Ignite Insights: SaaS Trends & Investment Outlook 2025
Opportunities, Risks, and Capital Trends in SaaS
2024 proved to be a pivotal year for B2B SaaS, marked by a partial rebound in venture activity and a surge of interest in AI-driven startups amid a challenging macro backdrop. Valuations underwent a healthy correction from the 2021 peak, forcing a renewed focus on efficiency and clear product-market fit. As we enter 2025, investors and LPs are cautiously optimistic – buoyed by signs of recovery (especially in AI/ML and enterprise software funding) but mindful of macroeconomic and regulatory headwinds. This report outlines key industry themes, early-stage investment metrics, illustrative portfolio examples, competitive dynamics, emerging risks, and LP perspectives to inform strategic decisions in the year ahead.
1. Key Trends & Themes
AI Takes Center Stage: Artificial intelligence has become the dominant theme in B2B SaaS. Close to one-third of all global venture funding in 2024 went to AI-related companies, making AI the largest sector for startup investment. Funding to AI startups jumped over 80% year-on-year, exceeding $100B in 2024 (up from $55.6B in 2023) (Startup Funding Regained Its Footing In 2024). A significant portion of this went into foundation model labs and infrastructure, but we also saw widespread integration of generative AI “copilots” into traditional SaaS offerings. Companies like Notion and Airtable launched AI-powered features to automate workflows and enhance user productivity, reflecting an industry-wide push to make AI a core feature rather than a niche offering. Investors are increasingly rewarding AI-first SaaS – AI startups are reaching unicorn status ~1.4 years faster than non-AI peers (5.4 years vs 6.8 years historically) (The State of the Pre-seed and Seed VC Market - 2024) – but there’s also recognition that not all “AI” claims are equal. The hype is substantial, yet truly transformative AI applications (e.g. adaptive financial modeling, intelligent process automation) are still emerging. The takeaway is that AI is now table stakes in SaaS, driving investment and product roadmaps, while raising the bar for innovation.
Fintech & SaaS Convergence: The boundary between SaaS and fintech continues to blur, unlocking new revenue opportunities and driving deeper customer engagement. Many B2B SaaS platforms are embedding financial services—such as payments, lending, and banking-as-a-service—directly into their software, creating high-margin, sticky business models. Conversely, fintech companies are leveraging AI and SaaS distribution models to enhance automation in fraud detection, underwriting, and CFO analytics.
While global fintech funding dropped by over 50% from $89B in 2022 to ~$43B in 2023, investor enthusiasm remains high for fintech infrastructure, financial software for underserved industries, and AI-powered fintech applications. In our portfolio, several companies exemplify this convergence:
B Generous (Neobanking for Nonprofits): B Generous is a fintech platform designed to help nonprofits receive donations upfront while allowing donors to contribute over time. By embedding financial tools within the nonprofit sector, the company is modernizing charitable giving and unlocking new financing mechanisms for mission-driven organizations.
Asset Reality (Digital Asset Custody & Recovery): Asset Reality is pioneering infrastructure for digital asset custody and recovery, helping institutions manage and reclaim crypto and digital assets. As regulation around digital assets tightens, solutions that combine fintech with compliance automation are in high demand.
Aura Finance (Employee Financial Wellness SaaS): Aura Finance is redefining financial wellness for employees by offering AI-driven tools for budgeting, savings, and financial planning. This trend of embedded financial services in HR tech platforms highlights the growing demand for fintech-enabled SaaS solutions.
As fintech and SaaS continue to merge, companies that combine workflow automation with embedded financial products are poised to scale faster and retain customers longer. This shift towards holistic platforms—monetizing both software subscriptions and financial transactions—will accelerate in 2025. However, fintech startups must navigate growing regulatory scrutiny, from AI-driven financial oversight to tightening compliance in crypto and payments.
Overall, the intersection of AI and fintech remains a hotbed of innovation. The ability to analyze large financial datasets for insights and deliver sophisticated financial tools via SaaS presents a compelling growth opportunity for startups operating at the convergence of these sectors.
We recently discussed AI's transformative role in SaaS on the Ignite podcast with top investors and founders who are building AI-first companies. Listen to our latest episode on AI-driven SaaS innovation.
