Connecting the Points: Sass and Alts

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As much as I love watching new trends, it’s equally important to get confirmation on past predictions that we’ve made or heard. This week brought us some fodder in that regard, on two areas that are very much on my radar: SaaS and Alts. let’s explore. , Anna

SaaS shrinks manifold, tough times for IPO

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alex And I spent a lot of time this week diving into Battery Ventures’ “State of the OpenCloud 2022” report. It brought to our attention some forward-looking data — for example, on cloud adoption — but also confirmed something impossible to ignore: that the SaaS multiplier — enterprise value compared to revenue projections — is shrinking.

“The average forward multiple for SaaS companies has fallen from about 16x forward revenue to nearly 6x today,” Battery General Partner Dharmesh Thakkar told us.

Not only have the multipliers shrunk, but they’re also border-compressed, with lower rewards for the fastest-growing companies than for the slowest-growing ones. There are many factors at play, but the gist of it is that profitability again matters to the markets.

As a result of that, we are getting to see the revenge of some old rules. “Adjusted for growth,” Thakkar said, “today companies that show efficient growth by the Rule of 40 (ie, growth rate + free cash flow margin greater than or equal to 40) are trading at a premium to those companies. are growing regardless of profitability.”

Note that this isn’t either growth or profitability: it should be both, and the bar is getting higher and higher to please investors.

An over-demanding market paints a worrying picture for many unicorns awaiting an IPO, as well as their peers who have already gone public but are struggling to maintain their market cap. Let’s also spare a thought for Alex, who can’t get his hands on another juicy S-1 before Q2 2023.

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