Surviving and Thriving: SaaS Companies Face Tough Times in the Quest for 10x ARR Multiples
The Struggle for SaaS Companies in 2023
Happy Sunday SaaSers!
Today, we're spilling the tea on the struggle for SaaS companies to achieve 10x ARR multiples in a fiercely competitive market. We'll also reveal which SaaS products are thriving and which are getting cut in the current economic downturn. And if that's not enough, we'll quickly dive into Meta's new language model, which is heating up the competition in AI with the big tech giants.
🍿 Quick Snack
🔟 Discover what it takes for SaaS companies to go public in 2023 and why achieving a 10x ARR multiple is harder than ever in today's market!
💬 Meta's LLaMA language model intensifies competition in AI space, with Microsoft-backed OpenAI, Alphabet, and Baidu seeking to impress investors with their own offerings.
✂️ Which SaaS products are thriving and which ones are getting cut in the current economic downturn?
🤓 Vendr's new Explore catalog helps companies streamline purchasing decisions and save money on SaaS spend.
🖤 +2 M&A Transactions: Turtlefin + Last Decimal; GoCo + WFHomie
💸 +11 Funding Rounds: Tome ($43m), Vitally ($30m), Buk ($35m), Sirclo ($30m), and more.
🍔 The Full Meal
SaaS Companies Need Exceptional Performance to Achieve 10x ARR Multiples in Today's Market
This week in enterprise software: Top 10 #SaaS#Cloud multiples as of today's market close
— Jamin Ball (@jaminball)
Feb 24, 2023
In today's market, both public and private SaaS companies need to acknowledge the harsh reality that 10x ARR multiples will only be awarded to the strongest performers.
VC firm Meritech wrote a post earlier this year summarizing the characteristics of the past year's IPOs in an attempt to understand "what it takes to go public" for SaaS companies in 2023.
Out of the approximately 100 public pure-play SaaS companies that Meritech tracks, only about 20% trade at a multiple greater than 10x ARR.
Their findings indicate that multiples have compressed by 70% from their respective peaks in late 2021, with the median coming down from 38.8x to 11.8x.
This means that a business must grow its top line by a multiple of 3.3x to reach the same previous levels in enterprise value, which could take years under current market conditions.
On the same theme, TechCrunch highlighted the same messaging by analyzing Unity's latest earnings data. Despite having strong software products, robust growth, and improving adjusted profits, Unity still has a single-digit multiple (~6x), demonstrating that it is difficult to achieve and maintain a 10x revenue multiple in today's conservative market.
This observation has also been validated by the Bessemer Cloud Index, which calculates an "average revenue multiple" of 6.8x and a median figure of 6.2x for emerging public companies primarily involved in providing cloud software to their customers.
Meta Releases New Language Model, Intensifying the AI Arms Race
Meta has released a large language model called LLaMA (Large Language Model Meta AI) to researchers. The model will be available under a non-commercial license to researchers and entities affiliated with government, civil society, and academia.
What are Large Language Models? Large Language Models mine vast amounts of text to summarize information and generate content. They can answer questions with sentences that read as if written by humans. Meta stated that the LLaMA model requires "far less" computing power than previous models and is trained on 20 languages, focusing on those with Latin and Cyrillic alphabets.
Performance: The company claims that LLaMA can outperform competitors that examine more parameters or variables than the algorithm takes into account. It is "competitive" with Google's Chinchilla70B and PaLM-540B. LLaMA has 13 billion parameters and can outperform GPT-3, a recent predecessor to the model on which Microsoft-backed OpenAI's ChatGPT is built.
Future Use: Meta is currently testing the generative AI capabilities of LLaMA with the aim of implementing them into their products in the future. This technology could be a game-changer for their business. AI has become a crucial area of investment for the tech industry, and Meta's announcement is indicative of a broader trend of integrating AI into products.
Previous Attempts: Meta had previously released large language model OPT-175B in May of last year, which formed the basis of a new iteration of its chatbot BlenderBot. Later, it introduced a model called Galactica which could write scientific articles and solve math problems, but quickly pulled down the demo after it generated authoritative-sounding false responses.
Which SaaS Products are Thriving and Which Ones are Getting Cut?
VCs are instructing their portfolio companies to increase their runway and reduce costs. This means that founders are being compelled to carefully consider which SaaS tools they truly need during difficult times. However, not all types of software tools are being affected equally.
Spending on SaaS tools for HR, analytics, and product have shrunk the most, while software for IT and security and sales have increased the most, demonstrating that "mission critical" tools are the most resilient in a downturn.
