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Ready? Let’s talk about money, startups and hot IPO rumors.
Despite some recent market volatility, the valuations software companies have generally received over the past few quarters have been impressive. On Friday we took a look at why this is the case and where the reviews might be a little more bubbly than others. According to a report written by a few Battery Ventures investors, it stands to reason that in the middle of the SaaS market, valuation inflation is peaking.
Here are some things to keep in mind if your startup’s growth rate is lower. But today, instead of being a huge bummer and worrying you, I’ve rounded up some historically notable data to show you how well modern software startups and their bigger brothers are doing today.
If you are not 100% enthusiastic about tables, let me save you time. At the top right we see that SaaS companies that are growing less than 10% per year today will average 6.9 times their revenue over the next 12 months.
In 2011, SaaS companies that grew 40% or more traded 6.0 times their sales over the next 12 months. Climate change, but for software reviews.
One more note from my chat with Battery. His investor Brandon Gleklen spoke to The Exchange about the definition of ARR and its nuances in the modern market. As more SaaS companies swap traditional software-as-a-service pricing for its usage-based equivalent, he declined to argue about the definitions of ARR, arguing instead that software revenue is all about whether they are maintained over a longer period of time and grow term. This brings us to our next topic.
Consumption v. SaaS pricing
I have received a number of profit calls from public software companies over the past few weeks. One topic that keeps popping up is consumption pricing versus traditional SaaS pricing. There is some data to show that consumer-priced software companies are trading at a higher multiple than traditional-priced software companies thanks to above-average retention rates.
But there is more to the story than that. In speaking with Joshua Bixby, CEO of Fastly, following his company’s earnings report, we discovered an interesting and important market distinction between a more attractive and a possibly less attractive consumption. Per Bixby, Fastly sees that larger customers prefer usage-based pricing because they can afford variability and prefer to tie their bills more closely to sales. However, smaller customers, Bixby says, prefer SaaS billing because it has solid predictability.
I took the argument to Open View partner Kyle Poyar, a Venture citizen who has been writing for TechCrunch on the subject for the past few weeks. He noted that in some cases, the opposite may be the case, that variable-priced offerings may appeal to smaller businesses, as their developers can often test the product without much commitment.
We may see that the software market prefers SaaS pricing for smaller customers when they are sure of their needs, and consumer pricing when they want to experiment first. And larger companies also tend to consumer prices when their spending is tied to equivalent changes in sales.
The evolution of SaaS prices will be slow and never complete. But people really think about it. Appian CEO Matt Calkins has a general pricing thesis that the price should “hover” below the delivered value. When asked about consumption versus SaaS, he was a bit shy, but found that he was not “entirely satisfied” with today’s pricing. He wants pricing that is a “better indicator of customer benefit” even though he refused to share much more.
If you don’t think about that conversation and run a startup, what’s wrong with it? More information on this will follow, including notes from an interview with the CEO of BigCommerce, who is betting on SaaS over the more consumer-centric Shopify.
Next Insurance and its changing market
Next Insurance bought another company this week. This time it was AP Intego that will enable integration with various payroll providers for the digital-first SMB insurer. Next Insurance should be familiar as TechCrunch has written about its growth a few times. The company doubled its premium rate to $ 200 million in 2020.
The AP Intego deal earns Next Insurance an active premium of $ 185.1 million, which means the new insurer has grown strongly so far in 2021, even without taking its organic expansion into account. But while the Next Insurance Deal and the upcoming Hippo SPAC are decent notes from a hot private sector, Insurtech has given up some of its heat in the public market.
Shares in public new insurance companies like Root, Lemonade and MetroMile have depreciated significantly in the past few weeks. The exit landscape for companies like Next and Hippo – still private insurtech startups with a lot of capital for their rapid premium growth – is deteriorating.
Hippo decided it would debut via a SPAC. However, I doubt Next Insurance will seek a quick ramp in the public markets until things settle down. Not that it has to be publicized quickly; A quarter of a billion were collected in September last year.
Miscellaneous and miscellaneous
What else? Sisense, a $ 100 million ARR club member, hired a new CFO. So we expect them to go public in the next four or five quarters.
And the following table, created through Lux Capital’s Deena Shakir, Nasdaq, and SPAC Alpha: