The Value of Software Revenue may have Finally Stopped Rising

Due to a number of variables, startups are raising record amounts of money all over 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 aided companies in another way: Investors chased gains by banking on growth as yields for some assets plummeted. 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 companies’ 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 be coming to an end.

After spending a little too much time on it in previous quarters, I 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 post, it’s time to take a break. But the value of software revenues has been on a tear, and I can’t say no to a graph. The rate at which software revenues have risen in the previous few years has been incredible. In 2016, the median revenue multiple for public SaaS companies was roughly 5x, according to the Bessemer Cloud Index. When the year started, the median SaaS multiple had raised to roughly 7 xs.

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 figure had risen to nearly 9 xs. It has now raised too little under 18 xs. That is why software businesses have been able to gather so much money in such a short period of time 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 at the end of 2019. It’s now worth roughly $18 for the average public software company.

The data has complexities, but we’re more interested in the directional change it depicts than in the precise definitions: Between 2016 and 2021, the median value of SaaS revenues more than tripled. That’s a staggering amount of development.