Although software-as-a-service is making a (modest) comeback, investors are still struggling to determine the value of these pre-AI software companies that dominated venture portfolios before the AI boom.
The problem is not only that AI companies are attracting all the capital, but also that it is difficult to assess which SaaS companies will retain an advantage and which will become obsolete in an AI-driven market.
“I’m really worried about the venture portfolio ahead of AI,” said a healthcare CIO who manages about $11 billion in assets. “Before 2022, there were a lot of SaaS; now everyone says, ‘I don’t know how much this is worth.'”
SaaS companies boomed after the pandemic increased demand for online services, bringing in a record $297 billion in global investor capital in 2021, according to SaasRise. But after the launch of ChatGPT in late 2022, VC funding shifted almost entirely to AI, pushing that number to $200 billion in 2025, down nearly 33 percent from its 2021 peak. Meanwhile, investors have pumped $222 billion into US AI companies – a 204 percent increase since 2022.
AI companies now account for almost a third of all global venture deals closed in 2025. And they’ll continue to dominate the venture landscape in 2026: Data from Crunchbase shows that OpenAI and Anthropic accounted for 43 percent of all startup funding in the first half of this year (both companies have highly anticipated IPOs coming up).
Although software VC deals are recovering, they are still far from reaching their pre-AI peak. Deal value increased nearly 13 percent year-over-year and volume increased 12 percent to an estimated 9,200 deals – the first year-over-year increase since 2021. Still, that’s below the 16,446 deals achieved at the industry’s peak in 2021.
“If you look at the 2020 and 2021 vintages, the returns are really concerning,” said Joshua White, director of private equity at OCIO provider Hirtle & Co. (formerly Hirtle Callaghan). “The average return is well below the historical average.”
White explained that many software companies once achieved high valuations because they grew 80 percent annually. Now this value has fallen to 15 percent. While that’s still healthy growth for most companies, it’s not enough for growth investors.
With AI disrupting valuations in recent years, enterprise software has been hit hardest: CNBC reported that 75 SaaS firms appeared on PitchBook’s list of fallen unicorns (startups once valued at $1 billion or more). That’s twice as many as fintech companies, the second largest category.
What’s happening in AI and software has happened in previous waves, including the rise of mobile devices and the Internet – but not necessarily on this scale. Software stocks experienced a massive sell-off in February driven by fears of AI disruption and months of underperformance, with the S&P 500 software and services index losing nearly $1 trillion in value.
“It’s not unique, just broad in terms of the number of use cases that can replace Anthropic or OpenAI,” White said. “The workflow SaaS companies that are really at risk are the ones that have a human at the start, a human at the end, and workflow in the middle.” (This also includes translation or transcription services.)
For many pre-AI software companies, the impact of AI depends on their business model. Some, like mobile banking app Chime, have had little impact, while others, including data and analytics company Databricks and truck driver safety equipment maker Motive, have benefited from integrating AI functionality into their services.
Scott Martin, head of global co-investments at Cambridge Associates, echoed this sentiment. The investment advisor noted that the leading AI companies will revolutionize several industries for a while, but will ultimately benefit these software companies.
Even though the future of many SaaS startups remains in limbo, Martin believes the crisis is exaggerated. “Despite what everyone says, AI is software, and if you don’t use AI as a software company, you will fail,” Martin explained.
https://www.institutionalinvestor.com/article/despite-software-making-comeback-investors-still-struggle-valuations
