Another day, another 52-week low for the value of modern software stocks.
Once a key indicator of the market’s buzzing enthusiasm for the value of cloud companies, the Bessemer Cloud Index has become a barometer of the opposite in recent months. After a staggering rise, the basket of public software companies has returned all its profits since May 2021 and is not Which far from losing 50% of its value since it hit record highs in late 2021.
This is despite the fact that the companies in the index showed good growth during the pandemic, and hard evidence that even during periods of economic hardship, tech companies don’t lose their footing like other industries might. However, that anti-fragility is proving less attractive as other sectors are coming back to life as the pandemic fades.
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New investor data clarify the outcome of software revenue repricing. It comes down to a simple question: what is your startup worth with a single digit multiple of revenue? For startups that have built software in recent years, the question may sound unnecessarily harsh. It’s not.
The question does not apply equally. Start-up startups that are in the process of hitting their first four, five, six sales figures aren’t really valued in terms of revenue, so they’re kind of on the side of this conversation. But for Serie A and beyond, the reality doesn’t change; it is changed.
It was not uncommon to hear about 40x, 50x even 100x startup revenue multiples last year. The Exchange heard from a number of investors that they saw Series As finished with low six-figure earnings, with valuations so high that the startup in question was essentially priced like the next Slack. Or Twilio.
What are That startups are going to do if they aren’t worth 100x their recurring revenue, but, say, 8x?
There’s more bad news from the market for software startups looking to scale up their valuation: the growth premium is shrinking.
Last year, startups could expect to see increasingly richer revenue multiples with faster growth rates. There was something of a reinforcing valuation effect on faster growth as investors took exponentially growing future value relative to current stock prices. But of course that was not sustainable. As the total value of software revenue declines, the software companies that saw the fastest growth from the pandemic era are now seeing the most compression, bringing their revenue multiples more in line with startups that suffered less from a COVID bump.
This means that startups that received a material valuation premium for faster growth in 2021 could be the most confused by the new market realities, while startups that struggled to achieve a comparable premium for their business progress would be less upset. could come.
Not that this means much to long-term investors, who want to discuss valuations ten years from now. But for those of us who are more focused on the short term — say the time interval it takes to see all current startups raise or exit their next round — the rapid deflation in the value of software revenue, especially for the fastest-growing software companies, is something we have to grapple with.
The bad news
Friend of The Exchange Jamin Ball of Altimeter released new data last week showing that the overall decline in the value of software revenue — startups’ main output, really — is hitting the most valued companies the hardest: