The value of software revenue may have finally stopped rising

The value of software revenue may have finally stopped rising

Due to a number of variables, companies are raising record amounts of money all around the world. To take one example, historically low-interest rates have aided venture capitalists in raising more funding than ever before, as The Exchange reported yesterday. Low-interest rates have also aided startups in another way: when yields on some assets decreased, investors sought higher returns by betting on growth. In recent years, the investing classes have focused on publicly traded software businesses, bidding up the value of their sales to new highs.

This increased the value of startups in general, and the value of private tech businesses’ revenues continued to rise steadily. Even if we were measuring the KPIs from the standpoint of public firms, if a dollar of SaaS sales was worth $1 one year and $2 the next, the repricing was excellent for private enterprises. The free ride may end.

After spending a little too much time on it in previous quarters, I have decided to take a vacation from discussing the value of software (mostly SaaS) sales for a few months. When VCs point out that you could easily change out figures quarter to quarter and write the same piece, it is time to take a break. Nevertheless, the value of software revenues has been on a tear, and I cannot say no to a graph.

The rate at which software revenues have risen in the previous several years has been incredible. In 2016, the typical revenue multiple for public SaaS businesses was roughly five x, according to the Bessemer Cloud Index. When the year started, the median SaaS multiple had raised to roughly seven x. That’s a 40% increase in price, but it turned out to be just a taste of what was to follow.

By the end of the year, the median value had risen to nearly 9x. It has now risen to a little about 18x. That is why software businesses have been able to gather so much money in such a short period and in such enormous amounts. In mid-2016, each dollar of recurring income they sold was worth $5 in market valuation. That same dollar of income was worth $9 by the end of 2019. It is now worth roughly $18 for the average public software business. The data has complexities, but we are more interested in the directional change it depicts than in the precise definitions: Between 2016 and 2021, the median value of SaaS sales more than quadrupled. That is a staggering amount of development.