Software spending by companies decreased by 2.9% in December 2022, continuing a trend of declining SaaS spending growth since August. However, there was a 1.3% increase in software spending in January 2023 compared to December 2022, according to the latest data from Cledara.
In January 2023, ten software vendors saw +50% growth in average monthly spend compared to Q4 2022. These were led by Grammarly, Docker, Loom, Zoho, and Vercel.
Vendr's Explore: The Dynamic Catalog That's Revolutionizing SaaS Purchasing
Speaking of software spend, Vendr, a leading SaaS buying platform, has launched Explore, a dynamic catalog designed to help companies make faster and more informed purchasing decisions.
Backed by unbiased data from billions in spend processed from tens of thousands of deals and thousands of suppliers, Vendr helps buyers understand which solution is the best fit for their needs and only connects sellers with the most high-intent buyers.
Vendr is trusted by hundreds of customers, including Brex, Drift, and Dashlane, to find, buy, and manage enterprise software, which Gartner predicts will exceed $750B in spending this year.
Here are the top 5 features of their product:
Comprehensive SaaS product database: Vendr Explore offers a vast database of over 19,000 SaaS products that helps users find the best solutions for their business needs.
Dynamic market insights: Through Vestimate, a dynamic market insight tool, Vendr helps users get a sense of how much they can expect to pay for a particular product.
Comparison and filtering tools: Explore enables users to compare and filter products based on their features, benefits, security, and legal policies.
Compliance details: Vendr Explore provides compliance details that help users understand whether a particular product can get through their internal approvals process.
Transparent Pricing: Vendr's proprietary algorithm considers contextual information about a user's company, category, and market trends to provide predictive pricing estimates that help users understand what they can expect to pay based on the size of their company.
🍟 Extra Fries
Despite making up a quarter of Google's full-time employees, the Cloud division has never turned a profit. To save money and allow continued investment in growth, Google's Cloud division is sharing desks among employees in its largest US locations. They will alternate usage with a "desk buddy", storing personal items and working from an "overflow drop-in space" if they don't follow the schedule. (Read More)
Abhishek Chopra is blazing a trail for other entrepreneurs with his decision to move his India-based SaaS company, BosonQ Psi, to Buffalo. With the help of infrastructure partners and channel partners, he is looking to revolutionize virtual simulations with quantum computing and is taking advantage of the talented software engineers in Upstate New York to commercialize his product and make the most of the thriving startup community in the area. (Read More)
Signal could stop operating in the UK if the government passes the Online Safety Bill, which proposes bypassing encryption. The proposed UK ban would not apply to off-the-shelf commercial mobile phones or the encrypted messaging apps available on them. (Read More)
In 5 words or less, how would you get your first 100 SaaS users if you were starting from zero?
— Stefan Smulders (@SmuldersStefan)
Feb 25, 2023
Most popular response: cold call/e-mail
🖤 M&A Transactions
Insurtech startup, Turtlefin, has made its first acquisition by snapping up a Bengaluru-based insurtech SaaS firm to strengthen its bancassurance technology offering and expand its market share in the insurtech space. (Read More)
GoCo.io, a Houston-based HR SaaS company, has acquired Toronto-based WFHomie, a remote-first platform that helps companies keep up with people analytics and enhance the employee experience. GoCo has raised $27.5 million to date. The two companies share a vision of improving work-life for employees and empowering organizations to operate more effectively. (Read More)
💸 Funding Rounds
Tome | $43m Series B: storytelling productivity tool that helps users transform ideas into visually appealing narratives (link)
Vitally | $30m Series B: customer success platform (CSP) designed for maximizing productivity, visibility and collaboration, plus eliminate churn (link)
Buk | $35m: cloud-based human resource management platform (link)
Sirclo | $30m: website building platform for e-commerce (link)
Metomic | $20m Series A: discover sensitive data and protect it from security, privacy and compliance risks (link)
Zerocater | $15m Series C: corporate catering and cafeteria solutions employees love as they transition to the hybrid workplace (link)
SendOwl | $9m: tools for selling digital products through social media and blogs (link)
CarbonCloud | $7.9m Series A: digital infrastructure for calculating and communicating climate footprints for food (link)
Prismatic | $9m Series A: integration platform for B2B software companies (link)
Klikit | $5.6m Seed: solution for restaurants to increase their food delivery profits (link)
Konfetti | $2.8m Seed: marketplace for local activities (link)
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