Weekly Links & Thoughts:
Have Public SaaS Stocks Bottomed?
Continuing the “have we hit the bottom” series…
Have publicly traded SaaS stocks bottomed?
Let’s hope the answer is “yes” - and this week there is good news. The WCLD cloud computing ETF opened today at $30.56, up almost 20% from its bottom (and 52-week low) of $25.66 last week.
Another vote for “yes” - news that Zendesk is to be acquired in a take-private PE deal has its stock up 29% this morning. That’s likely to have a salutary effect on its SaaS peers.
A good source for tracking public SaaS multiples on a weekly basis is Jamin Ball’s Substack. I’m using his data, which shows that the median revenue multiple (on a forecasted next twelve months basis) is 6.5x, up from 5.5x a week ago. The median forecasted revenue growth is 24% and free cash flow margin is 3%, implying a Rule of 40 score of 27.1
If SaaS companies hit their growth targets, it’s likely that their valuation today will prove quite reasonable. The biggest “if” in the SaaS market right now is if a slowing economy will have a significant impact on revenue growth. Or, perhaps the public market is applying a relatively low multiple because of this expectation.
Podcast recommendation of this week:
This week, Jason Lemkin did a SaaStr podcast that covered some fascinating results from a recent survey of SaaS companies on the topic of “leveling up” SaaS startup execution. He covers 16 different topics, but I’ll mention two that jumped out:
In the majority of SaaS startups surveyed, top sales reps make at least 3x what the number two rep makes. This tends to surprise SaaS founders when they first learn that it’s typical, but I think the intuition here is similar to understanding that a top programmer can be an order of magnitude better than an average one. The takeaways here are 1.) remember that a top rep can close a lot more than an average one and 2.) be rigorous in keeping a high bar for reps.
60% of SaaS startups surveyed have raised prices this year. Price raises are often justified when a SaaS startup is growing and steadily improving its product.2 Generally, it’s better to raise for new customers rather than existing ones.
A few interesting reads from this week:
On staying positive in a tough market, the legendary VC Fred Wilson had a great post this week.
On the topic of bubbles, I just finished Bubble in the Sun, a wonderful recount of the Florida real estate bubble of the 1920s. The author argues that the real estate bust in Florida in the late 1920s was a more impactful cause of the Great Depression than the stock market crash of 1929.
Note that the Rule of 40 can be calculated in a few different ways, depending on how growth and profit are quantified. I prefer using year-over-year ARR growth to represent growth, although taking the quarter-over-quarter growth rate and annualizing it can sometimes create a higher fidelity measure. For profit margin, an accrual-based measure could be used such as EBITDA or net income. I prefer a cash-based metric, with free cash flow being the the most conservative and arguably the best flavor.
One product dimension that early stage founders often overlook is “company stability” - at 1m ARR their startup’s product might have great features, but a prospect will apply a psychological discount reflecting that the startup is young and not established. As the startup grows to 5m and 10m ARR and establishes itself, the “company stability” dimension of the product elevates dramatically, raising the product’s value proposition and meriting a price increase for new customers.