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As much as I love seeing new trends, it’s just as important to get confirmation of past predictions we’ve made or heard. This week brought us some feed in that regard, in two sectors that are pretty high on my radar: SaaS and alts. Let’s investigate. — Anna
Shrinking SaaS Multiples, Tough Times for IPOs
Alex and I’ve spent quite a bit of time diving into Battery Ventures’ this week “State of the OpenCloud 2022” report. It brought to our attention some forward-looking data — on cloud adoption, for example — but also confirmed something impossible to ignore: that SaaS multiples — business value compared to revenue forecasts — are shrinking.
“The median forward multiple for SaaS companies has dropped from about 16x forward revenue to about 6x today,” Battery general partner Dharmesh Thakker told us.
Multiples have not only gotten smaller, but they’ve also compressed their reach, with fewer rewards for the fastest-growing companies compared to slower-growing companies. There are many factors at play, but the bottom line is that profitability seems to matter again to the markets.
As a result, we see the revenge of some old rules. “Adjusted for growth,” said Thakker, “today companies doing efficient growth as implied by the rule of 40 (i.e. companies with a growth rate + free cash flow margin greater than or equal to 40) trade at a premium to that which grow without taking profitability into account.”
Note that it’s not about growth or profitability: it has to be both, and the bar for satisfying investors seems to be getting higher and higher.
A more demanding market is a worrying picture for the many unicorns waiting to go public, as well as for their peers who have already gone public but are struggling to maintain their market capitalization. Let’s also think about Alex, who may not get his hands on another juicy S-1 before Q2 2023.
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.