Connecting the dots: SaaS and alts

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As much as I like spotting new trends, it is just as important to get confirmation on previous predictions we made or heard. This week brought us some fodder in that regard, on two sectors that are pretty high on my radar: SaaS and alts. Let’s explore.  — Anna

Shrinking SaaS multiples, hard times for IPOs

Alex and I spent quite a bit of time this week diving into Battery Ventures’ “State of the OpenCloud 2022” report. It brought some forward-looking data to our attention — for instance, on cloud adoption — but also confirmed something impossible to ignore: That SaaS multiples — enterprise value compared to revenue projections — are shrinking.

“The median forward multiple for SaaS companies has fallen from about 16x forward revenues to roughly 6x today,” Battery general partner Dharmesh Thakker told us.

Multiples haven’t only shrunk, but they have also range-compressed, with fewer rewards for the fastest-growing companies compared to slower-growing ones. There are many factors at play, but the gist of it is that profitability seems to matter again to the markets.

As a result of that, we’re seeing the revenge of some old rules. “Adjusted for growth,” Thakker said, “companies today that show 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) are trading at a premium to those that are growing without regard to profitability.”

Note that it’s not either growth or profitability: It has to be both, and the bar to please investors seems to be getting higher and higher.

A more demanding market is a worrying picture for the many unicorns waiting to IPO, as well as for their peers who already went public but struggle to maintain their market cap. Let’s also spare a thought for Alex, who may not get his hands on another juicy S-1 before Q2 2023.

The downstreaming of alts

When I interviewed Broadhaven Capital Partners co-founder and partner Michael Sidgmore last month, I asked him to expand on his thesis about the mainstreaming of alternative investments, or alts, an asset class that ranges from PE/VC and real estate to collectibles and metals.

One of the ways in which alts are gaining ground, Sidgmore replied, is through “downstreaming.” To understand what he means, let’s turn to a previous explanation he gave in his newsletter, Alt Goes Mainstream:

“Allocations to alternative assets are making [their] way downstream from institutional investors (like pensions and endowments) to individual accredited and non-accredited investors thanks to the infrastructure solutions that are making it possible for investors to find and access alternative investments.”

This week gave us a strong signal that the downstreaming of alts is happening. Indeed, fintech startup Arta is coming out of the woods with full pockets — $90 million in seed and Series A funding — and a thesis: that “financial superpowers shouldn’t belong to just the ultra-wealthy.”

By “financial superpowers,” Arta is referring to the fact that the wealthiest people on the planet typically “employ teams of professionals who use sophisticated financial strategies and tap investment opportunities that the rest of us can only dream of.”

“These teams are called Family Offices,” Arta added; hence its mission to become “the digital family office for the world.” As for out-of-reach investment opportunities, this explicitly refers to alts, although not the most novel ones. “Arta will let you invest into previously inaccessible categories like private equity, venture capital, private debt, and real-estate funds,” the startup promises.

Only time will tell if Arta succeeds at its goal. But its announcement adds weight to the argument that alts are going downstream.

Why? Because one funding round may look like a single data point, but there’s more to it: It also means that a team of people pursuing a vision are getting funding from investors willing to take the same bet.

In Arta’s case, those who put trust and money in its road map include “Sequoia Capital India, Ribbit Capital, Coatue and more than 140 entrepreneurs, including Eric Schmidt, Betsy Cohen and Ram Shriram,” TechCrunch’s Manish Singh reported.

Of course, they could still be wrong, but that’s some pretty strong signaling and gives us another reason to keep on tracking this trend.