David Sacks, founder and general partner of Craft Ventures (left), talks to Jason Lemkin, founder and CEO of SaaStr (right). (Michael O'Donnell Photography)
Last week in San Mateo, the sun shined brightly, and a DJ blasted upbeat electronic music at the entrance to SaaStr, the world's largest annual SaaS-focused conference.

But the mood at the conference seemed more tempered.

"If you're in the software business, we've been experiencing a recession over the last year or two," said David Sacks, Craft Ventures co-founder and host of the All-In podcast.

Sacks talked about how over the last five quarters, most of his board meetings were focused on reviewing portfolio companies' reduced revenue forecasts. Selling SaaS products has become decidedly more difficult as most buyers turned to cost-cutting mode.

Meanwhile, investors from Bessemer Venture Partners invoked their preferred term for the software downturn: "a SaaS-acre." 

Neil Sequeira, founder of Defy VC, also administered a bitter dose of reality to entrepreneurs at the conference. "Partners aren't focused on new deals. They are distracted with helping their portfolio companies survive," he said. SaaS metrics on steroids The metrics needed to raise a new seed or early-stage round have increased dramatically since the start of the downturn. "A few years ago, 200% was great growth. Today, you might not even get a meeting with a VC unless you're growing 300% to 400%," Sequeira said.

But fast revenue growth has been hard to achieve at a time when most investors have been pushing their portfolio companies to cut costs and inch their way toward profitability.

Mary D'Onofrio, a partner with Bessemer's growth investment practice, pointed out that after a couple of years of growing at or near 100% annually, companies in Bessemer's 100 Cloud List—which is made up of the top private SaaS companies—have expanded their revenue by only 55% this year.

While growth has slowed, these companies are now focused on turning the color of their bottom line from red to black—taking their cue from the public market, where investors have been pricing profitable software stocks higher than their unprofitable counterparts, according to Bessemer's analysis.

"About 23% of cloud 100 companies will be profitable by the end of this year, and two-thirds are planning to be profitable by the end of 2024," D'Onofrio said. AI-filled pond But this year's SaaStr was far from doom and gloom.

Investors' excitement about generative AI went well with the sunny weather and the upbeat tempo of the conference music.

"Every major platform shift is like a pond that's stocked with opportunities, but it will get fished out over time," Sacks said. "It was roughly a dozen years since the last big platform shift. We needed something new to come along and restock the pond."

Now that the proverbial pond has been replenished with generative AI startups, Craft Ventures is spending about 80% of the time evaluating opportunities with this technology, Sacks said.

Many panels at SaaStr were focused on AI, where investors and C-level executives from AI companies such as OpenAI and Anthropic discussed the future of this technology.

The pond may be filled with great catches, but investors are slowly becoming more discerning about the value of what they are fishing out. "I'm seeing the prices for the series A and B AI companies coming back down to earth after nine months of craziness," said Vanessa Larco, a partner at NEA.