Executive Summary
With Venture Capital restricting investment and SaaS-based business valuations plummeting, executives are refining their approach to valuing VC backed growth-stage companies. Favored strategies include focusing on fundamentals such as revenue growth, burn rate, and cash management. Companies demonstrating strong performance in these areas are more likely to thrive and find access to capital.
Introduction
It’s no secret that 2022 has been rough for valuations of public and private SaaS companies. As early as May, Meritech research indicated that combined market caps across the sector had fallen around 50% from highs set in 2021. Starting in Q2 2022, layoffs throughout the sector continue at a steady pace this year, making headlines as the economy slows and the cost of capital rises.
However, the extent of those valuation shifts were not consistent across the entire SaaS landscape, with early-stage and seed companies continuing to hit new highs even as late-state valuations plummeted in some verticals.
All of which raises the question: to what extent are these valuation shifts impacting companies? Earlier this year, Carpe Diem Partners spoke to 58 finance professionals across the SaaS B2C and FinTech landscape, and asked how they were approaching valuation in a market with tighter capital availability, rising labor costs, slowing demand, and fears of a recession.
Revenue and burn rate
Across the professionals we spoke with, revenue and burn rate emerged as common themes for maintaining realistic valuations in a tumultuous period.
- “Valuations will continue to be based on revenue because of the transformative nature of tech […] Data within the corporation could also be additive to the revenue multiple. Good environment for strong valuations. Valuation will have to be backed by the true power of recurring revenue, not diluted by long contractual lead times driven by tech implementation and deployment.”
- Our “Valuation just changed where it’s not just a multiple of ARR…, it’s burn rate. I’m focused on a real valuation incorporating the burn rate elements.”
Valuations likely to fall
Not surprisingly, executives we connected with expected valuations to continue to fall.
- “I see these valuations going down. Valuations are propped up by excess cash, not core fundamentals. Current valuations assume that these firms are category killers and they aren’t–the market is too crowded. Firms need to build fundamentals not be measured on growth and revenue at any cost.”
- “Valuations are at the peak, lots of inflated multiples in the market not based on real values and fundamentals.”
- “Feel like there needs to be a correction as they are too high. Infinite growth in double digits seems unreasonable, but the SaaS model may be able to sustain high valuations, (just) not sure how this is sustainable. (We need to) build a compelling argument that will drive a baseline of growth within SaaS.”
Cash management remains king
With such high levels of volatility, executives are looking to a business’ ability to survive without fresh infusions of capital as key to their valuation.
- “Valuations have dropped substantially for those firms needing more capital due to increasing cost of capital. Future earnings are being heavily discounted as attention on revenue is hard to maintain. Important to tell a story about high growth with a reasonable capital requirement as opposed to growth at all cost.”
- “There is still a huge volume of available capital, as soon as the markets stabilize post inflation, Covid, and other geopolitical churn will see capital emerge very quickly. Leverage may be a better vehicle than capital raise in the current environment […] The Market is punishing where firms miss on key numbers, especially COGS.”
- “18 months ago it was sales and growth rates, now EBITDA is more important. Spending a lot of cash is hurting valuations. When funds get cheap again this will change.”
These market insights from Carpe Diem Global Partners are gathered from the firm’s extensive client work leading Board, CEO, CXO, and CHRO executive search engagements for public and private multinational companies. For deeper, custom insights, contact Michael Whitehead at mwhitehead@carpediempartners.com.