How are software companies performing today? It’s going to be a busy earnings week, so we’ll have a lot of Q3 data to pore over to answer this question very soon, but it appears public-market investors have already made their minds up.
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Investors have sold off cloud stocks to the point where they are in bear-market territory when compared to 2023 peaks. As a result, the value of software revenue is now in the pits, which has led revenue multiples to reverse from where they were earlier this year.
Still, the news is not all bad. New data indicates that startups are winning back their growth premiums with a vengeance. Late-stage startups that traded growth for cash may find it hard to accrete value, but early-stage startups that are growing quickly may have something to point to when they go out to raise money and ask for a better valuation.
From a correction to a bear market
The Exchange carefully tracks the value of the Bessemer Cloud Index ($WCLD) because it’s a useful barometer for the cloud software industry in general. The index peaked at 34.93 this year before falling to just 26.93 today — that’s a nearly 23% drop.
A price swing of that scale is quite large. To earn the moniker “correction,“ an index needs to post a 10% decline from recent highs. At 20%, you enter bear-market territory, and that’s where SaaS companies find themselves today.
It’s not a shock that we saw a handful of IPOs taking off when valuations (and therefore multiples) were richer, so it’s also not surprising to see the opposite when the market has reversed direction.
Bessemer calculates that in mid-July, the median revenue multiple on its cloud index reached 7.47x, with the top quartile at 12.27x and the bottom quartile at 4.1x. The most recent print from the same dataset reads 5.66x, 8.36x, and 2.89x, respectively. That last number is the lowest on record for the Bessemer index; put another way, the bottom tier of cloud companies on the index have never been cheaper. Make of that what you will.
Altimeter investor Jamin Ball’s own running tally of cloud and SaaS data shows similar results. Ball calculated that the median value of software companies growing more than 30% a year is 11x their forward revenue; those growing 15% to 30% are worth 7.5x their forward top line; and those growing less than 15% are worth 3.4x their forward revenues.
Inside that data is an interesting trend: The fastest-growing software companies are holding on to much of the raises their multiples got this year, while their slower-growing counterparts are losing ground. In simpler terms, the growth premium for software companies is coming back.
That is the silver lining in the data for startups. After a period of prioritizing cash preservation instead of growth, startups are once again swimming in waters more conducive to expanding quickly. Young companies, after all, tend to burn cash to post quick growth; if investors don’t want that, startups will struggle to raise capital, which is almost a death sentence.
Even better, from what we learned recently about early-stage startup growth — it is strong and holding up — we can infer that fast-growing startups are not rare, and the public markets are rewarding growth more than they used to a while ago. That may unlock more capital for young tech companies.
And keeping in line with something we’ve had to write more often than we’d like over the past few months: Later-stage startups looking at an exit from a base of more moderate revenue growth can find little good news in these times.