportunities? Salesforce Sales Cloud. Customer service cases? Salesforce Service Cloud. Truck rolls? Qlik Software, later acquired by Salesforce. Salesforce Field Service. Renewals? Gainsight. IT trouble tickets? ServiceNow. any internal trouble ticket today, ServiceNow, escalations, PagerDuty, right? There's always a thing you're tracking and you're doing some basic automation around the thing. A friend of mine always said, hey, take your favorite important spreadsheet in a company and turn it into a SaaS app, right? So the forecast became Sales Cloud, right? The customer success spreadsheet became Service Cloud. The cap table became Carta, right? So these are examples where I'm arguing that there's really 4 parts to SaaS. There's a delivery model cloud, a pricing model per seat per year, a sales model, which is sales-led sales, and a functionality set that's largely around tracking and automation. Ray, do you want to talk about what's happening to each of these components?

Yeah, and I'm going to do it right along those 4 categories you just reiterated. So cloud delivery model, you know, it's here to stay. You're not seeing AI companies do something different or go to a total on-prem. Per-seat pricing, we're going to more consumption and outcome-based, you know, We're selling more of the work to be done versus seats of software. So that's changing the sales model. You're still seeing in the enterprise, right? People are still using direct sales to evangelize and sell AI software to the enterprise. Now the question is, you know, do we think PLG is going to be a more dominant way to sell AI software. And to me, it's only very specialized, maybe in the developer community, you know, with what Atlassian did. And now you see Cursor and Cloud Code do. But beyond that, I don't see PLG being the primary sales model for AI software. What do you think, Dave?

Yeah, I mean, PLG is certainly working for Cursor and Lovable and developer-oriented tools for sure. It's working exactly as was always promised and never really delivered that much for most companies in the prior 5 to 10 years. So, it's kind of AI is kind of the revenge of PLG, if you will. But I would say even in the prior generation PLG companies like Slack, in order to do enterprise deals, you quit, or even Atlassian, you needed to have an enterprise sales force. So, I do think that AI kind of is the revenge of PLG. But I also think you're going to end up with this hybrid sales model. You want to talk now about the functionality set?

Yeah. And you talked about, you know, really for SaaS, it was track and automate. But if you look at this more generative AI era, right? People use it to summarize this, like my emails, my documents, etc., even some reporting. Then it says, hey, build this. Can you build me a proposal? Can you build me a report? Can you build me a presentation? And with code right now, it's, can you build me an application? You talked about, hey, SaaS automated what Excel does. A lot of AI apps are just replacing SaaS apps. And then the third is analyze this. Give them a lot of data and say, help me analyze this. What does this say? Are there trends that I don't see here? So summarize, build, and analyze.

Got it. So I don't think SaaS is dying. I think cloud delivery is here to stay. Per-seat pricing is evolving, as is well known. The sales model will probably convert to this hybrid depending on your space. PLG will be a very important part. And the functionality set is definitively changing. There's a whole new layer or multiple layers coming in atop traditional business applications. And this is making— giving rise to a whole bunch of new kind of market textures, architectures, and taxonomies for how the world will look and what kind of the generic block diagram of applications will look like in the future. Look, as a marketing person, I want to say this is kind of a rugby scrum for your mind, right? The fundamental book on positioning was called Positioning: The Battle for Your Mind. That was the subtitle. This is the battle for your mind, which is everyone's trying to get your mind to see the world using their architecture diagram. And one of the classic tricks in architecture diagrams is to take the whole existing state of the world, smash it down, put it on the bottom, call it one very thin layer, and say, yeah, all that existing stuff you have, that's down here. And then all this value add is going to be in layers 2, 3, and 4. And that's what we do. Common thing, the modern data stack people did it with mixed success. I remember as a classical BI guy looking at the modern data stack, And just going, gosh, there's like 8 layers above a whole bunch of stuff we just built. And I don't think we're getting enough credit. I don't think there's enough thinking about how to make the modern data stack work with the classical stack, not just kind of smush it down and layer over it like sedimentary rock. But that is a common pattern, and you're seeing it in these new architecture diagrams out there. There's a bunch of them. But everyone's trying to come up with like a 3-layer, maybe a 4-layer taxonomy OpenAI introduced the frontier architecture that puts, of course, systems of record, i.e., Salesforce and Workday, at the very bottom in very small print. Foundation Capital came out with a very hot piece. I can't remember if they have a architecture diagram, but they're all about context graphs. And the top layer is going to be this high value-added layer that is called— that relies on context graphs. And of course, they say the value is going to accrue there. So I don't think SaaS is dying. I think there's this rugby scrum for your mind and for how the future will look in terms of how apps are built and where value will accrue.

