Yesterday during Disrupt 2020 I sat down with three investors who know the SaaS startup market very well, hoping to get my head around how hot things are today. Coming on the heels of the epic Snowflake IPO (more to come on that in this weekend’s newsletter), it was a great time for a chat.
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I’ve boiled our 40-minute discussion down to my favorite parts, getting you the goods in quick fashion.
What follows are notes on:
- how fast the SaaS investing market is today
- why Snowflake priced where it did and what that tells us about today’s market
- how SaaS companies are seeing different growth results based on their sales motion
- why some private-market SaaS multiples can get so high
- which software sectors are accelerating
- and what I learned about international SaaS.
There are more things to pull out later, like the investors’ thoughts regarding diversity in their part of the venture world and SaaS startups, but I want to give that topic its own space.
So, into today’s SaaS market with an eye on the future, guided by commentary from Canaan’s Maha Ibrahim, Andreessen Horowitz’s David Ulevitch and Bessemer’s Mary D’Onofrio.
Inside SaaS
To help us get through a good bit of the written word without slowing down, I’ll introduce an idea, share a quote and provide a little commentary. This should be good fun.
Let’s start with Ibrahim on the state of the SaaS investing market:
I’ve been in the venture space for over 20 years, and I’d say this is the most active market — from our basements and kitchens and bedroom and second homes — that I have ever seen. Valuations are the highest that I’ve ever seen, and the pace at which deals are getting done, particularly at the mid and late stage, is astounding.
This is a good bit of ground. This tells us how frenzied the private markets are for SaaS shares, and, I suppose, growth-y tech shares more broadly.
Of course, in the shadow of the Snowflake IPO bonanza, I had to ask about that particular debut which drove public investors so crazy. Bessemer’s D’Onofrio made a point that could apply to the private markets as well, given what we just read from Ibrahim:
The first day results were fantastic, but I think what the Snowflake IPO really pointed out was just the extent to which investors are really looking for growth during this period of uncertainty.
The average cloud company is growing 35% year over year and is worth about 17 times current revenue, or 15 times forward [revenue]. But this company is growing 120% year over year. And while it does have losses, on an efficiency basis it’s still 50%+. And I think what you see, you know, it filed at one range, revised upwards and then priced above that range. I think what it really speaks to is public cloud market investors wanting to price very good assets at premium prices and are willing to pay for that growth.
At that pricing range, which was 36 times forward revenue, that was actually the highest price that any software IPO has ever gotten. And then when you see it trade up even further, I think you’re just speaking a lot to the fact that investors are looking for that growth and are willing to pay for it.
My read of the notes concerning interest in growth-oriented SaaS shares on both the public and private markets is that the expectation that software growth will continue to be impressive is widespread and deeply held. This is good news for SaaS founders today and in the future. The wallets of all sorts of investors are open and could stay that way.
But not all startups are enjoying the same good fortune; some are struggling. And what’s notable is that it’s not merely the sector in which a startup operates that is determining its fate. Of course startups that serve hotels are having a harder time than before. But when we drill down a bit more, we can find further nuance in which startups are doing well in 2020, versus having a hard time. Here’s a16z’s Ulevitch:
For companies that had a long sales cycle [or] field sales teams, [COVID-19] was really an adjustment to figure out: How do you reconnect with your customers? How do you sell to them? How do you demo to them? That took some time and so that slowed things down for some of them.
And then for the bottoms-up SaaS companies, that have more of a try-before-you-buy, much more of sort of an engagement and product-lead sales motion, and maybe they focus more on expansion after you’re already on board? They’ve seen great tailwinds, and that has continued in many cases accelerated. So I think it really depends on what you’re going-to-market motion is, and what kind of sales team you have in terms of whether they’re in the field, or whether they’re sort of post-implementation. And all those things have come together and really created sort of a barbell distribution in terms of how companies have done, but I think a lot of it’s coming back on on both sides of that barbell.
That’s fascinating, and a good guide to help founders not feel so bad if they are in the higher-touch sales world and are having a rotten year; don’t worry, it’s not just you!
On the same topic, D’Onofrio had useful notes on why upsells are becoming key for SaaS startups in 2020:
What you have seen is a reliance on upsell in a way that you haven’t historically, because as companies have been experimenting and been trying to figure out what the sales motion is for them to land net-new logos in this environment, you just have to rely on your existing customers to catalyze revenue growth for this interim period.
She went on to add that as a result of this, she’s seeing startups invest more into customer success functions. Good news for Nick Mehta, we presume.
But back to more cheery news, it appears that not every insane ARR multiple we hear about is worth making fun of. You’ve heard of the rounds where Startup X got a 45x ARR multiple and you just wanted to scream? Well, according to Ulevitch, maybe hold your breath:
I think a lot of these valuations, or the multiples being paid on these valuations, […] they’re coming off a small revenue base. So 50 times, you know, going from one million in ARR to three million in ARR is a lot different than paying fifty times for a company going from thirty million in ARR to ninety million in ARR. It’s much easier to go from one to three then you know thirty million to ninety million in growth. And so these deals are happening much earlier, and so the multiples are much higher, but it’s off of a much smaller level.
On the other hand, this makes some of the more exotic SaaS deals that we’ve read about in 2020 sound nearly more suspect. Certainly this ARR multiple was very high, but surely Notion’s revenue base wasn’t super-low?
Anyhoo, two more things. One, regarding sectors. From our panelists, sectors that are receiving good marks from VCs today include: Security, databases, automation, developer tooling, e-commerce, insurtech, fintech and vertical SaaS. But Ibrahim added, “I mean, you name it. Every sector is ripe right now.”
Our read of that list and the final comment is that aside from a couple of SaaS areas that are still COVID-depressed, it’s a generally great time to build software.
But not everywhere, right? Surely we’re seeing differentiation around the world? Ibrahim said it is “too early to tell” if we are seeing a better SaaS recovery in the U.S., Europe or Asia, and Ulevitch agreed:
I think Maha is right. It’s a little bit too early to tell in terms of performance. I do think that the aperture for hiring talent has changed dramatically.
So perhaps a more global SaaS market in general, even if we don’t have a good feel yet which continent is leading the recovery.
There’s more in the clip, which I will try to find for us and share in the coming days. Have a lovely weekend!
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