The bull case for software growth in 2024


Image Credits: Nigel Sussman (opens in a new window)

In 2024, we could see software growth rates rebound, helping both the largest tech companies and startups alike.

Rewinding the clock a few weeks, after ceding critical gains, software stocks found themselves in a funk. Then, new inflation data landed this week and ebullience returned. Key cloud and SaaS indexes quickly added value, while the broader yet tech-heavy Nasdaq Composite opened at 13,745.96 on Monday. It closed at 14,094.38 Tuesday, and is adding to that tally today.

Investors were cheered because falling inflation makes it less likely that the U.S. central bank will raise rates further. Even without rate cuts, an end to rate hikes implies that some structural pressure on the value of tech stocks is concluding. Throw in hopes for a rate cut, and growth-oriented assets like tech shares could become all the more attractive.

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But what about tech company performance itself? Can tech companies meet rising investor confidence in their value with future results that will defend or extend those gains?

The answer is increasingly looking like yes. That’s critically good news for startups; upstart tech companies that have faced a market in recent quarters that were looking to curtail costs instead of investing in new software; and investors more hesitant to cut new checks while prices were in flux. A growth tailwind instead of the headwinds that 2022 and 2023 have brought to startup land would feel like a climatic reversal. A winsome breath of fresh air.

What is the bull case for software growth in 2024? Several additive components, some of which are derived from public-company reports, some from startup datasets, and venture expectations regarding AI. All told, there’s enough good vibes to indicate that tech growth is going to have a better next year. Let’s talk about it.

Sunny data

An early indication that the market for selling software was shifting came via Amplitude’s earnings. This statement in particular caught our attention:

Christopher Harms, CFO: As stated earlier, as companies come up on renewals, they are often resetting and optimizing for new expected levels of growth. The substantive portion of these legacy multiyear contracts should be reset by the end of Q2 2024. Taking this into account, ARR reacceleration should become mechanically easier in the back half of 2024.

The mere mention of reacceleration was enough to pique our interest. After so much talk of software spend optimization, or the process by which customers spend less through one means or another, seeing some light in the end of that particular tunnel was notable. But Amplitude was speaking about itself and some elements of its own customer base. So, it was not enough to provide much broader confidence.

Thankfully, other companies have been talking. As Clouded Judgement pointed out last week, Datadog’s earnings were incredibly well-received by investors, bolstering the company’s value from around $79 per share to more than $111 today.

Why? Partially the following:

Olivier Pomel, CEO: We are seeing signs that the cloud optimization activity from some of our customers may be moderating. As a reminder, last quarter, we discussed a cohort of customers who began optimizing about a year ago, and we said that they appear to stabilize their usage growth at the end of Q2.

That trend has held for the past several months, with that cohort’s usage remaining stable throughout Q3. Overall, we continue to see impact from optimization in our business, but we believe that the intensity and breadth of optimization we’ve experienced in recent quarters is moderating. . . .

David Obstler, CFO: We saw an improvement in usage growth in Q3 versus Q2. The Q3 usage growth was more similar to Q1 and relatively steady throughout the quarter. We had a very healthy start to Q4 in October.

That was music to investor ears, folks waiting for an end to software companies being more focused on cost-cutting than using more digital products to accelerate or improve their businesses.

Elsewhere, a recent Battery report — we covered it in more detail here — included two datapoints that we consider bullish in growth terms. First, software growth deceleration has reached a bottom and started to improve:

Image Credits: Battery Ventures, used with permission

Battery also noted that ARR growth at cloud giants has nearly crawled back to positive territory after four quarters’ deceleration. The start of something new? Perhaps.

What about startups?

Notes from public tech companies are useful for understanding larger market conditions, but we care much more how startups are faring in particular. Scale Venture Partners published a bunch of data sourced from early-stage startups that fills in the gaps we have left in our optimism bingo card.

To wit, early-stage startup growth rates dramatically decelerated from 2021–2022 levels this year. The 50th percentile company that Scale has data on saw its growth rate fall from 72% in 2021 to 43% in 2022 to 19% in 2023. For that company, the 2024 “whisper number” that Scale reports is 37%. Not the sort of growth that sets one’s hair afire, but an effective doubling of 2023, which is a lot.

For early-stage startups that Scale considers to be at the 75th percentile, growth rates decelerated from 135% in 2021 to 78% in 2022 to 43% this year, with an expected reflation of growth to 64% next year. Higher-percentile companies are expecting even faster growth than that in 2024.

That’s bullish.

To round out our view that things are looking up for software companies in general, and startups in particular, recall that AI is expected to help companies drive their ACV higher and perhaps even operate with a lower cost base. All told, it’s easier today to be optimistic about startup performance next year than the opposite. What a pleasant change.

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