And I think what we see here is kind of this emerging taxonomy, Dave, where to your point, we have that system of record, right, at the foundation, you know, Salesforce, Workday, et cetera. Then above that, you have that system of engagement, things like Slack or Zoom or outreach. It's how you're engaging with the target audience. And then that third layer, you know, a lot of people, because of the foundation capital context graph, they're calling it the system of context at the top. I still think of that also as like the system of intelligence, because that's where the generative AI is really making a lot of decisions. that humans traditionally would do. And that system of context knows more than SaaS software, does more, and does it independently with agents. What do you think of that kind of that 3-layer emerging taxonomy, Dave?

Yeah, I think it's a good one. I think there's a lot of them out there. If we had to kind of make the meta taxonomy or the generic one, I think that's good. System of record on the bottom, systems of engagement in the middle, systems of context/intelligence on top. I think it's a good taxonomy. There are other ones. But the point of that, and the people who promote those charts are trying to say that agentic systems, i.e., the systems of context, if you will, will add tons of value. They will do real work. And the assumption is therefore, because they're adding value and doing work, they will accrue a lot of value to themselves, both in terms of revenue and profit. And I think there's a potential mistake being made in that logic chain that I want to talk about. So, I think the mistake that gets made here is kind of conflating layer of the stack and value-add with the ability to command revenue and profit. Just because you're higher doesn't mean you make more money. Old example, I worked at database companies. Application development tools got very popular in the '90s. And the belief was that because they were higher in the stack, it was a better business. It's closer to the application. It's closer to the problem.

Yeah.

It was a terrible business, right? Application development tools like PowerBuilder, you've probably never heard of it. Ray's heard of it. But these people thought that was a really good business and it wasn't because in the end, it's not about stack layer, it's about industry structure. So, we talk about supply chains and there's all these industries that make up supply chains and all these layers in the stack. And in the end, what determines how big an industry is and how profitable it is is about the structure of that industry. For example, Oracle at pretty low in the stack has 40% operating margins, right? They're pretty far from the solution, at least in their database business, which probably has even higher operating margins, right? But they have 40% operating margins. NVIDIA, who's like one level above electrical generation, power generation, they are very low in the stack and they have 60% operating margins, right? The example I always use to demonstrate this concept is that farming generates a lot of revenue, but it's a pretty bad business, especially if you're not very large, right? Farming in the US overall, $500 billion a year. Operating profit, $25 billion, right? Big business, lots of revenue, lots of value add. Can't live without food, but profit, $25 billion. Inputs, seeds, fertilizer, Right? $100 billion business, right? So farmers spend $100 billion buying seeds and inputs, right? Operating profit, $20 billion. So they're generating, you know, 80% of the profit off 20% of the revenue, literally just math happened to work that way, of the inputs business. And then equipment, Caterpillar tractors, right? Combines, $40 billion a year. So less than a 10th the revenue of farming, but $7 billion in operating profit.

Wow.

So rather than drill into all this, I just want to remind people of 2 things. One, where you are in the stack does not determine how good a business you have. If I want to say the best businesses generate the most profit, right? You need to look at industry structure because it's really about how many other people are willing to sell the same thing for what price. And is the profit being squeezed out of the industry or do you have an oligopoly or a monopoly? where you're able to get really big profits. For example, Nvidia has kind of a de facto monopoly on GPUs. So point number 1, it's about industry structure, not stack layer. Point number 2, read the book called Profit Pools. It was written around 2000. It's not a new book, but that was the first time— there's a couple of Bain consultants, I think, who wrote this book saying, let's not just look at market share, but it's going to look like a profit share, and let's do it across the supply chain. And I think read that book. If any of this confuses you, great book to go read.

