Software Companies Have Given Up Years Of Multiple Expansion ...

And it also appears that profitability is in vogue. Previously, it has not driven a notable difference in multiples across the US SaaS universe — with generally less than a 20 percent variance across profitable vs unprofitable cohorts.

But we are now seeing a much more significant deviation in multiples. Profitable US SaaS businesses are being rewarded by investors with a roughly 60 percent profitability premium in revenue multiples.

Private markets

Finally, to private markets, where the story, as ever, is more opaque. And — at least based on the available data — it’s a little different as well.

Globally, private markets experienced strong growth in deal activity and investment prior to 2022. For instance, $50 billion was invested in minority/growth deals alone in 2021, which was more than twice the previous high mark. In fact, deal values are up 600+ per cent on 2015 levels.

For now, it appears that the impact of the recent public market valuation reset is only partially flowing through into the private markets.

Median valuations tracked by PitchBook for late-stage SaaS VC have retreated by about 23 percent from the highs of 2021. However, it’s important to note that these median valuations remain well above longer-run averages and have not shown the same regression as public markets to date.

Furthermore, earlier stage median valuations appear — for now — to be largely immune to the recent downturn. That picture may change in coming quarters, as the structured elements of deals (for example liquidation preferences, etc.) are likely moving ahead of headline valuations to deal with this ‘risk-off’ environment.

The Takeout

All boats rise with the tide, but they also fall the same way and the tide has been ebbing now for six months. Individual stock values are now more likely to be driven by how SaaS and Enterprise companies’ revenue growth profile is affected by the new normal – high interest rates, supply chain constraints, changes in work-from-home, and the industry focus and relative impact of these factors on individual software company clients.

That’s not to say there won’t be any further downside risk in multiples, but we suspect that will be a short-term factor and conclude that the impact on valuations from the multiple de-ratings has largely played out.

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