One of the most talked-about trends right now is the rapid decline in software-as-a-service valuations. Public markets in the sector have fallen dramatically over the last few weeks. Strong SaaS companies that were previously trading at seven to eight times revenue are now often trading at three to four times revenue.

Why is this happening? Let’s look at the main reasons being discussed.

1. AI coding tools enable “vibe coding.”
AI coding tools make it easy to build your own software. You can simply talk to a computer and it will create new software to replace existing SaaS applications. Don’t like your CRM? Vibe-code a new app that does exactly what you want.

2. Software lock-in is disappearing.
AI tools are extremely good at manipulating data and converting it between systems. In the past, SaaS businesses benefited from a premium valuation because switching costs were high. Now, AI makes it much easier to move between vendors, eroding that lock-in.

3. Per-seat SaaS pricing is under pressure.
Most SaaS products are priced per user, per employee, or per seat. In the age of AI, a single AI agent can effectively act as a “seat” and do the work of dozens or even hundreds of humans. Combined with companies having fewer employees and pushing for higher productivity, the ability to sell more seats is significantly diminished.

4. Long-term revenue durability is less certain.
Historically, it was easy to assume that SaaS products, especially platforms of record, would have 20- to 30-year longevity. While short-term durability may still exist, long-term durability is now more questionable. If future cash flows are less certain, company valuations should decline accordingly.

5. Customers don’t need all the functionality—and can’t unbundle pricing.
A friend recently shared a story about paying six figures annually for a product with extensive functionality, when they only needed a small slice of it. There were no lower-cost or modular options. Instead, they vibe-coded the specific functionality they needed in a single weekend and chose not to renew their contract. Many SaaS products are comprehensive, but their pricing and packaging are not agile enough for this new reality.

6. Barriers to entry are near zero.
AI coding tools dramatically reduce the cost of building new products. Tens of thousands of new SaaS applications are being created with cost structures that are a fraction of incumbents. Even if companies don’t build their own tools, they can increasingly find alternatives in the market at one-tenth the price.

7. Value is being captured by AI platforms.
As SaaS products are reduced to services, data stores, or systems of record, AI platforms layered on top will capture most of the net new value. Customers may receive more value overall, but traditional SaaS applications will capture a smaller share of incremental spend.

SaaS valuations have been under pressure for some time, particularly after the bubble of 2020 and 2021. The last few weeks have been especially dramatic and may represent an overcorrection. Even so, the valuation landscape for SaaS has changed permanently.

For these reasons and others, the future of SaaS fundraising and valuations will likely be more modest on a long-term basis. Entrepreneurs would do well to embrace this disruption: build AI-first SaaS companies with low cost structures, flexible pricing and packaging, and a focus on solving the hardest customer problems at dramatically lower cost.

The future is not fewer SaaS products—it’s ten times as many. And wherever there is opportunity, entrepreneurs will step in to fill the void.