Valuation Reset & Focus on Efficiency: After the exuberance of 2021, the past two years brought a valuation reality check in B2B SaaS. Public cloud multiples contracted and private market valuations followed suit in 2022-2023, flushing excesses out of the system. By 2024, early-stage valuations largely stabilized at more rational levels and even showed pockets of growth. For instance, median seed-stage valuations in H1 2024 were hovering around $14–15M (up ~11% over late 2023) (Seed valuations are soaring | Carta), approaching near-record highs but still grounded by steady round sizes (median seed round ~$3M) (Seed valuations are soaring | Carta). This uptick reflects rising investor optimism for high-quality startups and intense competition for AI deals, even as most SaaS companies are now expected to show real traction before commanding rich valuations. Investors are actively seeking “interestingly priced deals” in this market, as 2023’s correction created more attractive entry prices than 2021’s froth (Fintech Funding Halved Last Year, But VCs Are Excited About These Areas And Deals In 2024). Our portfolio experience echoes this: we saw follow-on rounds in 2024 generally priced below 2021 highs, but companies with strong metrics still earned healthy premiums. Crucially, the market’s mentality has shifted to “growth with efficiency.” Both investors and customers are favoring SaaS businesses that can demonstrate sustainable growth, clear unit economics, and disciplined burn rates rather than blitzscaling at any cost. Many SaaS startups responded by optimizing spend (cloud cost management was a notable theme) and refining go-to-market strategies for efficiency. In short, 2024 reset the valuation environment to one where fundamentals matter – a positive development for long-term industry health.
Emerging Opportunities and Vertical SaaS: The next wave of B2B SaaS growth appears to be coming from more specialized and harder problems, rather than generic “feature” apps. Investors report some fatigue with the glut of narrow, point-solution SaaS tools; instead, there’s growing enthusiasm for bigger, more capital-intensive applications of technology in B2B. Sectors like modern manufacturing software, intelligent robotics, aerospace & defense tech, and climate/energy SaaS are garnering interest, often combining software with deep tech or hardware components. We also see a renaissance in Vertical SaaS – software tailored to specific industries – which can build deeper moats. Recent success stories like ServiceTitan (tradesmen/field services SaaS that IPO’d in late 2024 and Procore (construction SaaS) highlight how focusing on an industry’s unique workflows can create multi-billion dollar companies.
Our portfolio’s Bland AI, for instance, is tackling AI-powered voice infrastructure, enabling companies to build and scale AI-driven customer communication solutions. This is a niche that large horizontal players never deeply addressed, as they focus on general-purpose AI models rather than domain-specific implementations.
Similarly, AI vertical applications are on the rise: rather than generic AI, startups are applying AI to specific domains—whether it's AI-driven SaaS for legal contract review, automated customer interactions, or optimizing hospital operations. According to a Forum Ventures survey, investor interest in “vertical AI” applications jumped to 36.6% in 2024, far outpacing generalist generative AI deals (The State of the Pre-seed and Seed). This indicates that domain-specific SaaS (augmented by AI) is seen as a high-potential area. In addition, emerging markets are contributing to SaaS growth globally – we observe robust SaaS ecosystems in regions like India and Latin America, often building cost-effective solutions for global customers. The globalization of SaaS talent and markets means great companies can now emerge from anywhere, not just Silicon Valley. Geographically, North America remains the hub, but it’s notable that Texas grew to 10% of U.S. early-stage deals in 2024 (up from 4% in 2023), and cities like Toronto, Bangalore, and Berlin are minting promising B2B SaaS startups. In summary, major new opportunities are unfolding in specialized verticals, AI-powered domain solutions, and non-traditional tech hubs – a broadening of the SaaS landscape that bodes well for innovation in 2025 and beyond.
2. Investment Metrics (Pre-Seed & Seed Funding Trends)
Early-Stage Funding Volume: Global early-stage venture funding remained resilient in 2024, even as later-stage deals saw more volatility. Total startup funding ticked up ~3% from 2023, reaching about $314B globally, with much of the boost coming from mega-rounds in AI. However, deal count hit a 10-year low, indicating capital was concentrated in fewer, larger deals. At the seed and pre-seed level, investment activity flattened or dipped slightly in 2024 compared to the prior year. Crunchbase data shows global seed funding was ~$7B in Q4 2024, down 16% year-over-year (though final numbers may rise after lagged reporting). For the full year, seed-stage funding is estimated to have settled just below 2023 levels, marking a return to roughly pre-pandemic norms. In fact, many VCs describe 2024 as a “back to 2019” environment for early stage – volume and valuations similar to five years ago, after the roller coaster of 2020-21 (Fintech Funding Halved Last Year). Notably, AI/ML startups dominated early-stage allocations, often raising the larger seed rounds. By some estimates, nearly one-third of all VC deals in 2024 had an AI angle. On the other hand, certain sectors (e.g. e-commerce or non-tech) saw steeper pullbacks in seed funding (Seed Funding Fell Hard In These Sectors - Crunchbase). Overall, while capital is still flowing to new B2B SaaS ventures, it’s doing so more selectively – the bar to get funded at pre-seed/seed is higher, and investors are concentrating dollars into the most promising opportunities.
