Preliminary 2022 private company SaaS survey results

Valuations of private Software as a Service (SaaS) companies have been slow to mimic the precipitous decline of stock prices for publicly traded software companies that started in late 2021. A Pitchbook report published in June noted that, while shares of fast-growing software companies had dropped by 60% from their 12-month highs, the median valuation of late-stage software companies had declined 23%.

Conducted in June, July and August, the 13^th annual KeyBanc Capital Markets Private SaaS Survey offers a glimpse at what’s behind that apparent resilience. At the KeyBanc Capital Markets (KBCM) Technology Leadership Forum in August, KeyBanc Capital Markets’ Managing Director Scott Peterson provided attendees with a preview of the survey results.

The results comprise data from over 100 private SaaS companies from across the globe. For this latest survey, KCBM adjusted the sampling pool to focus on larger companies. Forty companies in the survey had annual recurring revenue (ARR) above $25 million. Meanwhile, just over 10% of respondents had less than $5 million in revenue, compared to over 40% of respondents last year.

“Responses from larger companies are more indicative of the overall trends in the sector,” explained Peterson, “The median ARR this year is 40% higher than it was last year, this data is more indicative of mature SaaS companies.” 

Staying the course – so far

The projected growth rate of 27% across all companies participating was unchanged from last year’s study, despite the increase in the size of responding companies. Growth was highest among infrastructure management and vertical applications, also consistent with the 2021 survey. Companies with between $5 million and $10 million in ARR and companies with over $100 million in ARR projected the highest rates of growth. Peterson attributed this to aspirations to go public by the larger companies and the ability of the smaller ones to add new logos and grow quickly.

Overall, new logo bookings were the largest contributor of growth. Still, the survey revealed an uptick in expected growth attributable to upsell and expansion bookings. Larger companies rely more heavily on upselling and expansion within their customer base.

“What I find interesting is there's not a big change between this year and last year in what businesses are seeing, what they saw, what they’re expecting,” said Peterson. “We received survey responses in June, July and August, so even taking into account the market reset we've seen, companies are just as bullish about growth this year as they were last year.”

In another sign of optimism about the future, half of the respondents said they are planning to go public, a much higher percentage than a year ago. This is consistent with the conversations KBCM bankers have had with stakeholders. There’s modest apprehension about the back half of the year, but so far people aren’t yet seeing an economic impact inside their portfolio. 

Analysts are not quite so optimistic

While sentiment among private SaaS company stakeholders still optimistic, there’s no question that the days of 20x multiples¹  are over, and analysts have continued to tighten their metrics as the downturn in the public markets has dragged on. The survey results provided a snapshot of corporate sentiment and metrics as they stood in the summer of 2022, but economic turbulence can take time to work its way into financial statistics. That’s especially true for valuations of private companies, which are often based on figures and reports that may be months old.

Indeed, the session began with discussing the current valuation landscape with Jason Celino, Director, Equity Research Analyst at KBCM. Celino noted that, in the few months since the survey was conducted, forward multiples have pulled back to 6x levels, in line with the 10-year average pre-pandemic.

“Investors have been stress-testing their forward models for recession scenarios," said Celino. "Companies with a combined growth rate and profit exceeding 40% and those that can at least maintain margin leverage in a downturn have relatively outperformed. High growth companies with worsening margin profiles have obviously underperformed.”

On the private side, Celino noted that he and his team begin to engage with companies earlier in their lifecycle. Once they are on a public path, he looks at four main metrics:

• ARR growth in the 20% - 40% range
• the composition of growth
• net retention and gross retention
• profitability
   

Celino and his team use these metrics and other data points to model out several years of financial performance. Their assumptions have changed as investor expectations and the tech sector outlook has darkened over the past ten months.

“If a company that wants to go public can approach breakeven in year three of the model, I think public investors can get comfortable with that,” Celino explained. “If we stepped back six months or a year, we would be looking for that break-even point at year four or five, so that bar has gotten higher.”

He also anticipates that the size of companies going public will come back down to earth after ballooning over the past couple of years.

“When I started in 2014, it was not uncommon for a company to go public at $100 million revenue,” said Celino. “As valuations come down, I think companies will start to revert to going out at a smaller revenue run rate.”

Usage vs. subscription models  

One pandemic-era trend Celino expects to make a comeback is the investor preference for companies employing the usage model, where the client only pays for what they consume, over those relying on a subscription model.

“In vertical software, for example, you can sell the license, but if you can double or triple your Total Addressable Market (TAM) by incorporating some sort of usage, that’s ideal,” said Celino. “It’s quite efficient to upsell something that you’re already selling into.”

Smaller companies, especially, may start to employ a usage model as a way to have a more attractive entry point within enterprise and mid-market so that they can begin to build their footprint inside these organizations.

Conclusion: Valuations settle as the funding frenzy fades

While double-digit drops in private SaaS company valuations are unwelcome, the optimistic survey results paint a picture of a system that’s not broken, just cooling down. During the session, one audience member posited that current valuation levels are where SaaS companies likely would have been had the pandemic never occurred. On that note, Celino echoed some of the upbeat sentiment displayed by the survey respondents.

“The companies that test the waters of going public should be the cream of the crop, and it seems like there’s a lot of good companies out there,” Celino said. “We’ll just have to see how the market performs.”

To discuss the future plans of your company, or to learn more about the annual SaaS survey, contact your KeyBanc Capital Markets investment banker.

To learn more about attending one of our conferences, email the Corporate Access team.

About the 2022 Technology Leadership Forum

The 2022 Technology Leadership Forum attendees included 170 institutional investors, 124 private equity/venture capital and corporate development investors, 72 public companies and 82 private companies. The agenda included 56 Fireside Chats/Presentations, 11 thematic panels, 8 industry specific spotlight sessions, 3 banking workshops/industry deep-dives and 5 Keynotes.