Phil’s Monthly European SaaS Musings - October '22
Welcome to the second 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.
Thanks for all the comments and feedback so far, it’s all been really appreciated! To receive next month's European SaaS Musings in your inbox, subscribe to the Oxx newsletter (the subscription form can be found in the footer at the bottom of the page).
1) What’s going on in the public markets?
“You spin my head right round right round when you go down, when you go down down” (Flo Rida, 2009)
October was another month of volatile public SaaS valuations that caused heads to spin. The basket of SaaS stocks included within the BVP Nasdaq Emerging Cloud Index (EMCLOUD) is down >50% over the last year (as a reminder, Oct / Nov ’21 was peak-valuation), but just 5% down over the past 6 months, as you can see on the chart below.
Thoughts that this might be representing a valuation floor have been tested over the last few days though, as the index has dropped a further 15% in the first week of November alone. This appears to be partly due to the disappointing slew of Q3 tech earnings, which I alluded to last month, and deteriorating macro.
Whilst revenue guidance continues to soften, much of the decrease in valuations continues to be driven by drops in valuation multiples of revenue. Overall multiples measured by enterprise value to annual recurring revenue (EV / ARR) for public SaaS companies now stand at a 6.0x median multiple, down another 5% vs prior month, and over 60% lower than October in 2021.
It’s likely that EV / ARR multiples are now trading below most measures of the long-term trend, which reflects a combination of powerful factors: drops in company performance, fears over upcoming recessions, and further spectre of inflation and additional rate rises.
Interestingly though, whilst the drops feel precipitous within tech & software valuations, the general deflation of prices has not been as sharp as previous financial crises. The excellent analysis in Pitchbook’s “Silver Linings on the Time Horizon” report (link in the reading section below) shows the market decline has been longer, but softer than most previous cases. This has given some hedge funds feelings of vertigo, as they feel there's still potentially sizeable drops to come before we reach the bottom.
Some of the big cloud majors announced Q3 earnings, which were disappointing: both AWS and Azure for example grew slower than expectations, with a clear narrative that customers are seeking to optimise and control their costs. Generally, the picture was one of slowing growth, performance vs expectations collapsing, and increasing guidance that the market sees future growth estimates as unrealistic.
Unsurprisingly – IPO activity remains muted. There have now been ~170 US IPO’s in 2022 YTD (across all sectors), which is >80% less than the same period last year. Within Technology specifically, Wilson Sonsini report that there were just 9 tech companies that IPO’d in the first half of 2022, vs 64 in the first half of 2021 – a similar drop of 85%. And within SaaS itself, there haven’t been any IPO’s in 2022, down from over 40 last year, per Accel’s Euroscape.
We continue to expect a forthcoming uptick in private tech M&A, a view recently corroborated by Ryan Nolan, Goldman Sachs’ global co-head of software banking in an interview with The Information. He stated:
“We’ve had a very busy year on the public side of [M&A]. The private side of that is really to come, and that’s where we’re set up for 2023”.
Timing remains the key question here – this remains contingent on facilitation from the debt markets, as well as more clarity on individual company performance, and a narrowing of potential paths in the macro…
2) Macro remains tumultuous
But it’s not becoming much clearer where the macro is headed: October was another intense month across the world, and there’s a real divergence in perspectives from economists and financiers on the likely outcomes.
More rate hikes from major central banks continue to be announced, with the Fed leading the way with the most aggressive movement, resulting in a clear upward trajectory of interest rates to attempt to deal with stubborn inflation.
Inflation expectations globally are increasing, and appear to be particularly well entrenched in the UK vs other major countries / regions.
Though there are some notable regional variations here within Europe – some of the countries in CEE have very high rates, the latest from Estonia for example was at 22% in October(!) This presents a potential challenge for the ECB, who has to deal with a broad range of Eurozone inflation levels.
Political uncertainty has also persisted – with another new PM in the UK; new right-wing governments elected in Sweden, Italy and Israel; and ongoing tensions in France and Germany. The UK also saw an embarrassing U-turn on the mini budget announcements from last month and the Chancellor replaced almost as quickly as he was appointed.
Whilst the labour market does remain reasonably tight and we remain close to full employment, in the month there’s been several high profile announcements of further tech layoffs; and there are indicators there may be more to come. As Goldman Sachs reported in a recent note: “Historically trucking jobs have been a decent indicator for what is to some in the wider jobs market. Trucking jobs saw the biggest monthly fall since April 2009 last month (September).”
And to end with some more bleakness – the prominent hedge fund Elliott Management has sent a pretty dismal letter to clients, with perspectives that the world is “on the path to hyperinflation” that could lead to “global societal collapse and civil or international strife”. Cheerful stuff. Their perspective (and presumably position) is that markets have not fallen enough, because “there are so many frightening and seriously negative possibilities that it is hard not to think that a seriously adverse unwind of the everything bubble is coming”. See the FT article here for some additional commentary.
3) More green shoots in European venture, particularly at the earlier stages
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 Series A – C stage). This results in a narrowly defined European scale-up stage SaaS market of ~$5bn a year across ~350 rounds (roughly one deal per day).
Overall, Q3 2022 ended up with significantly fewer deals announced than Q3 2021 due primarily to a very busy 2 months of summer announcements in July/August 2021 which were not matched in 2022.
However, October was a busy month for transactions at this stage, with 39 already announced, higher than the comparable October figure for each of the past 3 years, which is more encouraging evidence of activity levels picking back up.
YTD, there’s now been about 340 rounds, which is ~10% down on 2021, but 20% up vs 2020.
Below the surface, this is due to strong resilience in Series A rounds in this size range, where the YTD total of 268 is now even higher than the YTD figure for 2021 of 265, which to me felt quite surprising.
Series B rounds within this size range have stayed quite steady though: 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 66 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 October. Congratulations to the companies raising - some great businesses & rounds here! If there are any other companies & rounds you think I should have included, LMK.
There’s a continuation in the patterns in the market vs last month - private scale-up SaaS companies are still largely closing debt rounds, convertibles or internally-led rounds, but there is a good stream of (mostly Series A) companies coming out to market for externally-led equity fundraising.
Whilst the activity at the Series A (and Seed) stages has been quite robust, Series B to growth rounds have been happening at a dramatically reduced pace. We know there have been multiple unannounced insider rounds in these later stage businesses, who are focussed on securing enough cash runway to further prove out their fundamental economics before raising external equity fundraising.
Given the volume of earlier stage rounds, as well as ‘bridge’ style rounds at the later stages, mechanically we would expect there to be a high volume of follow-on rounds planned happen from around the middle of 2023, regardless of how healthy the fundraising market is at that time.
As with last month – the tension between the large availability of VC dry powder is matched against a lower availability of very high quality new opportunities with a workable transaction structure (at the mid-late stage); a requirement to fund follow-on rounds in the portfolio; and the heightened prospects of a more protracted recession/inflationary period & challenging trading environment.
4) Great things I read this month
Lots of interesting data-driven reports with rich insights on key trends in the market & company performance, below were some of my favourite ones:
Pitchbook: Silver Linings on the Time Horizon
Wilson Sonsini: IPO Report
RevOpsSquared: 2022 Benchmarks
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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PS - the Oxx team will be attending Slush in Helsinki on the 16th – 18th November. If you’re around, let us know!
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