Phil’s Monthly European SaaS Musings - November '22
Welcome to the third edition of my Monthly European SaaS Musings!
I’ll be publishing this early each month, and will 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?
“We conclude that markets were following developments on the soccer pitch rather than in the trading pit” - ECB Economist, Michael Ehrmann
November was a game of 2 halves. Public SaaS valuations plummeted in the first week of the month, before racing back to re-gain all their losses in the second week. Whilst by comparison, the second half was remarkably calm, with an unusual level of stability. Volatility dropped to very low levels around the 20th of November, which was the day the FIFA World Cup kicked off…
The basket of SaaS stocks included within the BVP Nasdaq Emerging Cloud Index (EMCLOUD) remains down >55% over the last year (as a reminder, Oct / Nov ’21 was peak-valuation), and about 20% down over the past 6 months, as you can see on the chart below.
Overall multiples measured by enterprise value to annual recurring revenue (EV / ARR) for public SaaS companies increased slightly over the month, now standing at a 6.3x median multiple, up 5% vs prior month. 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.
Within the month, FTX, a cryptocurrency exchange, spectacularly collapsed, a historically significant fraud which has some parallels with Enron. This brought about some scaremongering around contagion, but that week, the Nasdaq bounced by 10%. Undoubtedly there will be some longer term implications in the crypto industry (both positive & negative), but immediate fears it would lead to widespread market contagion appear to be misplaced. The next candidate for contagion risks – property – is now in the news, as Blackstone recently was forced to limit withdrawals from a $125bn fund due to a sudden influx in redemptions.
In the capital markets, as has been widely reported, there’s been a slowdown in exit activity driven by the freezing of the IPO market. Which means private exits are increasing in relative importance; Pitchbook’s analysis expects sponsor-backed exits to drive the M&A landscape as we head into 2023, which mirrors our own views we shared last month.
2) Synchronised & steep monetary tightening
The monetary policy tightening by the Fed and other major Central Banks now represents one of the most intense in history.
The Pitchbook Q4 report shows the net change in the fed funds rate for the 2022 tightening vs historic comparables, with steeper rate hikes only experienced in 1974 and 1980. This was a notable period of stagflation – increasing levels of commentary comparing the current global economy with the challenging economic times of the 1970s – which famously also included an oil / energy crisis.
The US took a long time to recover during the 70’s, with inflation at nearly 14.5% and unemployment over 7.5% at the summer of 1980. The period of the 'Great Inflation' lasted for the entire decade of the 70’s, and inflation only returned to normal levels in ’82/’83.
There’s also now a remarkable degree of monetary policy synchronisation – per BIS, around 90% of the world’s Central Banks are hiking rates, this is around 20%pts higher than the previous record.
BUT – some key data indicators suggest that inflation may have peaked, and there’s partial evidence to support the theory that the pace of headline price growth will start decelerating. Producer price inflation, across most countries, now shows signs of dropping. Notably – the countries with the highest producer price inflation have now also seen the sharpest falls over the past couple of months
Though most analysts are guiding towards a longer & softer landing, partly due to the prolonged impact of the energy crisis on the wider supply chain through into 2023.
From a future rates perspective, markets are now pricing in interest rates in the UK between 4-5% in 2023, and economists are widely expecting a 50 basis point rate rise in December from the BoE, with further rate rises in 2023. The ECB is also expected to continue increasing rates through 2023. But the Fed’s fast movements means markets are now pricing rate cuts in the US from mid-23.
And reassuringly, in the US at least, there’s significant capacity remaining in the labour market, with around 2 job openings for every unemployed person. So let’s not get too carried away with the comparisons to the decade of Stagflation in the 70’s…
3) Continued green shoots in early stage European venture
We generally review about 30 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).
November was a pretty typical month with 33 deals, with almost all of these happening at the Series A stage, where there continues to be very impressive momentum in Europe. YTD, there’s now been 375 rounds, which is ~5% down on 2021, but 20-30% up vs 2019 and 2020.
Series B rounds within this size range been weaker: in 2021, there was a very large number of SaaS Series B’s above $30m that drove much of the growth in the overall funding market, but we’re seeing slower Series B activity across the board in 2022 so far, with a YTD total of 68 rounds, 20% down on 2021, and even lower than both 2019 and 2020.
Below are my top favourite European SaaS deals that were announced in November. Congratulations to the companies raising - some great businesses & rounds here! If there are any other companies & rounds you think I should have included, LMK.
No major updates in-month in overall sentiment. Investors are being pulled between decent amounts of dry powder (but potentially a more challenging future fundraising environment); mixed portfolio performance, wide-ranging growth rates of new opportunities, big variability across sectors, volatile macro, frozen IPO market, tentative PE & strategic acquirers… Hard to work out what will dominate in the coming months.
4) Great things I read this month
Given it’s December, I’ve included a bumper reading list for the holidays, as there’s a lot of really high quality reports & advice that have been published.
Openview - 2022 SaaS Benchmarks Report
Battery – OpenCloud 2022
KeyBanc – 2022 Private SaaS Survey
Balderton / Dave Kellogg – Founders Guide to B2B Sales
Insight – SaaS Pricing Tactics for a High Inflation Environment
A16z – Pipeline Cures All
And finally - it would be remiss of me not to mention the absolutely phenomenal ChatGPT launch from OpenAI. Truly transformational technology, which I read has managed to grow to 1m users in just 5 days.
As context - Instagram took 2.5 months, and Netflix >3 years to reach this milestone. And no wonder - when at the press of a button, it creates content like the below. Hyperbole aside though - genuinely game-changing tech that will have huge implications.
5) Thanks for making it this far!
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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And crucially – happy holidays to everyone! See you in 2023.
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