May 23, 2022

another day, another 52-week low for modern software stocks.

Once the leading indicator of market enthusiasm for cloud computing companies, the once Bessemer Cloud Index has become a barometer of the opposite in recent months. After a staggering rise, the basket of public software companies has returned all of its profits since May 2021, and this is not some kind It is far from losing 50% of its value as it hit an all-time high at the end of 2021.

This is despite the fact that companies in the index have shown decent growth during the pandemic, and there is strong evidence that even during the economic crisis, technology companies do not lose ground like other industries. However, this antifragility is proving to be less attractive as other areas come alive again as the pandemic fades.

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New investor data clarifies the results of software revenue repricing. It all comes down to one simple question: what is your startup with single digit multiple returns? For startups that have been involved in software development in recent years, this question may seem unnecessarily tough. This.

The question is not equally applicable. Startups that are in the process of hitting their first four, five, six digits of sales aren’t very valuable in terms of revenue, which is why they keep this conversation going. But for Serie A and above, reality doesn’t change; This has been changed.

Last year, it was not unusual for a startup to generate 40x, 50x, and even 100x revenue. The exchange learned from several investors that they saw the streak end with a low six-figure profit, a valuation so high that the startup in question was essentially priced as the next Slack. Or Twilio.

what She What will startups do if their regular income is not 100 times higher, but, say, 8 times?

premium compression

There’s even worse news out of the market for startups looking to boost their valuation: the growth premium is shrinking.

In the past year, startups could expect to see increasingly prosperous revenue multipliers with rapid growth. The rapid growth had a strong impact on the valuation, in part because investors saw a rapid increase in future value from current share prices. But of course it wasn’t sustainable. As the total value of software revenue shrinks, the software companies that experienced the fastest growth in the era of the pandemic are now experiencing the most contraction, bringing their revenue multiples in line with startups that were less affected by the impact of COVID.

This means that startups that are receiving a content rating premium for rapid growth in 2021 may be the most confused by new market realities, while startups that are struggling to earn comparable premiums for growing their business may be less upset.

Not that it makes sense for long-term investors who want to discuss valuations ten years from now. But for those of us who focus more on the short term — say, the delay it takes for all existing startups to grow or exit the next round — the rapid decline in the value of software revenues, especially the fastest growing software. this is what we have to deal with.

bad news

exchange friends jammin ball altimeter New data released last week shows that the overall drop in the value of software revenues – essentially the main source of income for startups – is hitting the most valuable companies the hardest:

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