Deal Sizes, Valuations & Traction: The typical global seed round in 2024 ranged from about $1M on the lower end (Crunchbase H1 average) to $3M+ on the higher end (PitchBook data for Q3). In our portfolio, the majority of seed raises fell in the $1–4M range, which aligns with industry surveys (52% of seed companies raised $1–4M). Pre-seed rounds (often <$1M) are still common for founders at the concept stage, but many startups are opting to show a bit of product and traction and skip straight to a larger seed raise. Valuations at seed stage have become more nuanced post-boom. Median seed pre-money valuations held steady in 2023 and then jumped ~13% in H1 2024 to ~$14–15M (Seed valuations are soaring | Carta), approaching the record highs of the 2021 era. Importantly, this increase was largely confined to hot sectors (AI, deep tech); investors are paying up for conviction in cutting-edge areas, while more traditional SaaS plays still trade at reasonable multiples of ARR. Early-stage valuations are also more tied to tangible progress now. Investors are scrutinizing metrics like ARR, user growth, or beta customer engagement even at seed. Many seed-stage term sheets now require evidence of product-market fit milestones: in one survey, 27% of investors said they prioritize seeing clear signs of market pull and a repeatable sales engine at seed (The State of the Pre-seed). As a result, founders are raising later and with more traction – e.g. seed-stage revenue benchmarks have shifted upward to ~$300–500K ARR in 2024, vs ~$200K a year prior. This dynamic is lengthening the seed stage: the average time from seed to Series A has stretched to over 2 years (up from ~1.7 years in 2019), as companies take longer to hit the higher bar for A rounds. To bridge the gap, bridge rounds (seed extension or “Seed+” rounds) became prevalent – 40% of all seed/A rounds in Q3 2024 were bridge financings. In summary, early-stage deal sizes and valuations in 2024 remained healthy but rational: plenty of $2–4M seed rounds at ~$10–$20M post-money valuations for companies showing promise, with outliers in the $5–7M raise or $25M+ valuation range for standout teams (often serial founders tackling AI).
Series A+ Context: The trends at Series A and beyond provide useful context for the seed environment. Series A and B (“early growth”) funding in 2024 was essentially flat relative to 2023, suggesting that while seed startups are raising, many will face a tough Series A market unless the tide turns. The good news is that by late 2024, some momentum was returning to Series A/B for the best companies (Q4 saw a marked uptick in early-stage term sheets for AI, climate, and infrastructure startups). Series A median round sizes hover around $8–12M globally, with pre-money valuations often in the $30–50M range for solid SaaS startups – but those numbers skew lower outside top tech hubs. For later stages (Series C+), 2024 was bifurcated: a handful of “ultra-rounds” ($100M+ raises) grabbed headlines – e.g. Databricks’ $500M+ round at a $43B valuation, and OpenAI’s $6.6B private raise (The State of the SaaS Capital Markets) – while the majority of mid-stage startups either delayed fundraising or raised flat/down rounds. In fact, roughly 30% of all VC deals in 2024 were flat or down rounds as many growth-stage companies reset valuations (The State of Venture Capital). This trickles down to seeds: new investors at seed are mindful of exit prospects and later-round appetite. The valuation dynamics at the growth stage (public market multiples still below 2021 highs) mean today’s seed investors are underwriting more conservatively. We see this in the return of structured rounds or simply lower entry prices to ensure upside.
M&A and IPO Activity: Exit markets remained muted in 2024, which directly impacts early-stage investors’ timelines and strategy. Global VC-backed exit value improved modestly to about $149B in 2024 (up from the doldrums of 2022-23), but this was still a far cry from the peak liquidity years. Most of that value came from a few large exits – 21 exits over $1B accounted for 42% of total exit value. For context, many of those were acquisitions by bigger companies or private equity (for example, the $8B take-private of Coupa in late 2022, or Vista Equity’s acquisitions in 2024). The IPO window was largely closed for SaaS until Q4: we finally saw one significant SaaS IPO, ServiceTitan, which debuted strongly and ended the year ~40% above its IPO price (Startup Funding Regained Its Footing). Other enterprise tech IPOs (e.g. Klaviyo in marketing automation) were modest in size and had mixed post-market performance. M&A picked up slightly from 2023 but was concentrated in small strategic tuck-ins and acqui-hires – especially in areas like cybersecurity and AI, where incumbents grabbed talent and tech without triggering antitrust alarms. Big Tech acquirers were mostly on the sidelines due to regulatory scrutiny; instead of blockbuster acquisitions, firms like Microsoft and Google resorted to hiring entire AI teams (from startups like Inflection AI and Character.ai) rather than formally buying the companies. For early-stage B2B SaaS startups, this means the most likely exit in the current climate is a modest acquisition or a longer path to IPO. Until the IPO market fully reopens (expected hopefully in 2025), seed investors should plan for extended hold periods or lean into secondary markets to seek liquidity. The late-2024 uptick in IPO activity is an encouraging sign; if a few $1B+ IPOs or acquisitions materialize in 2025, it will re-rate valuations and provide much-needed liquidity, benefiting the whole venture ecosystem.
