Startup Valuations in the Time of the Everything Bubble

Last week I was talking to a prominent investor and I asked about the current state of the investment climate. He said that startups a year ago raising money at 30-50x revenue were off limits to his firm and today they’re commonplace. Hearing this, it made me think of Fabrice Grinda’s excellent Welcome to the Everything Bubble.

Ten years ago, a hot, fast growing SaaS company would get a 6-8x run-rate valuation (see ExactTarget at IPO in 2012). Then, in the last 4-6 years, hot, fast growing SaaS companies moved to a 10-12x run-rate valuation (see Zoom raising $100M at a $1B valuation in 2017). Now, there are dozens of public SaaS companies trading north of 20x run-rate and plenty trading north of 30x run-rate (see BVP Cloud Index). What gives?

The main factors:

  • Market Size – The total addressable market for SaaS is much larger now, providing more confidence that startups can grow to a scale even bigger than previously anticipated.
  • Digital Transformation – COVID has accelerated the adoption of many SaaS products as companies have been forced to work in a distributed fashion, driving up growth rates.
  • Interest Rates – With the Fed interest rate effectively at 0%, the bar for a quality rate of return has been dramatically lowered, making investors willing to pay a higher price to achieve the same outcome.
  • Money Supply – With so many stimulus dollars flooding the system, and not a corresponding drop in overall incomes, the money (Read more...)