Yeah. You know, Dave, I think we've done a very nice job setting the foundation here. Talked about the SaaSpocalypse, talked about kind of the SaaS definitions, but now let's bring some data to the party and talk about the Avenir report.

Sure, sure. So with no further ado, 30 minutes into the episode, let's talk about the Avenir report. Avenir Growth is a New York-based growth equity firm. They were founded in 2017. They have $2 billion in assets under management. If you've heard the name here before, it's because we did an episode on GrindScore. Episode number 91 was on GrindScore. It's a workplace attractiveness metric.

I was going to say the GrindScore episode. It's interesting because we also mentioned 996 in that same episode. I don't hear much or read it on LinkedIn much anymore as SaaS companies are fighting for the lives and AI companies are trying to take them.

Yeah. Okay.

Yeah.

996 kind of came and went quickly, but, but we will see. That's why we do timely episodes on the podcast here, Ray, on the podcast. This report that Avenir has produced was published in January 2026. It's written by Jared Sleeper, the creator of GrindScore, Hannah Boa. It's 46 pages. The title is The Future of SaaS: A Fork in the Road. And I want to talk about this because this is back to this theme that SaaS companies have a decision to make. In the Avenir, the entire report of page 1 is red pill, blue pill, which is a metaphor from The Matrix. It says, you got to pick one. Which one do you want? Right? Morpheus says to Neo, for those who don't remember the movie, you take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes, right? So, that's Morpheus to Neo in The Matrix. And the idea in this case, the full metaphor is, hey, you just want to live in your peaceful world, take the blue pill. I'm not sure that's an option for SaaS companies, right? Or you could take the red pill and we're going to wake you up to reality and it's going to be pretty complicated. So, I like the fact that they're posing this as a choice. I think the red pill, blue pill metaphor works within limits. And Ray, let me hear from you on this. Are you a Matrix fan, Ray?

I've become a Matrix fan and I really liked the second movie, which is called The Matrix Reloaded. And there's kind of a third pill or a third door option. And that's when they kind of introduced the Architect and the Architect strategy. And he was actually the creator of the Matrix. He was an AI developer. And just summary, the Architect didn't fight the humans or the machines. He built the system where they both could coexist, ensuring that the machines had a purpose and the humans had a framework to operate within. So I think going forward, there is an opportunity for those SaaS companies, especially those who have established system of record, to coexist with generative AI and become that system of context we talked about earlier. So I think there's a third option.

