Happy New Year and welcome to my Monthly European SaaS Musings!
I’ll publish this early each month, and cover some of the game-changing need-to-know’s in the European SaaS world.
You can expect opinionated commentary & data on the public markets, macroeconomics, the most interesting, notable & exciting VC rounds in European SaaS, and finally some of the top things we’ve been reading or seeing IRL.
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1) What’s going on in the public markets?
December was a smoother month for public SaaS valuations, with lower volatility than normal. Valuations rebounded slightly in the first half, before sliding down in the last few weeks of the year.
The basket of SaaS stocks included within the BVP Nasdaq Emerging Cloud Index (EMCLOUD) is about 50% down over the last year (as a reminder, Oct / Nov ’21 was peak-valuation), and about 20% down over the past 6 months. Mid-October to the current date is roughly flat, and there’s now been about 3 months of a flat trendline.
Overall multiples measured by enterprise value to annual recurring revenue (EV / ARR) for public SaaS companies increased again over the month, now standing at a 6.5x median multiple, which is a second consecutive month of a 5% increase. This means that the drop in valuations is now increasingly driven by softening revenue guidance, vs previously being dragged down by a like-for-like drops in multiples.
There’s an increasing volume of analytical content now being published that describes the slowdown in revenue and deterioration in general performance of public software companies.
Particularly notable was a piece written by Jamin Ball of Altimeter on the CAC Payback periods of public software companies (in his Clouded Judgement newsletter on the 20th December). These historically had a tight long term band around 22-24 months, but in Q1 – Q3 ’22, this has deteriorated to 38 months – about a 70% increase. This reflects challenges in revenue acquisition, even for the top global software companies, and means even if businesses are willing / able to invest the same as previously in sales & marketing, it will take them 70% longer to recoup that investment. This presents a clear headwind for capital-efficient growth.
Looking at the private markets, Tomasz Tunguz recently posted some interesting analysis on the US M&A market, showing the sheer extent of the quietness in the exit markets for VC backed tech businesses. He states “In percentage terms, last quarter dropped the most since 2000, falling 94% year-over-year”(!)
The picture on the volume of US VC M&A shows a proportionately significant drop in activity after the dot-com bust in 2000, before a steady, linear increase through to 2020, before an explosion and equally sharp contraction in the number of transactions in the Covid aftermath.
Interestingly, if you chart the value rather than the volume, as you might expect, the picture is even more pronounced. He makes the point that the very low average median M&A price now happening implies that most exit transactions occurring are aquihires. After the drops in 2000, there was a time period of about 3 years before the market saw a material return to positive exit dynamics, as the proportion of comparatively low-value aquihires continued to drag down overall exit values for several years.
Of course, there remains some outliers. In the middle of the month, Thoma Bravo announced the take-private acquisition of Coupa for $6.2bn, which was a 30% premium to the public markets and represented 8.4x forward revenues – well above the market average. Furthermore, Coupa is a business with lower than typical revenue growth and gross margins (but strong cash generation), which highlights the premium that tech buyout funds are willing to pay for efficient SaaS companies.
2) Increasingly labour-market focussed macro
Macro in Europe remains a fuzzy picture, with plenty of commentary about inflation beating expectations, but sanguine responses from most central bankers who are keeping up pressure on forward rate guidance. The ECB Chief stated interest rates in the Eurozone will rise ‘significantly’ in Feb and March. During December, the ECB raised rates by a further 0.5 pts and the BoE by the same amount.
General forecasting remains bearish with high risk of recessions globally as we enter 2023, which is resulting in softness in both consumer and business spending.
Challenges in the labour market still abound, in the UK, there has been the persistent spectre of strikes across multiple sectors (healthcare, mail, trains, planes & tubes) as employee demands for wage increases, particularly in response to the high inflation rates, and in many cases, very poor working conditions. Though the picture isn’t all uniform – it’s likely there’s some deflationary pressure starting to appear from within tech as some of the large scale layoffs (Amazon, Salesforce etc) have been announced.
Some really powerful data was published by Carta, which tracks the number of employees departing by choice or by layoffs. In November 2022, more employees were laid off from startups than left their jobs by choice. This had only happened twice since 2015 (the other time being April 2020, for obvious reasons).
Per Peter Walker, their Head of Insights, there are 3 key points underpinning this pattern:
Mindset Shifts – incessant layoff headlines are encouraging employees to stay put
Hiring Freezes – reduced or frozen new hiring in many companies
Seasonality – typically low departures near the end of the calendar year
3) Solid Series A's, bleak later stages
We generally review about 30-40 scale-up stage B2B SaaS rounds happening each month on average across Europe and Israel ($5-30m equity rounds in B2B SaaS businesses that are named Series A – C rounds). This results in a narrowly defined European scale-up stage SaaS market of ~$5bn a year across ~350 rounds (roughly one deal per day).
December was a slower month for announcements so far with just 23 deals, with a modest volume of new Series A’s but a bit of a rebound in Series B’s. YTD, there’s now been 415 rounds, which is ~7% down on 2021, but 20-30% up vs 2019 and 2020.
Looking at the quarterly volumes across the last 4 years, we can see that after Q1 2022, the markets have been characterised by a slight slowdown vs the highs of 2021, but the last year still compares well vs the longer term trend.
This has been very insulated in the earlier stage VC markets, vs the later stages (see the bottom of this section). Series A rounds in total ended the year just 5 deals short of the total for 2021, and there’s a continued softness in new milestone Series B and C rounds.
Below are my top favourite European SaaS deals that were announced in December. Congratulations to the companies raising - some great businesses & rounds here! If there are any other companies & rounds you think I should have included, LMK.
Great report from Cooley in the month which looks at the conclusions from their very large dataset of VC rounds. The picture is as bleak as you might expect for the later stages (Series C & D). A few snippets:
Median pre-money for Series D has dropped from £3.5bn to $0.5bn (-85%)
Median pre-money for Series C has dropped from $0.5bn to $0.13bn (-75%)
Series B’s are about 45% down
To me, these were still eye watering numbers. Everyone has been speaking about the late stage slowdown for some time, but this was the first robust statistical analysis I had seen to quantify the scale of the changes. The large later stage funds have spent several quarters now mostly looking inwardly, and the question remains when the re-acceleration into large scale, later stage, net-new investments will start with impetus.
4) Great things I read this month
Lots more interesting content came out last month, with many funds publishing (very similar) forward looking recommendations for 2023.
Unsurprisingly, this covers pricing, product, GTM, growth and burn, the below were some of my favourite:.
M3ter – B2B SaaS Pricing in 2023
Bessemer Venture Partners – Product Metrics that Matter the Most
A16Z – Guide to Growth Metrics
Balderton – Balancing Growth and Burn in 2023
5) Thanks for reading!
I hope you enjoyed reading this month. If you have any feedback, please do reach out (email@example.com); all comments or recommendations are welcome.
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