Weekly Update: Special Access For Everyone!
Highlights from SaaS & VC & Markets from the week of 2/20
It was tough week for the markets, with indices down across-the-board. The WCLD SaaS index took it on the chin, closing at $28.25 - down 4% on the week.
What happened?
Friday’s inflation report was particularly troubling:
The sizzling economy and persistent inflation continues to defy the expectations that the Fed’s hiking campaign would calm the economy and tame inflation.
Why is the economy so hot? Famous economist/pundits Paul Krugman & Larry Summers don’t agree on much, but both are puzzled:
The major question is if the economy will slow down gradually - a “soft landing” - or more abruptly - a “hard landing.” The stock market’s decline this week can be viewed as reflecting a rise in expectations for a hard landing.
While there’s plenty of uncertainty around the landing scenario for the economy, it’s clear that that public SaaS & growth stocks have have already had their landing. It was hard. The chart below shows that the median valuation for publicly traded SaaS companies is 5.9x projected next twelve months’ revenue - dramatically down from the extravagant multiples of late ‘21.
On the other hand, highly valued private tech companies are still working through their landing scenario. A good example is Stripe, which has been rumored to raising at a $55b valuation. This is down significantly from its last round’s $95b valuation.
Must be a good deal, right? Maybe not.
Stripe is run-rating ~$3b in revenue with ~20% growth and, last year, lost money. If it were public, as a software company with a Rule of 40 score of ~20, Stripe would be fortunate to fetch the median public valuation of 5.9x forward revenue.
There is a case to be made that it merits a higher multiple than the typical SaaS business because payments businesses are capable of unusually high profit (see the discussion of Adyen below). But Stripe is far from showing any profit, making this a hard case to support.
While some investors have committed to invest at the $55b valuation, it appears that Stripe has been struggling to fill out the round. This week, news broke that Goldman is offering wealthy clients access to Stripe’s round.
This news reminded me of Uber’s efforts to raise a late stage round back in 2016:
I couldn’t be more cynical of these “special access” situations. It’s likely that the Stripe round has been shopped widely, with only marginal interest from late-stage investors. Goldman is stepping in where few others want to venture — and is likely taking a hefty fee in return for promoting it to its clients.
While Stripe’s struggles are relatively public given its high profile, similar travails will be playing out across the unicorn and decacorn landscape over the next few years. Unfortunately, hard landings await for many other late-stage startups.
Deal of the Week: DOJ v Adobe
The biggest tech M&A news of the week was about a deal potentially not going through. The DOJ announced they would try to block Adobe’s $20b acquisition of Figma.
Figma has been stunningly innovative as an independent company. While Adobe is relatively innovative for a $150b market cap company, it’s a safe bet that Figma’s product velocity will slow down significantly if this deal closes. That means Figma competitors should be rooting for this deal to close — ironic, since the DOJ is supposed to stop deals that would harm competition.
Podcast Recommendation of the Week: All-In Podcast
The All-In Podcast has become the most popular podcast in tech.
My source? The All-In Podcast, naturally.
This has become a guilty pleasure for me every week as it’s loaded with hot takes & VC-insider-repartee. While the participants like to position themselves as outsiders, they are anything but. Even if you find yourself disagreeing with their views, it’s worth listening to stay abreast of the current Silicon Valley insider consensus.
This week the podcast starts out with a good discussion of Stripe, covering some of the details of why it needs to raise (for employee tax issues) as well as comparing it to Adyen.
Reading Recommendation of the Week: Adyen’s Earnings
This is a few weeks old, but the comparison between Stripe and Adyen is striking. Adyen’s growth is higher and profitability is much, much higher. That said, Adyen is the best case for Stripe’s valuation as it’s currently worth ~23x forward revenue.
How is such a high valuation multiple possible? Adyen has strong growth, stunning profitability, and very sticky revenue.
