The state of SaaS venture capital
From time to time, we’ll share our views of what we’re seeing in the market for software venture capital. Below is the latest.
The bid-ask spread is still wide. The bid is what venture funds are willing to pay for equity in a company and the ask is what founders are willing to sell their equity at. The difference between those two numbers has narrowed a bit from Q1/Q2, but is still wide. Many VC (us included) are looking to pay 5x to 8x current ARR for good SaaS whereas many founders are still looking for 10x+, which is more commensurate with 2020 to 2022 pricing.
Unhealthy focus on profitability. Many companies are focusing too much on profitability, whereas there are still funds like us that want to invest in companies generating cash efficient growth. In our view if you can add $0.60+ of high quality net new ARR for every $1 of operating loss, as long as NDR is 100%+, do that! We’ll gladly fund it. That’s a company with a payback period inside 2 years and building a SaaS revenue stream that looks like an annuity. A business like that doesn’t need to be nor should it be profitable. Build that SaaS annuity.
M&A supports strong multiples and cash burn. Since December 2020, there have been 30 acquisitions of publicly traded software companies. The businesses on median sold for 7.7x trailing twelve month revenue, had good growth given their size, and negative EBITDA margins. The market is still there for cash burning businesses so long as you’re growing cash efficiently.
Public markets support healthy multiples. Of the publicly traded SaaS companies we follow, the median public SaaS business is trading at 5.6x revenue while the average is 6.4x. Multiples for SaaS companies growing above their peers trade at 7.7x on median and 8.7x on average.
M&A window is open. If you want to sell your company you can, but the buyers are bargain hunting. If you can avoid selling your business, raise capital and keep building.
More complex sales cycles. SaaS companies are seeing the sales cycle elongating, more scrutiny in the sales process, more senior personnel from the customer side in the sales process, and customers being tighter with their budgets. Budgets are not shrinking, but they are being scrutinized by more personnel at the customer.
The hiring market is flooded. I’ve never seen more great candidates looking for roles. There are talented engineers, sale reps, product people etc that need jobs. This is a fantastic time to level-up your talent if you have the capital.
Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com and email directly at sammy@blossomstreetventures.com. We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 100%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.
