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As much as I love seeing new trends, it’s important to find confirmation in predictions we’ve already made or heard. This week brought us some fodder in this regard on two sectors that are very high on my radar: SaaS and alts. Let’s investigate. – Anna
Decline in SaaS multiples, tough times for IPOs
Alex And this week I spent time diving into Battery Ventures’ “State of OpenCloud 2022” report. It brought to our attention some forward-looking data – for example on cloud adoption – but also confirmed something that cannot be ignored: that SaaS multiples – enterprise value compared to revenue projections – are declining.
“The average forward multiple of SaaS companies has fallen from 16x forward earnings to about 6x,” Dharmesh Thacker, general partner at Battery, told us.
Not only have multiples declined, but they’ve received smaller rewards compared to regionally compact, slower-growing companies. There are many factors at play, but the bottom line is that profitability seems to be important again in the market.
As a result, we are seeing a reversal of some of the old laws. “Adjusted for growth,” Tucker said, “today, companies that show efficient growth as defined by the Rule of 40 (i.e., growth rate + free cash flow margin greater than or equal to 40) are trading at value. It’s growing regardless of profitability.”
Note that it’s neither growth nor profitability: it has to be both, and it seems the top priority is increasing to keep investors happy.
A more demanding market is a worrying picture for many unicorns awaiting IPOs, as well as for their peers that have already gone public but are struggling to maintain their market presence. Let’s spare a thought for Alex, who might not get his hands on another juicy S-1 before Q2 2023.