Okay. So Now, away from the matrix and back to reality, although is reality the matrix? The choice ahead that is offered by the Avenir report is 2 things. The red pill, I can't remember which is red or which is blue. We're going to get rid of that. Embrace AI and become a system of contacts or accept maturity and financialize. And that is the argument they're making. You've got one of 2 choices. Ray is arguing there's a 3rd choice, which is kind of coexistence. We'll come back to that in a minute. But let's continue along with Avenir. This Avenir report has 2 parts. Part 1 is what I would just call the what's going on part. And I like Part 1 a lot. I think it's an excellent data-driven summary of what's happening to the SaaS business. Part 2, slides 21 to 40-something, I don't like so much. And we're gonna let Ray talk about that part because he likes it better. He found some stuff in there. But let's talk about Part 1 with Avenir. And I'm gonna summarize a whole bunch of slides very quickly. But they go through and show slides for all these points. That SaaS revenue growth is down from roughly 40% to roughly 20% since 2021. Okay? So, growth is cut in half. NRR has been resilient from roughly 120% to 110%. So, 110 is the new 120 if we're talking about NRR. Sales has gotten harder/worse. CAC ratios back in 2021 were 1.3x. Now they're closer to 2x. So, and not just a little worse, CAC ratios have gotten a lot worse. It's more expensive to sell this software. Companies have generally stuck to the Rule of 40, but their Rule of 40 profile has changed. They've gone from back in 2021 from 40/0 to 20/20, right? So 20% growth, 20% free cash flow. Yet equity performance has been abysmal. Everyone was told, hey, if you could just do a 2020 Rule of 40 score, life's going to be good. Well, not so much. SaaS stocks are down a lot. I think $1 trillion in combined value despite this kind of progress on compliance with the Rule of 40. There have been weak to no IPOs. I think they show around 5 or 6 IPOs over the past 3 years. But rising M&A. Okay. So there's kind of one way out, which is M&A, not so much IPO. They have a chart. There's only one chart worth looking at. It's the one that shows revenue multiples. And they basically very clearly show that revenue multiples from 2019 to '21 were an aberration. Roughly speaking, the median was 15x in 2019 to 2021. And today it's back to, and this is why I talk about regression to the mean, Because for the longest time, I think a good SaaS revenue multiple was 5x, right? And now we're kind of back to those days. The other thing they talk about, and this is super interesting to me, Ray, is that they say, hey, embrace AI and kind of go all in, choice 1. Choice 2, financialize. Oh, and by the way, you're not as close as you think. Because when we mean financialize, We mean looking at kind of net income, GAAP profitability, not non-GAAP profitability, which typically excludes stock-based compensation, which excludes about 20% of sales, right? Because stock-based comp at a typical company runs 15 to 20% of sales. So the argument is, in effect, you think you're profitable, but when we factor in SBC, you are not. And if you want to financialize, and this is the tough part about, I think it was the blue pill, if you want to financialize, that means real profit, not just adjusted EBITDA kind of profit. So look, you can either embrace AI and become a system of context or accept maturity and financialize, right? That is slide 2 of the deck. And that's the fundamental choice Avenir thinks people need to make. I'm going to summarize slides 3 through 21 of the deck, which I think is quite good, where they walk through the data points that support this argument. First, revenue growth is down from roughly 40% in 2Q21 to roughly 18% today. So growth has been cut in half. NRR is resilient from 120% a few years ago to 110% today. So 110 is the new 120. Sales has gotten harder, worse, more expensive, however you want to say it. But the CAC ratio back in 2021, median was 1.3. Today it's closer to 2. So it's not just a little worse, a little harder. It's a lot. Companies have generally stuck to Rule of 40 compliance. In 2021, they were roughly Rule of 40, and today they're roughly Rule of 40. The difference is the Rule of 40 profile. Back in 2021, it was kind of 40% growth. 0% profit. Today, after being told that profit matters, people have effectively traded growth for profit. They're still Rule of 40 compliant, but their profile is now 20/20. So 20 points of growth and 20% free cash flow margin. Yet equity performance has been abysmal. $1 trillion of value has been lost since roughly the start of the year. There are weak to no IPOs. I think 6 IPOs in the trailing 3 years. M&A is coming on strong. So there is more M&A activity. That's good. It's kind of rebounding. And that makes sense given the lack of IPO activity and given the need for VC and PE investors to get liquidity. So that all makes sense. The most important slide in the deck in my mind is the one that shows how enterprise value to revenue multiples in 2019 to 2021 were an aberration, where roughly they were running around 15x. And if you look historically, and for even way back before this slide starts, they ran around 5. So that's why I talk so much about multiple compression, because we were running in that time period at kind of historically unprecedented levels of enterprise value to revenue multiple. The most interesting part, I think, of this deck is that they say, hey, wait a minute, if you want to financialize, I gotta remind you of a little unpleasant truth, that if you're a low-growth company and you want to get valued as a financial asset, you need to do something about the stock-based compensation. Because you say you have 20% free cash flow margins, but that's excluding SBC. And when you include that, right, if you look at net income, you get close to zero. So you're not done financializing. In fact, you haven't started yet. So if you want to get valued as a financial asset, we need to look at kind of net income and earnings per share, not free cash flow or adjusted EBITDA. And I thought that was a big insight because I think a lot of people think they have financialized because their Rule of 40 score is 40. But when you include the effects of SBC, oops, just kidding, it's only 20. And that's a problem. Any other thoughts here on part 1, Ray?

No, that wraps up, I think, the first kind of 21 pages. But then there's, there's still about 20 pages left. And I think the battle to be a system of context is the 3rd section. And the state of play today is section 4. I don't think you were as big a fan of the 2nd section, Dave.

Nope. There was a lot of VC dreck in there, Ray, in my opinion. But I thought you did pull a few nuggets out. Look, I love part 1 of this report. Part 2, I just think kind of the wheels fell off. So I kind of stopped reading it, but I thought you dug in, Ray, and you made me feel bad for stopping reading because I thought you found a few good points.