3. Portfolio Companies Illustrating Key Trends
Our portfolio spans a range of B2B SaaS and fintech startups, many of which exemplify the trends discussed. Below, we highlight a few companies and their recent progress to shed light on broader industry movements:
Arvist (AI-Powered Warehouse Automation): Arvist is revolutionizing warehouse operations by integrating AI-driven vision technology to optimize logistics and inventory management. With the supply chain industry facing persistent inefficiencies, Arvist's AI-powered automation tools have helped enterprises reduce error rates and improve operational speed. In 2024, the company secured strategic partnerships with major logistics firms, reflecting the growing demand for AI-driven industrial automation.
ApproveIt (Automated Spend Approvals & Controls): ApproveIt simplifies and automates corporate spend approvals, ensuring real-time compliance and fraud prevention. As businesses focus on optimizing financial workflows, ApproveIt has gained traction among mid-sized enterprises looking for seamless spend management solutions. The company raised a seed round in 2024, signaling strong investor interest in workflow automation within enterprise finance.
Anchor (Embedded Banking for Africa): Anchor is redefining embedded banking infrastructure in Nigeria, enabling businesses to integrate payments, lending, and financial services through simple APIs. Despite fintech funding headwinds, Anchor expanded its partnerships with major African financial institutions in 2024, further proving the scalability of fintech infrastructure tailored to emerging markets.
Archer (Cybersecurity & Fraud Prevention for Fintech): Archer provides a global real-time fraud detection and data-sharing network for fintech companies. As cyber threats evolve, Archer’s advanced machine learning models help financial institutions prevent fraud before it occurs. In 2024, Archer expanded its footprint across European financial markets, illustrating the increasing demand for robust fraud prevention solutions in fintech.
Abhi (Earned Wage Access for Emerging Markets): Abhi is pioneering financial access in South Asia by offering instant earned wage access (EWA) integrated directly into payroll systems. Despite challenging macroeconomic conditions, Abhi has maintained rapid growth, processing millions of transactions monthly. The company raised follow-on funding in 2024, reinforcing the trend of embedded fintech platforms solving critical financial inclusion problems.
These companies exemplify how AI, embedded fintech, automation, and cybersecurity are shaping the next wave of enterprise software and financial infrastructure. Despite market challenges, startups demonstrating clear ROI and scalable solutions continue to secure capital and gain traction.
4. Competitive Landscape
New Entrants vs. Incumbents: The competitive landscape in B2B SaaS is dynamic, with early-stage challengers addressing gaps that incumbents have left open. In 2024, a wave of AI-native startups emerged, threatening to disrupt incumbents in fields like customer support (with AI chatbots), coding (AI-assisted software development), and business analytics (natural language queries on data). For example, startups like Adept AI (which builds AI agents to automate software tasks) attracted significant funding and attention. However, the power of incumbency is still strong: large SaaS players such as Salesforce, Microsoft, and Oracle responded by building or acquiring similar capabilities. Microsoft’s introduction of its AI Copilot across the Office and Dynamics suites is a prime case – it leverages Microsoft’s distribution to blunt the edge of smaller competitors offering AI features. Similarly, Salesforce’s venture arm has been actively investing in promising SaaS upstarts (and integrating some into its AppExchange) to ensure they don’t erode Salesforce’s CRM dominance. The result is a convergence in features, where startups and incumbents alike are racing to incorporate the latest tech (AI, automation, integrations). Startups still have the advantage of speed and focus: many early-stage players differentiate by targeting a specific user persona or industry extremely well, whereas incumbents offer breadth. In our analysis, point solution startups need to scale fast or partner up, as platform incumbents will either catch up or acquire them. The good news for startups is that larger cloud companies have been more acquisitive of late (albeit mainly for small deals due to antitrust caution). Even the “Magnificent Seven” tech giants hired or acquired AI talent in 2024 to keep their edge. This indicates that innovative startups with unique IP are likely to find willing acquirers, if not now then as the regulatory climate shifts.
