Monday’s news that a COVID-19 vaccine candidate looks to be incredibly effective gave investors reasons to believe in a better future. Perhaps COVID-19 won’t be with us for years, investors appeared to think, but will instead become something that we can bend the curve on sooner than we thought.
A strong vaccine would be key toward moving back to life as it was. And for many companies battered by the pandemic, news that one was coming was more than a shot in the arm — it was stock market salvation. Airline shares soared. Cruise companies jumped. Even long-suffering Boeing shares took flight.
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But amidst the cheering, one sector of the stock market, a key comp for a host of startups, took hits. Yes, the high-flying SaaS and cloud stocks that have been such a key narrative in 2020 thanks to the pandemic and low interest rates, fell sharply while other sectors rallied off the vaccine tidings.
SaaS and cloud stocks are off more this morning, though their declines are shallower than Monday’s losses.
We asked yesterday what signal public investors were trying to send with their trades. But that’s just one angle of the picture. So, to better understand how private investors are viewing the same signals, I reached out to a few VCs who invest in SaaS and, in my experience, are worth listening to.
Below I’ve compiled notes from Bessemer’s Mary D’Onofrio, Work Life Ventures’ Brianne Kimmel, Day One Ventures’ Masha Drokova, Floodgate’s Iris Choi and Shasta’s Jacob Mullins on our question.
Are the bulls still bullish? Let’s find out.
SaaS, vaccines and the future of work
D’Onofrio wrote that her firm was still digesting the vaccine news and that it was “too early to say decisively whether or not people will be back to a pre-COVID life in the next few quarters.” That’s fair. Some good vaccine news does not mean that I’ll be back to speed-running United Economy Plus across the country every two weeks come April.
That said, D’Onofrio doesn’t appear too worried about the early-week selloff, noting that SaaS and cloud stocks — as measured via her firm’s cloud index — are still far ahead of other, broader indices this year. Why does that matter? “Stocks are forward-looking,” she said, which tells her “that even with more visibility into returning to ‘normal,’ the market anticipates that cloud companies will still be able to capitalize on the [market expansion] and growth opportunities that COVID helped to propel.”
“The pie,” she concluded, “has expanded.” That’s bullish and fair, I reckon.
The idea of the software market being larger post-COVID than before is something that Mullins also touched upon, saying in an email that “the overall pie — total dollars spent on enterprise software — has been enlarged and that won’t decrease” in the future.
What happens to high-flying startups if the pandemic trade flips?
What then, is going on with public markets? Mullins has an idea that seems reasonable: “Specifically related to [Monday’s] market trading out of SaaS[,] the market is always looking for growth,” he wrote, adding that “it appears the market has optimism that other nonsoftware sectors finally have an opportunity to see growth, as opposed to pandemic-caused loss.” The good news for startups is that, in Mullins’ view, the “trading activity will not have a direct result on the economic opportunity or operations of software companies.”
Don’t presume that slightly more modest multiples are the worst of it, however. Choi has both a bullish take and a note of caution for the software space, writing that she is “not worried” that recent public market trading “will cast a shadow on startup investing unless software IPOs start to struggle,” which she does not anticipate. At the same time, Choi wrote that she does “think more investors are starting to realize that much of the growth that we had seen in SaaS/cloud was a pull forward and not necessarily a new normal.”
What does that mean? That the growth that some startups have seen in 2020 on the back of COVID-19 should not be viewed as a new performance baseline. Instead, it was a welcome — and temporary — bump to performance.
Mullins has a similar perspective, writing that software startups may see “lower-growth new ACV quarters compared to Q2 [or] Q3 2020, because the immediate shock-demand isn’t there.” The startups that have best net retention, he continued, will be able to keep capitalizing on 2020’s growth boost. Those that don’t won’t get as much of an edge.
Back to a vaccine returning us to our pre-COVID state, the idea of returning to normal doesn’t mesh with how Drokova and Kimmel view the future. “Even in a post-vaccine era, employees will expect more flexibility moving forward,” Kimmel wrote to TechCrunch, adding that companies have already “invested significantly in the infrastructure and documentation to make working remotely effective.” Perhaps they will want to continue to drive returns on that investment and not rush back to an expensive office? Such a move could limit churn for software startups.
Productivity is getting better as well, Kimmel said, saying that the market is “seeing meaningful efficiency gains in how software companies buy and sell software without in-person meetings and with new asynchronous processes to enable collaboration on a global scale.” That is another knock against a rapid, mass return to offices and the era in which companies perhaps spent less on software than before.
Drokova agrees, saying that “work from home will stay” in place to some degree even after a vaccine, using what she observed in Switzerland this year after the country got its COVID-19 cases down and went back to offices. People still worked flexibly, she wrote, cutting their travel spend and leaning on Zoom. If that trend holds up in many markets, perhaps we’ll see only limited churn of software products that companies snapped up to keep the lights on once COVID-19 is behind us.
If that’s the case, perhaps software startup growth won’t take a vaccine hit to the degree that Wall Street could be signaling. And that would be good for public software companies, which means strong comp valuations for software startups. Which means active VCs and fast deals.
It is not surprising that software VCs are bullish on software startups. But what’s notable is that their bullishness doesn’t feel misplaced. I kept nodding while read their emails, which is either indictment of my proximity to VC thinking, or some form of agreement. We will see!
Software companies are reporting a pretty good third quarter
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