The last few years have brought two major challenges for SaaS companies. First, rising interest rates pushed investors to reward efficient growth over growth at all costs. Second, the rise of large language models means customers may need fewer seats as AI lets them do more with fewer people, while some SaaS products risk being replaced outright by features built into the AI models themselves.
The AI challenge came to a head at the start of 2026, when a selloff erased nearly $1 trillion in software market value. The SaaSpocalypse was underway.
But SaaS isn’t one business. Companies serve different industries, sell to everyone from small businesses to large enterprises, and offer very different products. The charts below draw on SEC filings from 80 public SaaS companies spanning a range of industries, maturity stages, and product types, using the standard metrics for judging a software company’s growth and efficiency. Together they show how public SaaS companies are running their businesses as AI reshapes the industry.
1. The move to efficient growth
For most of the past decade, SaaS companies were encouraged to grow at all costs. That changed in 2022. As interest rates rose and capital got more expensive, investors began demanding efficiency and profitability. This chart shows two trends since 2023.
First, the industry’s Rule of 40 score is rising. The Rule of 40 measures the balance between a company’s growth and its profitability: revenue growth rate plus profit margin should total at least 40%. (In this analysis, the Rule of 40 is calculated as year-over-year revenue growth plus trailing-twelve-month free cash flow margin.) The median company in our sample rose from 31 in Q1 2023 to 39 in Q2 2026. That’s still just short of the bar, but closer than at any point in the period.
Second, the mix within the Rule of 40 has shifted. In Q1 2023, the median company’s growth rate (18%) was about twice its free cash flow margin (9%). By early 2024, the two had flipped. Median FCF margin climbed steadily to 22% by Q2 2026, while median growth slipped to 14%. In other words, the Rule of 40 is improving because margins are expanding fast enough to more than offset slowing growth.
2. Different SaaS types take different paths to the Rule of 40
In aggregate, SaaS is moving toward profitability and slower growth. However, segmenting SaaS companies by the type of product they provide shows two different paths to the Rule of 40.
Infrastructure companies provide the data, security, and developer platforms that applications run on. They skew toward growth.
System-of-record companies own a customer’s core data, such as CRM, HR, or ERP. They skew toward margin.
Workflow companies sit on top of that data to help people get work done. They are scattered between growth and margin, but as a group they are the most likely to fall short of 40.
What might this mean in the age of AI? One read is that AI spending is landing first with infrastructure companies, which would help explain their growth. System-of-record companies are so far defending and even expanding their margins, which could give them room to fund their own AI products. Workflow companies look squeezed, and they may face the hardest road ahead.
3. The market pays for the Rule of 40, and pays infrastructure companies most
This chart shows how the market values SaaS companies relative to their revenue (price-to-revenue), highlighting two key trends.
First, more efficient companies command higher valuations. Companies aren’t just moving toward efficiency; the market is rewarding them for it.
Second, the premium for efficiency is far larger for infrastructure companies than for everyone else. Here system-of-record and workflow companies are grouped together as ‘application’ companies. Application companies with a Rule of 40 above 50 are valued 23% higher than Application companies with a Rule of 40 between 30 and 40. Infrastructure companies above 50 are valued nearly four times as high as those between 30 and 40. Infrastructure companies get to 50 through growth. Application companies get there through margin. The market pays far more for the first.
4. Vertical SaaS gets more from every dollar invested in Sales & Marketing (S&M)
SaaS companies also differ in whether they sell the same product to customers in every industry (horizontal SaaS) or build a product for one specific industry (vertical SaaS). Veeva in life sciences, Guidewire in insurance, and Tyler Technologies in local government are all examples of vertical SaaS companies.
On this chart, the horizontal axis shows how much each company spends on sales and marketing as a percent of revenue. The vertical axis shows the SaaS magic number, which measures how much new revenue a company brings in compared to its sales and marketing spend. The magic number is calculated as the year-over-year increase in annualized revenue divided by sales and marketing spend over the prior four quarters. A magic number of 1.0 means each dollar of sales and marketing brought in a dollar of new annual revenue.
The data shows that vertical SaaS companies spend less and get more. The median vertical SaaS company spends about 17% of revenue on sales and marketing, half the 34% spent by the median horizontal company. Yet the median vertical SaaS magic number is about 0.6, compared with 0.4 for horizontal companies. Horizontal companies that spend more don’t close the gap. Many spend 40% to 55% of revenue on sales and marketing, and most of them still have magic numbers below 0.5.
In the age of AI, the sales efficiency of vertical SaaS companies may be a sign of protection. Vertical products are built around the rules and data of a specific industry. This industry focus makes vertical products harder for a general-purpose AI tool to replace. The industry focus also makes vertical products harder for new competitors to sell against.
Horizontal products face more risk. Horizontal products solve problems that are common across many industries, such as customer support or project management. A general-purpose AI model needs less specialized knowledge to copy what a horizontal product does.
AI may also be moving in a direction that favors vertical SaaS. Many companies are now training open-weight models on their own data. Open-weight models are AI models that anyone can download and customize. Companies use these customized models to solve problems specific to their own business. This trend suggests that AI is most useful when the AI has detailed knowledge of a specific business or industry. Vertical SaaS companies already have that kind of industry knowledge.
The trade-off for vertical SaaS companies is a smaller market. Selling efficiently to one industry is easier than selling to every industry. But focusing on one industry can limit how large a vertical SaaS company can grow.
5. The market rewards improvement, not just efficiency
The third chart in this analysis shows that companies with a higher Rule of 40 earn higher valuations. This chart looks at a different question. The chart compares how a company’s stock performed over the course of the past year, relative to how their Rule of 40 fluctuated over that same time period.
Most SaaS stocks fell over the past year. The selloff in early 2026 pulled down the whole sector. Companies whose Rule of 40 score declined by more than 2 points had a median stock return of -34%. Companies whose Rule of 40 score stayed roughly flat did even worse, with a median return of -42%. Even companies that improved their Rule of 40 score by 3 to 8 points had a median return of -23%. Only one group of companies saw stock prices rise. Companies that improved their Rule of 40 score by more than 8 points had a median return of +12%.
Holding steady was no safer than declining. The market sold off SaaS companies as a group. The companies that escaped the selloff were the ones that showed large and visible improvement. A modest improvement was not enough to stand out.