Notable Early-Stage Players & Recent Exits: Despite a slower exit market, several early-stage B2B SaaS companies achieved notable milestones. ServiceTitan, which started as a relatively early-stage company in field services management a decade ago, went public in 2024 – a rare successful SaaS IPO in a quiet year. Its journey from startup to $8B+ IPO underscores the potential for vertical SaaS disruptors. On the M&A side, 2024 saw Klaviyo (marketing automation, albeit more B2C-focused) make a public debut and Qualtrics (experience management SaaS) acquired by private equity in a $12B deal. These exits, while involving later-stage companies, provided some benchmark valuations for the sector. Among younger startups, we observed a rise in acqui-hire and soft landing exits: companies that struggled to raise the next round often got picked up by bigger tech firms for talent and tech (with deal values mainly sub-$50M). In areas like cybersecurity, at least a dozen seed-to-Series A startups were acquired in 2024 by larger security firms looking to plug product gaps. A notable early-stage player to watch is OpenAI (and its ecosystem) – not an early-stage company itself by 2024 (having raised billions), but it spawned countless SaaS applications built on its API. Another is Databricks (big data and AI platform), which, while later-stage, executed one of the largest private fundraises ever in 2024 (The State of the SaaS), reinforcing its position against cloud giants and hinting at a future IPO. For comparative insight, consider the Cloud 100 list (top private cloud companies): in 2024, the average Cloud 100 valuation was $7.4B with a median of $4.6B (The Cloud 100 Benchmarks Report 2024 - Bessemer Venture Partners), and these elite firms were still growing ~70% annually on average. This shows that market leaders remain extremely valuable, even as smaller players fight for footholds. In summary, the competitive landscape is a barbell – at one end, big incumbents are larger than ever (and expanding via bundle offerings and selective acquisitions), and at the other, new entrants are attacking specific pain points with nimbleness and novel tech. Mid-sized SaaS companies that failed to attain scale are getting squeezed, often becoming acquisition targets or focusing on profitable niches. The balance of power in 2025 will hinge on how successfully startups can convert technological innovation (AI, etc.) into market share before the incumbents respond.
Market Power Shifts: One clear shift is the increasing role of cloud infrastructure providers (Amazon, Microsoft, Google) in SaaS distribution. With marketplaces and co-sell programs, these giants can favor certain SaaS vendors, effectively influencing winners and losers. For instance, startups that secure a spot in Azure’s or AWS’s marketplace can tap large enterprise channels quickly. On the flip side, reliance on such platforms means those providers have leverage (e.g. they might launch a native service competing with a popular third-party SaaS on their platform). Another shift is private equity’s growing influence in SaaS. PE firms took advantage of depressed valuations to buy out public SaaS companies (and even late-stage private ones) in 2022-2024, refocusing them on profitability. This PE roll-up trend means some formerly innovative players may slow down on innovation and leave openings for startups. For example, after PE acquisitions, companies like SailPoint and Anaplan became more revenue-focused, which new startups in identity management and planning software are keen to exploit. We also observe customer power tilting toward consolidation: large enterprises, tired of managing dozens of SaaS subscriptions, are pressuring vendors to broaden their offerings or bundle. This puts incumbents (with broad suites) in a stronger position, unless startups partner to offer integrated solutions. To navigate this, many early-stage companies are now building with integration in mind – touting how well they play with Slack, Teams, Salesforce, etc., to reduce friction for users who are already deep in those ecosystems. In summary, competitive dynamics require early-stage SaaS players to be smarter about alliances and differentiation, while incumbents must innovate to avoid disruption. We expect 2025 to bring a few high-profile showdowns – think of an AI-driven upstart taking on an established enterprise software giant – as well as some surprise partnerships between old and new guard.
5. Challenges & Risks for B2B SaaS in 2025
Macroeconomic Overhang: The macro environment remains a double-edged sword for B2B SaaS. On one hand, the high interest rate regime and risk of economic slowdown have made customers more cautious with IT spending. Many SaaS vendors saw longer sales cycles in 2024, as clients demanded higher ROI justification for new tools. Elevated interest rates also increase the cost of capital, which damps valuations (public and private) and forces startups to operate more leanly. However, there are signs that inflation is moderating and central banks are easing up – 2024 saw a few interest rate cuts which were a “bright light” for markets (though by year-end that light dimmed as cuts paused). If 2025 brings clearer economic stability or rate relief, it could boost enterprise spending on SaaS again. Nonetheless, startups should plan for a scenario of persistent capital scarcity: the era of cheap money is likely over, so efficient growth is a must, and break-even timelines have shortened. For investors, the macro risk means we continue to underwrite deals assuming lower exit multiples than the 2021 peak, and we encourage portfolio companies to secure at least 18–24 months of runway with each raise. The flip side of a tighter economy is that it often spurs innovation – economic pressure forces adoption of productivity tools (which many SaaS products are) to save costs. We see strong demand for any SaaS that can demonstrably either increase revenue or reduce costs for customers.
