SaaS spending will grow by 8.5% annually over the next three years. GDP will grow by 2.3%. In the last 6 years, venture capital investments in SaaS companies have grown by four times. AI, machine learning, cloud and content creation: this is where you’ll find value.
In 2021, Software as a Service (SaaS) will score an average growth rate of 19.6% starting from the year 2016, globally. The growth rate of software in general will be +8.5% and that of IT in general +3.3%. All of these numbers are higher than the expected growth rate of US GDP, which stands at an average of +2.3%.
This is what an analysis by Battery Ventures – PE and VC investment company operating in the US, London and Israel – has found when studying data by Gartner, Forrester, PwC and IMF. According to Battery, and also according to us at P101, these numbers explain why, contrary to what many stock market analysts fear (maybe thinking of the tech bubble of the year 2000), the IT industry won’t collapse soon. In the USA, VC financing has grown by four times in the last six years: which means that this industry has a huge unexplored potential.
The software industry in particular is on the crest of the wave: since its appearance on the global scene at the end of the 1970s, it has known a continuous development from zero to over 500 billion dollars today. In the US, software employs 10 million people, 2.5 million of them are directly involved in software production and the others in satellite activities. Moreover, the average salary of a software developer is twice that of the average US worker, according to the study The $1 Trillion economic impact of software.
In the report, analysts list the reasons why software won’t slow down. These are at least five: first of all, as we have seen, volumes are growing; secondly, software is becoming increasingly pervasive. The third reason is that software is replacing hardware thanks to virtualization. Fourth reason, software can carry out services and maintenance work for which we previously needed the human touch. And fifth, if a few years ago any company, in any sector, could consider technology as accessory, now it has to transform its core business and become a software company.
SaaS will have an ever increasing weight in the software business: International Data Corporation (IDC) stated that in 2018 SaaS applications would make 27.8% of the software business market, compared to 16.6% in 2013. And we are only at the beginning: by 2030, this industry will be worth 1 trillion dollars, reaching 5 trillion dollars by 2050 if we estimate a 5% yearly growth.
Silicon Valley is no longer the place where everything happens: since 2008, all the major geographies have surpassed the US in terms of IT investment growth rates. Even Europe, which has intensified its IT investment by 9.1 times from 2008 to 2017, while US investments have grown by 3.1 times. In 2017 there was a global slowdown caused by the US, while in that very year Europe and Canada increased their IT spending respectively by 72% and 71% year-on-year.
Another embryonic trend that is expected to grow exponentially is that of server virtualization platforms. They were worth 1.9 billion dollars in 2016 and will reach 7.7 by 2021 with a 32.7% average annual growth rate. The State of the Cloud Report 2018 by Bessemer Venture Partners explains why: it has become relatively easier to access the cloud and hence give life to a cloud company that from the start-up level quickly raises to the status of scale-up. It took Twilio – cloud communication platform that builds messaging apps – and Box – cloud communication platform for the management of sophisticated content – a year to scale-up. And it took SendGrid – world leader in email marketing systems – just over three years.
In the cloud market, a consolidation process is underway and four aggregators have already emerged: Adobe, Oracle, Salesforce and SAS. According to GP Bullhound’s Global Software Market Perspective, some of the trends that are just starting to emerge will drive the industry’s development: first of all, artificial intelligence and machine learning will become increasingly pervasive in business processes and decisions. Cybersecurity itself will rely more and more on algorithms that can learn how to defend people and companies from continuous hacker attacks, while the number of connected devices will increase exponentially.
Big corporations are increasingly adopting Software Asset Management systems to optimize IT spending. And the interest in containerization tech is growing: through virtualization, this technology simplifies the development and management of applications, as it overcomes the need to own an entire virtual machine for each of these activities. Finally, content creation: consumer software users ask for quality contents, for which they are now willing to pay. These will be the investment opportunities of the near future.