The state of Software 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 very wide. The “bid-ask” is as wide as we’ve ever seen it. 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 is astronomical. Many VC I know (us included) are now looking to pay 5x to 7x current ARR for good SaaS whereas founders are looking for 10x+, which is more commensurate with 2020 to 2022 pricing.
M&A supports the founders view. Since December 2020, there have been 19 acquisitions of publicly traded software companies. The businesses on median sold for 8.9x trailing twelve month revenue of $789mm with YOY growth of 19%.
Public markets support the VC. Of the 119 publicly traded SaaS companies we follow, the median public SaaS business is trading at 4.9x revenue while the average is 5.95x. Multiples for SaaS companies growing above the median of 24% are better: 6.5x on median and 7.6x on average. Only 16% of companies are trading at 10x revenue or greater, whereas the peak was 60% in Q4 2020. Only 1 company trades above 20xm whereas 35 traded above 20x in Q4 2020.
M&A window is open. If you want to sell your company you can, but the buyers are bargain hunting. For instance, we sold a company recently with ARR and growth in the teens, net dollar retention over 100%, and very low burn but the multiple was only 3.5x. In 2022 that multiple would have been 5x+.
Longer 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.
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 balance sheet.
Many SaaS companies wisely raised capital in 2021 and the first half of 2022. We’re advising our own portfolio companies to make those dollars last longer than they planned. It’s also a good time do cull your staff. If you do a layoff, no one will think any less of you because, well, everyone is doing a layoff. Finally, we’re still very active. If you’re raising, reach out (my email is below).
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.