Regulatory and Policy Shifts: Regulatory changes pose a significant strategic risk (and sometimes opportunity) for B2B SaaS. In fintech and finance-related SaaS, as noted, regulators globally are intensifying scrutiny – from stricter capital requirements to new data privacy rules – which can raise compliance costs for startups or lengthen product development (e.g. getting approvals). For AI-centric SaaS, emerging regulations like the EU AI Act aim to impose transparency and accountability on AI systems (For Fintech, 2024 Was A Year of Hype, Hustle and Hard Truths. What’s Next In 2025?). This could affect SaaS providers deploying AI models (needing more documentation, bias audits, etc.). Data privacy laws (GDPR in Europe, CCPA in California, and similar laws elsewhere) continue to evolve, and B2B SaaS companies must be vigilant about data handling, especially those processing personal or sensitive data across borders. A noteworthy 2024 development was the EU’s stricter stance on data transfers and cloud data residency, which might require SaaS firms to offer localized data hosting for European clients – a challenge for smaller companies to implement. Antitrust enforcement is another factor: big tech companies are under watch, which indirectly affects startups’ exit options (as seen by the cooling of big acquisitions). If the regulatory environment relaxes in 2025 (for example, a new U.S. administration could potentially be more lenient on mergers), we might see a flurry of M&A as cash-rich incumbents acquire startups. Conversely, continued strict antitrust will mean startups must build with the expectation of independent growth or IPO, rather than an automatic big-ticket sale. Startups also face sector-specific regulations – e.g. healthcare SaaS must comply with HIPAA, ed-tech with FERPA, etc. One positive trend: governments are also investing in digital transformation (e.g. incentives for cloud adoption, grants for AI development), which can benefit B2B SaaS that align with public priorities. Overall, regulation is a top-tier risk that needs proactive management – savvy SaaS teams are hiring compliance experts early and turning regulatory requirements into competitive advantages (trust as a selling point). Our recommendation is that companies stay ahead of the curve on AI ethics, data protection, and industry compliance, as regulatory missteps can quickly derail growth or investor interest.
Technological Disruption & AI Uncertainty: Ironically, the same AI trend driving opportunity is also a source of risk. The rapid advancement of AI could potentially commoditize certain SaaS features. For example, if AI can auto-generate code or content, some developer tools or content management SaaS products might see reduced demand. Similarly, improved AI assistants could handle tasks that previously required standalone software (like scheduling meetings or basic design work). B2B SaaS firms must ensure they are riding the AI wave, not caught underneath it. There’s also platform risk: reliance on third-party AI models (e.g. a startup building on OpenAI’s API) carries dependency risk if API terms change or better open-source models emerge. Additionally, AI models can produce inconsistent outputs (hallucinations, biases), which might undermine user trust in SaaS features powered by them – a risk to watch for companies heavily marketing “AI inside.” Cybersecurity threats intensified in recent years too, with more frequent and sophisticated attacks on software supply chains and cloud services. A breach or data leak can be devastating for a young SaaS company’s reputation. The push to remote/hybrid work expanded the attack surface, putting pressure on SaaS vendors to harden their security (which is costly but non-negotiable). There’s also a talent risk: while big tech layoffs in 2022-2023 made more talent available to startups, the specialized expertise in areas like AI, security, and cloud infrastructure is in hot demand. Early companies might struggle to attract or retain the right engineers and domain experts when competing with well-funded players. In addition, consider the risk of market saturation – with lower barriers to building SaaS (thanks to cloud and open-source), many niches have multiple venture-backed players. This can lead to price competition and noise, making it harder to rise above the fray. We’ve observed some “SaaS stack fatigue” among enterprise buyers, which could risk slower sales for new entrants that don’t clearly differentiate. Finally, geopolitical factors (like U.S.-China relations) pose risk for globally operating SaaS firms – e.g. export controls on certain technologies or fractured internet regulations could limit market access. In summary, while B2B SaaS outlook is strong, companies must navigate a minefield of potential disruptors: they should continuously innovate their product (before someone else does), invest in security and compliance, and remain agile in the face of rapid tech shifts.
Prioritization of Risks: Among these challenges, the macroeconomic and liquidity issue is perhaps most immediately felt – it influences fundraising and budgeting in the here and now. Startups and investors are accordingly prioritizing cash management and runway extension as top-of-mind. Next, AI-driven disruption is a high-priority strategic area: every SaaS firm needs an AI plan (either leverage it or risk obsolescence). Regulatory changes are somewhat slower-moving but carry heavy impact; wise companies are allocating resources early to compliance and lobbying efforts. We also rank competitive risk (incumbents copying features or undercutting on price) as a significant threat, particularly for point-solution SaaS offerings – which is why forming partnerships or focusing on unique IP is crucial. Each risk area requires a mitigation strategy in 2025 planning: e.g. hedge macro risk by securing sufficient capital now, hedge tech risk by investing in R&D and talent, hedge regulatory risk by implementing robust governance and engaging policymakers.
