After enduring a multiquarter selloff that started in late 2021, the value of software companies on the public market is recovering. The modest rebound posted thus far appears to have formed after a bottom in valuation terms was reached in mid-June, toward the end of the second quarter.
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This column asked in April if the SaaS selloff was over. It quickly became clear we pondered prematurely. But the good news for software startup founders is that the period when the deck was being increasingly stacked against them may now be behind us.
Let’s take a peek at the numbers, and then what might have changed in the market to halt the decline in software — SaaS, more or less — valuations.
Started from the bottom
Regular TechCrunch readers should be familiar by now with the Bessemer Cloud Index — the venture firm is one of several that tracks various startup niches in a public manner, including GGV’s API index — a basket of public cloud companies that was also built out as an ETF. We use it as a dataset to track the value of software companies of varying growth profiles, allowing us to better understand the connection (or lack thereof) between startup valuations and the public markets.
How has the Bessemer index performed in recent weeks? It’s picked up some life:
Image Credits: YCharts
Notably, we had drafted the start of this post before U.S. inflation data for July came in more muted than anticipated. Why does that matter? Because in the wake of a slower-than-expected inflation print, the chance that the U.S. central bank will be as heavy-handed when it comes to raising interest rates as it has been thus far in 2022 has declined.
In turn, a future with lower rates implies that bonds and other yield-based investments will not become as valuable in contrast to assets that usually trade in reverse of yields themselves, namely tech stocks with a special focus on those more tilted toward growth (revenue expansion) than profit (net income and resulting shareholder returns).
It’s not a shock that tech stocks are having a good day in the wake of the inflation figure, but we were comfortable making an early call here even before the market affirmed our perspective. Now we’re fractionally more confident.
Now we here?
Where are we today? Per the same Bessemer data, cloud software revenue multiples are recovering from recent lows. Looking at the venture group’s calculated public cloud company revenue multiple, broken into growth-sorted tiers, the data is as follows (measured in revenue multiples terms):
- Bottom quartile (slowest growth): From a low of 3.58x to 3.66x.
- Median (middle growth): From a low of 4.86x to 5.89x.
- Top quarter (fastest growth): From a low of 7.12x to 9.09x.
I believe that the data we’re looking at today from Bessemer has yet to ingest the gains posted in the first few minutes of trading, so expect the multiples expansion detailed above to be slightly greater when all the data filters in.
While we’re still looking at single-digit SaaS multiples today for public cloud companies, startups tend to grow more quickly than those that have already undertaken an IPO, meaning that they will likely trade at a premium. Therefore, good news! We can infer from the data that not only are SaaS (cloud software, more or less) multiples recovering, but double-digit revenue multiples are back, baby!
Naturally, startups priced in 2021 terms awaiting a market recovery to make their internal valuation math pencil out are by no means out of the woods. But at last, the market is moving in their direction, not away. That must be helping a sizable cohort of founders and their backers sleep better.