Updates from the Market
Recently, we put out a piece on how SaaS startups can achieve high Multiples (Market Cap/ Funding) while being prudent in raising funds. Post that piece, the SaaS public market, just the like Tech market in general, has seen some major corrections.
In the current piece, we updated the data to understand how the markets have reacted, what are some suggestions for SaaS founders, and what the future might hold for the SaaS industry.
Before interpreting the data, let me set the stage right by defining the metrics and methodology used:
The (Funding) Multiple here is Market Cap / Funding, i.e. a high Multiple means the company was able to create a larger market share for the funding it raised. The higher the multiple the better returns on the VC funding.
We divided the SaaS companies into three buckets and compared them to each other:
Most valuable SaaS companies, i.e. Companies with the highest market capitalisation;
SaaS companies with the most funding; and
Companies with the highest (Funding) Multiples, i.e. companies with a high market capitalisation to low funding ratio.
We noticed: that the recent market corrections led to a reduction in Market Cap for all three buckets and the brunt of the corrections was faced by the (1) High-Value companies and (3) companies with high Multiples.
However, regardless of the market cap contraction, the Multiples in the High-Value companies and the High Multiple companies were still ~10X of the Highly Funded companies. This proves, that even with market cap corrections, companies that had the most efficient growth continued to remain so.
Suggestions
The key question thus is how do SaaS founders continue to grow with more efficiency:
Recent layoffs in the current market are one unpopular method of reducing operating costs and increasing efficiency.
Another method is to reduce your CAC. This could be reducing your Marketing spend on advertising, and removing ineffective channels (letting go of some partnerships that weren’t working well).
Additionally, you can also look into selling to international markets. This might allow for higher pricing and therefore higher revenues with the same operating costs.
If you are a SaaS founder thinking of global markets drop us a note at 👉 deepthought@fortytwo.vc
Future of SaaS / Cloud companies?
The recent public market blood-bath was a significant correction of valuations of the hyper-growth companies seen in the Cloud/SaaS verticle.
The high valuations were partly due to the competitive nature of VC investments in the last few years. The corrections have adjusted the optics bringing the focus back to the basics, i.e. Revenue/ARR. As Bessemer’s latest cloud report stated: Revenue is King. (You can check out our breakdown of their Report here).
However, the reason to still remain bullish on the SaaS market is that the basics remained solid!
We noticed: that the YoY revenue growth for the SaaS companies remained positive and still high. Any growth rate positive of 25% is considered a “Very Rapid Growth” and we noticed that with a +30% YoY growth for public SaaS companies.
The revenue growth is a reminder that the value creation by SaaS companies remains steady and high, and will be a key focus for investors & founders going forward!
What else did we notice?
We saw a reduction in Revenue Multiples (Market Capitalization / Latest Annual Revenue) in the public markets. And in the private markets, companies are valued based on revenue multiples.
We noticed: an average reduction of 20% in Revenue Multiples for the entire cohort of Public SaaS companies. While the 30 most valuable companies had their Revenues Multiples reduced much further to ~43%.
Public market multiples are the leading indicator of what the multiples should look like for private companies and their valuations. Therefore, the reduction 20%-40% reduction in Revenue Multiples is slowly reflecting the valuations at which private companies are now raising funds.
Suggestions
Raising a large round like before might not be the best idea right now. With low multiples, such rounds would push founders to shell out more of their ownership. The other consideration for founders is to maintain enough runway to whether this winter.
Therefore, founders should look to raise small rounds (non-priced) just to increase their current runway to an ideal 20-24 month mark. And to echo our previous piece’s recommendation, efficient utilization of cash in the bank would be tantamount!