6. LP Insights and Recommendations
LP Capital Allocation Trends: Limited Partners (LPs) – the investors in venture funds – have been adjusting their strategies in response to the evolving VC landscape. In 2024, we witnessed a pronounced “flight to quality” among LPs. Established venture firms with strong track records sucked up the majority of new capital commitments, while newer or smaller funds struggled. Data shows the top 30 VC funds raised 75% of all VC capital in 2024, with just 9 mega-funds accounting for nearly half of the dollars. For example, Andreessen Horowitz alone raised about 10% of the year’s VC capital. This concentration means LPs are consolidating their portfolios, preferring to re-up with managers who have proven distribution (cash return) histories. Emerging managers, especially those launched in the frothy 2020-21 period, found 2024 to be extremely challenging for fundraising, often needing much longer to close funds or downsizing targets. In fact, emerging managers raised only ~$15B (20% of capital) across 245 funds in 2024 (including yours truly), a sharp reversal from the historically larger share they used to command. The reason is clear: with exit distributions to LPs still low, many LPs are maxed out on their venture allocations (“denominator effect”) and are being very selective about new commitments.
At the same time, the composition of LPs is shifting. Family offices and sovereign wealth funds (SWFs) have stepped up as increasingly important backers of VC. Unlike some endowments or pension funds that pulled back, family offices and SWFs often have more flexible mandates and were actively committing to venture, particularly in innovative sectors. For instance, Singapore’s GIC invested nearly $1.9B into European startups in 2024, and Abu Dhabi’s Mubadala committed $29B across 52 deals (a 67% increase from 2023) (Discover Top Venture Funds). These players have large capital bases and a long-term view, and they’ve been crucial in funding AI and biotech-focused VC funds and late-stage rounds. Institutional investors (pensions, insurance) are cautiously increasing exposure as well, drawn by venture’s potential high returns in a low-yield world. Some have turned to co-investments to put money to work without paying full fees – notably, pension funds co-invested more in 2024 than they have in five years, targeting fintech, clean tech, and AI deals alongside GPs. Corporate LPs (venture arms of big companies) are aligning their capital with strategic interests: tech giants like Microsoft and NVIDIA are investing heavily in AI startups (Microsoft even announced an $80B AI investment plan through its venture initiatives). This corporates’ participation can be double-edged for traditional LPs – while it brings more capital into the ecosystem, it often goes to very targeted areas and sometimes at terms a financial LP wouldn’t accept. University endowments have largely maintained or slightly increased their VC allocations, buoyed by decent performance in their portfolios (many U.S. endowments saw >12% returns in FY 2024, partly thanks to venture holdings). In sum, LP capital is still flowing into venture, but it’s more heavily weighted towards big firms and certain LP types (FO/SWF/corporate) than before.
Expected Returns and Sentiment: LP sentiment towards venture has been mixed. On one hand, many LPs are dissatisfied with recent fund performance – one survey noted LPs are more negative about VC returns now than even during the pandemic lows – largely because distributions (DPI) have been very low since the IPO market shut (The State of Venture Capital: A look back at 2024, an eye on 2025). Some late-vintage (2020-21) funds are still sitting on markdowns and illiquid portfolios, testing LP patience. As a result, LPs have modest return expectations in the near term; few expect the extraordinary returns of the last decade to repeat soon. That said, there is a growing belief that current vintages (2023-2025) could yield strong returns if one looks 7-10 years out. Why? The consensus is that the correction in valuations means new investments are at more reasonable entry prices, setting the stage for better multiples on exit. History supports this – funds deployed after downturns (e.g. 2009-2010, or post-dotcom 2003-2004) often ended up top-performing vintages. Moreover, the technological shifts underway (AI, etc.) could create new mega-winners that drive outsized fund returns. For example, if even a few of the AI platform companies live up to their potential, the value creation could be enormous. LPs, especially those with venture experience, are aware of this dynamic and don’t want to miss out. So despite the short-term heartburn, most LPs are maintaining or carefully increasing their allocation to venture, but calibrating their expected IRRs to be, say, in the mid-teens rather than 20%+ until exits improve. We also see LPs negotiating more conservative terms or side-letter provisions (like opting out of certain high-risk areas, or requesting fee discounts on oversubscribed funds) to safeguard their interests.
Structural Shifts in Early-Stage Investing: The early-stage venture model itself is evolving. One structural change is the prevalence of multi-stage “platform” funds playing at seed. Large VC firms (with billion-dollar funds) are increasingly writing seed checks of $1-3M, especially for AI startups, alongside or instead of dedicated seed funds. This can squeeze traditional seed VCs and accelerators, but also means seed founders might raise from a different mix of investors (often fewer, deeper-pocketed backers who can follow on). Another shift is the elongated path to Series A (as discussed, >2 years now) (The State of the Pre-seed), which changes how seed funds manage reserves and how LPs view seed fund timing. Many seed funds are doing more follow-on (leading or participating in bridge rounds for portfolio companies) to support them until A. Some are even restructuring fund models to have opportunity funds or longer fund lifecycles. Secondaries and continuation vehicles have emerged as important tools – since traditional exits are slow, GPs are arranging secondary sales or moving assets to continuation funds to deliver partial liquidity to LPs around the usual 8-10 year mark. LPs generally view these as innovative solutions, though they scrutinize them for alignment of interest. Furthermore, specialization is a structural trend: we see new micro-funds focused on niches (AI, climate SaaS, etc.), and while fundraising is tough, those with differentiated thesis and network (e.g. an AI researcher turned VC) can still attract LP commitments despite the consolidation trend. LPs are showing interest in specialist seed funds that can be “discovery engines” in nascent areas, as a complement to their core allocations in larger funds. Another shift is in geography – LPs are gradually diversifying globally. For instance, European and Asian early-stage funds have gained more attention as those ecosystems mature. We also note the rise of non-traditional syndicates (angel collectives, crowdfunding for equity) in early stage, though these remain a small fraction of the capital; some LPs (especially family offices) co-invest alongside these to access deals outside of fund structures. Structurally, early-stage investing in 2025 is more complex and competitive: fewer deals get done without heavy diligence, round sizes are right-sized, and GPs must truly add value to win allocations. LPs in turn are doing deeper due diligence on GPs – looking at portfolio construction, follow-on strategy, and value-add in a granular way – before committing.