I did. I had to go all the way to page 37. But on that page, they apparently asked a question through a survey is, you know, do you see yourself replacing a vendor due to AI in the next 5 years, replacing a SaaS vendor? And then they asked for the, it looks like the Percentage probability. So the chart says what percentage of respondents see an 80% or greater odds of replacing a SaaS vendor due to AI. And what's amazing, Dave, you know, like Atlassian, only 2% of people said they had a greater than 80% chance of replacing them. Datadog at 3%, Snowflake at 3%, MongoDB at 6%, ServiceNow and Salesforce only at 7%. So when I saw that, it's like, wow. Enterprise buyers right now don't think there's a high probability that they're going to be replacing SaaS vendors due to AI.

Yeah. To me, that makes perfect sense. And this is where VCs can get a little bit kind of breathing their own vapors. When you ask the customers, that makes perfect sense. If I've got Workday up and running and like it, if I've got Snowflake installed and running and like it, why in the world would I change? I have AI coming. I want to use AI to do new and exciting things, to build value-added layers on top, or to buy value-added solutions on top. I don't want to go tear out existing infrastructure that works. So I thought that survey was awesome. And by the way, it kind of undermines one of their arguments. But anyway, I think you had one other one you wanted to talk about too.

Well, and then on slide 39, they had another great data point to back up what they showed on 37. And that is, That the buyers, you know, do you want to buy from existing vendors and how's AI is going to impact it? Well, 63% of buyers said that our existing software vendors will be beneficiaries of generative AI. 63%. Only 8% of buyers said that our existing SaaS software vendors will be losers due to generative AI. About 20%, or 29% exactly, said, well, they'll neither be big beneficiaries or big losers. But Dave, 63% will be beneficiaries of generative AI. That is not aligned with the SaaSpocalypse we're seeing in the stock market right now.

Yeah, nor is it aligned with a lot of the predictions that say, you know, you can't just be an existing system of record and build value-added AI layers and/or acquire value-added AI layers. So I think the data here, is dissonant with the narrative in part 2. And I actually believe the data, not the narrative. So, um, Ray, I do think we need to wrap up. I want to thank the audience for being here with us on an extended episode because we did want to cover the Avenir report and talk about the SaaS-pocalypse, the elephant in the room. So to summarize, one, SaaS stocks are indeed sick at the present moment. Um, a lot of that, in my opinion, is regression to the mean. But a lot is also AI fears, the fear of being obsoleted. Underneath that, there are really 2 questions. One, what is the future application architecture? How much is going to get built versus bought? Will AI be the kind of the revenge of build and bought software will get in trouble? Or will they be complementary? Doesn't have to be a dichotomy. And then what is the industry structure at each layer? How much revenue will they get? And more importantly, how much profit will accrue to which layers in the stack. I like the red-blue pill analogy. The Matrix is a fun movie. There is a choice to make. I think Ray has pointed out that maybe there's a third option, and it's a little bit of both. Not everyone can even do blue, to be honest with you. If you're Workday, you can't reinvent yourself as a native AI solution, right? You just can't do it. You certainly could financialize, but I think that would be a bad strategy for these leading vendors, and their customers don't seem to want it. Either, according to your point. So overall, Ray, I think it's a report worth reading. Do you have any other concluding thoughts for us today?

No, I just think this is a really great report for anyone who's really trying to figure out what is the future of SaaS and what is the future of AI and how do they coexist. I love the report because it made me think.

Thanks a lot, Ray. It's always good to make you think. Take care, and we'll see you next week. The Metrics Brothers AI, SaaS, and More is a production of the Metrics Brothers Growth and CAC, and a member of the Bench Market Podcast Network. By accessing this podcast, you acknowledge that the Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told. Ray? Information, opinions, and recommendations presented are, according to our spouses, probably wrong. and provided for information purposes only. This podcast should not be considered professional or for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, indirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of, or God help you, reliance upon the information presented here. Ray Grothreich is based in New York City and available on X @RayReich. Dave Kellogg is based in Silicon Valley and available on X Kellogg. Schedectity, which is French for unspellable, is not our actual production location. Thanks for listening.