Another day, another 52-week low for the value of modern software stocks.
Once a key indicator of the market’s effervescent enthusiasm for the value of cloud companies, the Bessemer Cloud Index has become a barometer of the opposite in recent months. After a dizzying ascent, the basket of public software companies has given back all its gains since May 2021, and is not that far from losing 50% of its value since it reached record highs in late 2021.
This is despite the companies in the index posting good growth during the pandemic, and hard evidence of the fact that even during periods of economic distress, tech companies don’t lose their footing as other industries might. However, that anti-fragility is proving less attractive as other sectors come back to life as the pandemic fades.
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New data from an investor clarifies the result of the repricing of software revenues. It sums to a simple question: What’s your startup worth with a single-digit revenue multiple? For startups building software in the last few years, the question may sound unnecessarily harsh. It’s not.
The question doesn’t apply evenly. Seed-stage startups busying accreting their first four, five, six figures of revenue aren’t really valued in revenue terms, so they are somewhat to the side of this conversation. But for Series A and beyond, the reality is not changing; it has changed.
Hearing about 40x, 50x even 100x startup revenue multiples last year wasn’t uncommon. The Exchange heard from a number of investors that they were seeing Series As getting done with low-six-figure revenues, with valuations set at multiples so high that the startup in question was essentially priced like the next Slack. Or Twilio.
What are those startups going to do if they are worth not 100x their recurring revenue, but, say, 8x?
There’s more bad news from the market for software startups looking to scale their valuation: The growth premium is compressing.
Last year, startups could expect richer and richer revenue multiples to come with faster growth rates. There was something of a compounding valuation effect to faster growth, as investors baked in exponentially growing future value to present-day share prices. But that, of course, was not sustainable. As the overall value of software revenue decreases, the software companies that saw the most rapid pandemic-era growth are now seeing the most compression, bringing their revenue multiples more in line with startups that saw less of a COVID bump.
This means that startups who got a material valuation premium for faster growth in 2021 could find themselves the most befuddled by the new market reality, while startups that struggled to achieve a similar premium for their corporate progress could find themselves less upside-down.
Not that this means much to the long-termers out there, content to discuss valuations a decade hence. But for those of us focused more on the near-term — say, the time interval required to see all current startups raise their next round, or exit — the rapid deflation of the value of software revenues, especially for the fastest-growing software companies, is something that we have to grapple with.
The bad news
Friend of The Exchange Jamin Ball of Altimeter published new data last week showing that the overall decline in the value of software revenue — the key output of startups, really — is hitting the most richly valued companies the hardest: