A Few, Possibly Controversial, SaaS Market Observations - Q4 2025
I'm starting to believe we're at a tipping point in the SaaS investing and M&A market. Call me crazy, but is the SaaS aggregator model on its deathbed? And are "zombie" SaaS companies—those stuck in VC portfolios with some combination of revenue growth or profitability not meeting expectations and therefore neglected—essentially worthless? Both stemming from the massive growth, proliferation, and disruption AI is having on the industry? I’m likely oversimplifying AND overestimating the risk of AI - I don't want to say the sky is falling... but is it? The good thing is that software and tech is incredibly resilient - look where we are now compared to the early 2000s - and so if we are at a tipping point, I believe the next phase will be more interesting than the one before it.
The Old Software Aggregator Playbook
For years, "zombie" SaaS companies weren't actually a problem. There was a natural exit for these companies—the software aggregators or value-focused PE firms. Yes, the exits for these VC investments weren't the triples or home runs VCs like to see, but they were transactions that enabled the VC to return capital to LPs and move a company consuming time, energy, and money out of the portfolio. Oftentimes these zombie companies were still solid SaaS businesses; they just didn't meet the characteristics for a VC home run.
The typical process looked like this:
The VC holds a zombie company for 5-8 years. Growth has slowed, but the product works, customers are sticky, and revenue is stable.
A buyer appears. A software roll-up firm or PE shop sees value others don't. Firms like Constellation Software have been extremely successful at acquiring these companies.
The deal gets done. The VC gets 1-2x their money back—not exciting, but enough to provide liquidity. The founder gets to move on.
The new owner revitalizes the business. They clean up the cap table, cut costs, stabilize churn. The company generates healthy cash flow for 5-10 years. Everyone wins.
This worked. For a long time, it just worked. The zombie companies weren't dead. They just needed new ownership and a trip to the Medspa for a touch up (as they say here in Newport Beach, CA).
What I've Noticed Now That Has Me Scratching My Head
AI has burst onto the scene in an extraordinary way. Yes, we're in the early stages of adoption and return on AI investment, but we DO know that AI is needed and essential—almost all businesses in just about every industry are experimenting with AI, and SaaS vendors must have an answer.
This is creating explosive revenue growth for AI companies in short time frames. AI "Supernova" startups are reaching approximately $100M ARR in just 1.5 years—a speed that would have been unthinkable in traditional SaaS. Cursor, an AI-powered code editor, achieved the fastest SaaS growth ever, going from $1M to $100M ARR in just 12 months with fewer than 20 employees. For context, that's revenue velocity that typically took traditional SaaS companies 4-7 years to achieve.
In 2025 so far, 40% of VC exit value stems from AI companies, and by Q3 2025, AI accounted for 64.3% of total deal value in the U.S. As one PitchBook analyst put it: "AI has basically become the foundation of VC."
If you're holding a legacy SaaS company that hasn't raised or exited in 5+ years, you're competing with an entirely new set of companies that are absorbing all the oxygen in the room.
And that brings me to three questions I've been thinking about as I read story after story about AI disrupting the software industry and capturing the attention of the VC and M&A world.
Question 1: How Do You Sell a Zombie Company That Raised at 2021 Valuations?
Let's say you backed a B2B SaaS company in 2020-2021. Money was free. Your Series B was at a 20x revenue multiple because everyone was doing it.
Fast forward to today. The company has $10-12M ARR, growing maybe 10-15% annually. Not terrible, but definitely not venture-scale.
Now you need an exit. Your LPs want distributions. You want to focus on portfolio winners.
But here's the problem:
The last round price set a valuation that likely won't get cleared in an exit
AI-native competitors are offering better features at competitive prices
Value buyers are demanding steep discounts
Any reasonable exit would be a massive down round
So do you accept the down round and take the hit? Hold out for a premium price while AI competitors get stronger, further eroding the company's growth and profitability? How long can you keep this company in the portfolio?
Question 2: How Does a SaaS Company Compete With AI When Raising a Fresh Round of Capital Is Almost Impossible?
The valuation problem means you likely can't raise new capital at terms that work. VCs don't want to lead a down round into a zombie company, especially one that needs capital to invest in an AI strategy to stay competitive. (That company is already at a disadvantage.)
So how do you compete when the pace of innovation is higher than ever today? AI-native startups are shipping features faster than ever. A three-person team can build what used to take 50 engineers. Your customers are being pitched by competitors with AI co-pilots, automation, and insights.
Without fresh capital, how do you:
Hire the talent to build AI features?
Keep pace with AI-native competitors?
Retain customers being courted by shinier alternatives?
Maintain any product velocity?
A capital raise or exit is extremely tricky. Its nearly impossible out-innovate AI-first competitors. And every quarter, your position gets weaker.
Some founders are bootstrapping to profitability. Others are pivoting to "AI-enabled" versions with existing resources.
But is that enough?
Question 3: Is A Software Roll-Up Sustainable in the AI Era?
I mentioned earlier that software aggregators like Constellation Software were integral parts of the zombie company exit landscape. Their model is built on acquiring underperforming (from a VC lens) SaaS companies and turning them into cash machines.
The model has roughly always been:
Buy at 1-3x revenue
Cut costs and optimize
Stabilize revenue and churn
Milk cash flows for 5-10 years
Generate a decent IRR
This depends on a major critical assumption: the cash flow window is long enough to justify the purchase.
But what if AI has obliterated that timeline? What if 5-10 years of cash flow is now only 24-48 months? These SaaS companies are even more of a falling knife.
Constellation Software's stock has faced pressure recently—not just because Mark Leonard stepped down for health reasons, but because the entire roll-up model is being stress-tested by AI.
So if you're a buyer, especially one whose strategy is to buy orphaned SaaS companies, how do you underwrite deals?
Only target AI-“resistant” verticals? Acquire a company for free? Figure out how to underwrite on a drastically shorter hold period? Build internal AI capabilities? No VC is going to give away a company, which seems like the only justifiable price that makes a model predicated on cash flow harvesting work these days.
And if buyers pull back, what happens to all the zombie companies that used to have an exit path?
So What Happens? What's the Exit Strategy for These Companies? Is There Even One?
I Have to Be Missing Something—What Is It?
I'm curious to hear different perspectives on this. Am I completely misunderstanding AI and its impact in the software space?
One perspective I've heard recently was from Orlando Bravo of Thoma Bravo, who stated that while AI valuations are "at a bubble," he's more bullish (and working harder than ever) on the software sector. His take is that AI will be a tailwind for existing SaaS companies, stating "the software industry together with AI is going to provide a new growth curve to it". Thoma Bravo just closed $42 billion in acquisitions this year, including their largest deal ever—the $12 billion Dayforce acquisition. His firm is the model in the software sector, so there has to be something to what he's saying.
What are you seeing from your perspective?
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Sources:
Fortune/PitchBook: "In 2025 so far, 40% of VC exit value stems from AI" (October 2025)
Bessemer Venture Partners: "The State of AI 2025" (August 2025)
Market Clarity: "Top 35 Most Profitable AI Startups in 2025" (October 2025)
CNBC: "Orlando Bravo says valuations in AI are at a bubble" (October 2025)
SaaStr: "The $1.5 Trillion Software Tailwind: Why Thoma Bravo's Orlando Bravo Says AI Valuations Are in a Bubble" (October 2025)
Bloomberg coverage of Constellation Software
