While bank closures may be stealing headlines and fueling uncertainty about the state of lending markets, private investors have found a bright spot in the ‘work software’ sector.
According to the recent Road to Next report from Deloitte, after enjoying a landmark $53 billion in completed deals across more than 1200 transactions in 2021, work software remained among the most resilient sectors for dealmaking in 2022, accounting for 15 percent of all expansion-stage transactions completed last year.
This comes after expansion-stage deal activity overall took a modest dip in 2022 (just over $200 billion across sectors) following unprecedented levels of dealmaking in 2021 (almost $320 billion). It’s worth also noting that totals prior to 2020 barely inched past the $150 billion mark, with sub $100 billion investment tallies from 2015-2016).
All of this is to say that despite investments ultimately slowing down over 2022, venture-backed funding remained much higher than historical averages last year, even despite fears of inflation and larger market concerns.
And for work software companies, the picture is even rosier.
Venture-growth deals (broken down to median financing sizes) also remained extremely steady year-over-year in the work software space, dropping from $35.4 million in 2021 to just $35.0 million in 2022.
So why is work software—which encompasses everything from Enterprise Resource Planning tools to Human Resources and Onboarding platforms—such a bright spot in an otherwise murky venture landscape?
At least one factor, according to the report, is that change remains one certainty that investors can bank on.
Digital transformation makes a meaningful impact on work
“As market trends remain relatively dynamic, qualitative data shows the appetite for innovation among workforces is strong,” the Road to Next co-authors noted.
What this means in practice is that while overall investment into new ventures is becoming more cautious, the onset of remote work and changes brought on by the pandemic—among many other factors—is actually calling for new solutions to ease broader workplace digital transformation.
That said, work software companies generally have a more stable growth trajectory than other investment categories because these tools demonstrate a more consistent return on investment.
Supporting innovation for the future of work
“Work software providers are revamping their product and service offerings and reorganizing along novel lines that may turn out to be the workplace, workforce, organizational structure and operating models better suited for the future, thus enhancing overall productivity and well-being,” the report’s co-authors add.
The numbers indicate that investment in work software may still be just ramping up: 2022 saw the most-ever completed work software startup-related rounds in the $5 million to $10 million range, while the median exit size via acquisition for work software companies in 2022 was $100 million.
Still, businesses in the work software industry have market fluctuations to navigate, even if VC spending in their sector remains strong. For instance, software-as-a-service (SaaS) offerings, which represent a major chunk of the work software marketplace, may need to start adjusting their business models, as it’s estimated that average organizations waste upwards of $17 million in unused SaaS licenses annually.
At the same time, SaaS company valuations have remained relatively static year-over-year, according to additional data from Carta, which indicated that the seed SaaS deal in Q4 2022 was down only $1 million to $13 million (or a -7.7 percent dip).
As businesses evolve to support new ways of working, it’s critical that they explore partnerships—with VCs, finance pros, and work software providers—that, combined, help extend their organization’s runway without stretching their solution-focused teams too thin.
At Boast AI, we offer startups a platform of intelligence to not just visualize their business operations from a single pane of glass, but maximize their ability to plan and finance their product roadmap. To learn more about how Boast AI can work for you, reach out to the team today.