BACK

#025 The SaaSacre of 2022

Wed, 25 May 2022 07:00:35 GMT

Cornerstone Ventures

Since the beginning of December 2021, we have seen a massive correction in the valuations of listed technology companies across the globe, especially the SaaS companies.

Over the last 6 months, some of these SaaS companies have lost upto 75% of the market-cap in the on-going SaaSacre (a massacre of the SaaS companies), aptly coined term by Bessemer Venture Partners (BVP).

Both, our CGES Index and BVP’s EM Cloud Index are significantly down from the highs of September 2021. Even then, the CGES has outperformed all other indices, due to the fact that enterprise SaaS business are inherently more resilient to macro-economic factors compared to consumer SaaS businesses.

Why did this Saasacre happen and how is CGES Index still outperforming ?

Lets start from the basics - SaaS businesses are valued basis their future expected cashflow (which are highly predictable in nature). These forecasted cashflows are then discounted back to present value using a discounting rate (typically linked to government treasury rate) to arrive at the current valuation of the business.

This is represented via a simple metric - Revenue Multiple. SaaS companies are valued as a multiple of their one-year forward revenue. At its peak in the pandemic, the average Revenue Multiple for the SaaS companies went upto ~50x of the revenue. These lofty valuations assumed extremely aggressive growth momentum for the SaaS companies.

We all know, the pandemic did accelerate the adoption of SaaS products across the board and some very interesting use-cases emerged. But, this accelerated adoption would have not sustained for long, the growth was expected to normalize (pre-pandemic average) with time, maybe the market wasn’t just expecting it anytime soon !

In November, as economies started opening up and businesses reverted to pre-pandemic way of operating, the growth and outlook for these SaaS companies started reverting to the mean growth. To top this, the Fed started increasing the treasury rate to control the rising inflation - effectively increasing the discounting factor used in discounting future cashflow.

Thus, a normalizing growth, coupled with higher discounting led to sudden drop in valuations. Since Enterprise SaaS companies were comparatively valued at lower Revenue Multiple compared to Consumer SaaS, the reversion to mean had a lower impact on CGES Index compared to other indices.

Emergence of resilient SaaS

As an investor, we are extremely bullish on the SaaS businesses. Nothing has changed fundamentally - infact the SaaS story is more compelling than ever given the more reasonable valuations now.

While the global SaaS multiples had reached to ~40X - 50X, we had cautiously stayed away from investing in such highly valued companies where the super-normal growth was unsustainable. Even now, when the mean Revenue Multiples have corrected to 20X - 25X, we prefer investing at lower multiples to have a reasonable margin of safety while at the same time enjoy the double benefits of valuation growth due to revenue expansion and multiple expansion!

Given the global valuation benchmarks are reverting to long-term mean and the demand for the SaaS solutions is growing as expected, we are aggressively investing in enterprise SaaS businesses with a resilient business models, reasonable valuation and high potential for growth.

Post-pandemic, we have seen the emergence of more resilient SaaS models that are intelligently diversified with scalable pricing models and catering to businesses that are inherently more stable. We are building a structured portfolio of such enterprise SaaS companies that together make our portfolio even more resilient.

- Vatsal Bavishi

BACK

Disclaimer:

The data provided on this website (www.csvpfund.com) is for informational purpose only.

Any information provided on this website or any of the other digital assets owned & maintained by Cornerstone Venture Partners Fund, Mumbai, India (“CSVP”)and managed by the Investment Manager, Cornerstone Ventures Investment Advisers LLP, Mumbai India, does not constitute investment advice or investment recommendation nor does it constitute an offer to buy or sell or a solicitation of an offer to buy or sell shares or units in any of the investment funds or other financial instruments.

The Cornerstone Global Enterprise SaaS Index (“CGES Index”) ™ is a trademark of CSVP. The CGES Index is created & maintained using a proprietary algorithm and is to be used for informational purpose only. It is not to be construed as an investment advice or investment recommendation in any of the constituent companies / stocks that are directly or indirectly part of the Index. The Index is created using publicly available data published on the websites of the respective companies. All data presented is as per our internal research and analysis leveraging publicly available data and is being presented only for academic deliberation and discussion purposes and is not to be viewed as any specific commentary / recommendation / evaluation / conclusion on any of the companies / stocks that are directly or indirectly part of the CGES Index.

CSVP also analyses, maintains, and publishes certain financial and non-financial metrics (“SaaS Metrics”) on the Index at an aggregate level, and not at a specific company / stock level that constitute the CGES Index. These SaaS Metrics are provided purely for informational purpose and CSVP assumes no liability for accuracy, suitability, or completeness of the SaaS Metrics. The SaaS Metrics are created using publicly available third-party information and CSVP does not claim any ownership of the sourced data. CSVP is not responsible for the accuracy, suitability or completeness of the information originally disclosed by the owner of the information and any information provided herein. CSVP accepts no liability and offer no guarantee as to whether the information is up to date, correct or complete.

CSVP may have used third-party data, information, and content (including all text, data, graphics, and logos) on the website. CSVP assumes no ownership and intends no infringement of rights, titles, and claims (including copyright, brands, patents and other intellectual property or other rights) of the respective owners or authorized users of the respective content. Use of such content is from publicly available sources and for indicative and informational purpose only in good faith. All trademarks and registered trademarks are the properties of their respective owners. This website may contain references or links to other websites. References and links to third-party websites do not mean that CSVP adopts the content behind the reference or link as its own. When first setting up the link, CSVP will have checked the linked site for illicit content and found none at that time. However, CSVP have no influence over the current and future design or content of such linked sites and will accept no liability for such content or design. Any use of these websites is at your own risk. The obligation of CSVP to remove or block the use of information according to the general laws from the time of knowledge of a concrete violation of the law remains unaffected.

Krafted with

Krafted with