Decimation of SaaS Valuation Multiples [2022 Mid-Year]


With the drop in SaaS valuation multiples, I knew things were bad. Since I have clients in the middle of capital raises, I’ve been getting the details on their term sheets… and oh my, is it bad.

What a difference a few quarters make.

There are two deal attributes that are getting hammered in terms of valuation multiples.

  1. Startups that are not growing
  2. Startups that are not cash flow positive and profitable

Seeing a company that was valued at 10x sales in its last round more than double sales and still face the prospect of having a significant down round is, in a word… brutal.

A number of high-profile equity investors have been sending memos to their portfolio companies.

Sequoia Capital put out their slide deck to portfolio companies here:

Adapting to Endure

YCombinator put out their memo as well:

YC advises founders to ‘plan for the worst’ amid market teardown

The themes were very similar:

  1. Capital that used to be cheap and plentiful is now rare and expensive.
  2. Be profitable or die.
  3. Focus on the fundamentals of running a solid, profitable business (a.k.a. go “old school”).

As I read the Sequoia capital memo, it seemed oddly familiar. I vaguely remembered Sequoia putting out a memo during The Great Recession of 2008. So I looked it up and found it here:

R.I.P. Good Times

Turns out that they reused many of the same slides from 2008 in their 2022 slide deck.

The basics of running a profitable business never seem to go out of style. With unlimited, cheap capital, you can defy the basics for some time… until you can’t. And now is that time.

There is a fairly strong likelihood we are already in or will soon be in a recession. This will be the fourth major recession of my career (2001, 2008, 2020, 2022?).

There is a playbook for how to navigate these times. Sequoia and YCombinator do a great job of covering those points.

On my end, I’ve been advising all of my CEOs to:

  1. Slash operating expenses (get rid of poor performers).
  2. Invest in opportunities with a “sure thing” ROI. (Invest in stuff that is working, not stuff that you hope will work, might work, or could work.)
    Translation: Every salesperson below quota gets managed out ASAP.
  3. Be profitable and cash flow positive… within a 45-day period.
  4. For those already profitable, improve margins and accumulate cash.

The theme of the day has shifted from “go big or go home” to “be profitable via capital-efficient growth.”

You can no longer use cheap capital to cover up poor management decisions.

When capital markets provide ridiculously cheap capital, the company that’s great at raising capital wins.

In a recessionary environment, the company that acquires customers, solves customer problems, retains customers forever, and commands superior margins while doing so wins.

A recession can be a tremendous opportunity to build a great business. In the economic history of the United States, we’ve had far more years of economic growth than years of recession, yet the majority of Fortune 500 companies started during a recession.

Here’s a partial list:

  • Fortune Magazine
  • FedEx
  • Charles Schwab
  • Vanguard (the stock index fund was invented during a recession)
  • UPS
  • Price Club (which later merged to become Costco)
  • Walt Disney
  • Hewlett Packard
  • Domino’s Pizza

How and why did they win when the entire economy was suffering?

Very simple.

  1. They found customers who had problems they were willing to spend money to solve (it’s a shorter list than before, and what’s at the top of the list may have changed, but there is still a list).
  2. They solved customer problems (often in differentiated ways).
  3. They gave customers more value than what they received in pricing.
  4. They ran operations cost efficiently, so they had good margins.

That. Is. It.

It is not rocket science.

It’s called running a good business + being able/willing to adapt to market changes (and in a recession, there are a lot more changes, and they tend to occur more abruptly).

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