Recommendations for LPs: In light of these trends, we offer a few recommendations for LPs with exposure to early-stage venture:
Stay the Course, but Emphasize Quality: If your capital allows, maintain your venture allocations through this cycle. Cutting back now could mean missing the upswing that usually follows a downturn. Instead, concentrate commitments in funds that have demonstrated strong selection ability and prudent deployment in tough times. Many of the best startups of the next decade will be seeded in this environment. As Beezer Clarkson of Sapphire Partners notes, when liquidity returns via IPOs, it historically leads to more LP capital flowing into venture – being positioned before that wave is ideal.
Diversify Across Theses and Geographies: Within early-stage, consider diversifying your bets. For example, allocate some capital to a specialized AI or deeptech seed fund (to capture upside in transformational tech) while also backing a generalist fund known for consistent exits. Geographically, if you are U.S.-heavy, 2025 might be a time to add a European or Indian fund – valuations there can be lower and markets less picked over, offering a complement to U.S. deals. Ensure, however, that any new relationship meets your criteria on governance and track record.
Engage in Co-Investments and Secondaries: To enhance returns and liquidity, take advantage of co-invest opportunities alongside your GPs in their top deals (many GPs are offering these to strengthen LP relations). Co-investing at seed requires fast decision-making and high risk tolerance, but when done selectively (e.g. the lead fund’s highest conviction company), it can significantly boost returns without additional fees. Similarly, explore secondary purchases – some LPs under pressure are selling stakes in quality venture funds on the secondary market at discounts. If you have a long-term view, picking up those stakes could yield strong IRRs when the funds mature. Just be sure to assess the underlying portfolios carefully.
Monitor Fund Deployment and Reserve Strategies: In early-stage funds you’re invested in, keep an eye on pace and reserves. You want GPs deploying at a steady, opportunistic pace – not sitting out of the market entirely (missing good deals) nor rushing (due to pressure to show activity). Ask how they are supporting companies through the longer road to Series A – do they have enough reserves? Are they syndicating bridges with other trusted investors? Funds that manage this well will emerge with a larger ownership in the eventual winners. As an LP, you might prefer funds that have flexibility to hold winners longer (via SPVs or opportunity funds) so you can capture more value before an exit.
Expect Longer Horizons and Adjust Liquidity Planning: Align your expectations that exits might take longer. Build a buffer in your liquidity planning – the usual 10-year fund life may stretch to 12+ years for final distributions. Make sure your own portfolio (endowment, etc.) can handle the delayed returns. This might also mean pacing your commitments (vintage diversification) to avoid clustering too many commitments in one vintage year, which could all call capital at once and then all face slow returns at once. Staggering commitments ensures more continuous distribution streams in the out years.
Push for Transparency and Governance: In this period of structural shifts, encourage GPs to be transparent about valuations (write-downs as needed), follow-on financing status of portfolio companies, and any GP-led secondary processes. Strong governance (advisory boards, LPACs for funds) is important, especially if/when funds pursue continuation vehicles or extend fund lives. Being an active, informed LP can help safeguard against unfavorable moves and align GPs with LP interests.
In conclusion, LPs should approach 2025 with cautious optimism. The venture market is rebounding in areas and reinventing itself, which creates a fertile ground for future returns as long as one navigates prudently. By backing high-quality early-stage managers, staying flexible on strategies, and looking past the current illiquidity, LPs can position themselves to reap the rewards when the next generation of B2B SaaS leaders exits in the coming years. Venture remains a long game, and the current challenges are setting the stage for potentially strong vintages – the key is to participate thoughtfully and partner with fund managers who have the vision and discipline to capitalize on these shifts.
For deeper insights and conversations with industry leaders, check out the Ignite podcast, where we discuss emerging SaaS trends, venture capital strategies, and the future of AI-driven startups.
