Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
This morning we’re taking a brief look at SaaS stocks ahead of earnings, making note of their recent movements (and recovery), and what those somewhat violent movements could mean for SaaS startups as we head into the new economic world.
Investors generally expect churn (revenue loss) to rise at SaaS firms. For modern software startups that need to raise new capital, more churn means slower growth. If public software companies trip over their earnings reports, clipping their valuations, it could set up a double-bind for a number of startups. Let’s explore.
A recovery, a return
Tracking the value of public SaaS companies is a fun way to understand a piece of the venture capital market. If public SaaS shares rise, their gains help founders raise new money at attractive prices, defending and extending private valuations. When SaaS stocks fall, they do the opposite.
The link between public shares and private valuations, however, is slow. This is something that venture investor Mary D’Onofrio told TechCrunch the other week, saying that “public market dislocations affect the public market prices immediately, but the private markets take a while to trickle in.”
So as we watch public SaaS shares gyrate, we can infer a bit of what might happen next for SaaS startups.
The good news for founders and private investors is that after a rough period, SaaS stocks have regained much of their recent losses. Indeed, observe how the Bessemer cloud index, a basket of SaaS and cloud-focused companies, has traded off of its 52-week highs and lows (each set in Q1 2020):
- Bessemer cloud index % ∆ from 52-week highs: -20.05%
- Bessemer cloud index % ∆ from 52-week lows: +28.66%
- Total peak to trough % ∆: 37.86%
Let’s unpack that. SaaS shares as a group are off 20% from recent highs. That’s bad; it’s bear market territory, actually. But as it came off the back of a good-sized run-up in value during January and February, the Bessemer index is actually a little under 3% over the last year.
And as we can see, SaaS shares have bounced mightily off their recent lows. So some of the fear that raced into the public markets’ most interesting group of tech companies has raced back out again. This has left the index itself, per the firm behind it, with an enterprise value to revenue multiple (EV/rev multiple) of 11.2x. That’s still sky high.
So, despite all the chop and turbulence that we have seen in recent weeks, SaaS shares have come through kinda ok. Not great, mind; few stocks are performing well during the start of what appears to be a looming recession. SaaS companies’ recent gains have raised their revenue multiples from high to higher, at least when compared to historical norms. And they have done so up against earnings, making their current prices larger bets than they might seem.
This could provide a very welcome cushion to private SaaS companies looking to raise during a downturn; public software companies could have gone down much more sharply if investors decided that their implied expected growth was too rosy a forecast.
That brings us to earnings. Over the last few years, public technology earnings reports have generally been pretty good. You don’t wind up with several tech companies over a trillion dollars on accident. But this quarter the stakes are higher. Mistakes could be costly for the public SaaS contingent.
And for private siblings looking to raise capital from worried venture capitalists, potential public market SaaS declines come with a real cost. Not right away, but soon enough to matter. No startup wants fundraising to be even harder than it has to be in a recession.
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