By now you may be tired of stories detailing the bad news in the market. Too bad! More are coming.
If the deluge of negative headlines feels like a pile-on, recall that in 2020 and 2021, TechCrunch obsessively covered the technology, startup and venture capital markets’ various excesses; to not cover the party’s comedown would be a gross oversight.
For a broader think on the slowdown, and what falling prices for stocks and crypto assets mean for startups and unicorns more generally, head here. From here on out, we’re only talking SaaS.
What’s the matter with software companies?
Software companies, viewed through the public subset of the larger cohort, had a simply amazing run after COVID settled onto the global stage. Public software companies were beneficiaries of two things: First, it quickly became clear that software would keep selling, even in a downturn. And, second, there was little to no growth in other places to invest in, so money piled into tech concerns.
This was the pandemic trade, in effect. And as it became a defining period for the value of tech stocks, its unraveling is having a similar effect, in reverse.
That reversal is not done. Not yet. Despite a massive sell-off since November highs, tech stocks are proving today that there are new depths to plumb. For example:
This particular ETF tracks the Bessemer Cloud Index, a list of public software companies that mostly deliver their business through the cloud. The basket of stocks peaked at $65.51 per share, meaning that as I write to you, it’s off 54% and change.
If a correction is a 10% decline from recent highs, and a bear market is 20% from the same mark, what do we call a greater than 50% decline? A shellacking? A stern fuckerclucking?
Whatever you prefer, what’s clear is that software revenue did not find a new, long-term valuation mark last year. Instead, it enjoyed a temporary period of unseasonable favor. That has now passed.
Has the sell-off gone too far?
As I am not into catching falling knives, I won’t take part in calling the bottom. But based on the regular flow of venture chitchat that I imbibe, there are now some notes floating about asking if the correction has gone a little bit too far. Some cream off the top was perhaps reasonable, the thinking goes, but have public-market investors culled valuations too much?
Wrong question! It doesn’t really matter. What does matter is what the number on the ticker tape currently reads. That is what is going to impact startup valuations and the ability of venture funds to keep stacking cash to invest; currently, there are many funds with capital yet to call, but can they with LPs under pressure? The further the market pulls back, the less real ammo many venture players will have, as their LP backing was predicated on public-market holdings.
That’s a standoff we can’t see play out, but may be able to view in hindsight if venture investment slows more than what we’ve already seen.
But as the market just ran along with the boom times, it must muddle through the implosion. Thus, startups will take lumps regardless of whether the stock market is reasonable.
So what’s next?
Pain.
Some startups are going to get unfairly stuck holding someone else’s bag. If a startup did not raise extra cash when it could because it didn’t need the funds last year, it might find itself fundraising in an unfriendlier market this year. But for the startups that raised new capital at valuations that had high-double-digit ARR multiples, or — gulp — triple-digit multiples, this is kinda on them. They raised at insane prices, effectively wagering that the good times had more sand left in the hourglass.
There wasn’t, and now those startups will have to figure out how to reduce burn, maintain growth and avoid a repricing all at the same time.
If you read our earlier entry today, that will sound familiar. The issue for software companies is that they perhaps saw the biggest boon from the pandemic era, crypto aside. That means that, more than other startup categories, software concerns have more dissonance to work through when it comes to their current valuation compared to the new market.
It’s amazing how fast sunny startup days can cloud over.
Our question from March is starting to look less like a threat and more like a fact. Especially for software startups:
Your startup raised at 40x revenue. What’s it worth at, say, 6x?
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