My Thoughts on Public vs Private Valuations for SaaS Companies in Q1 2022

Public Market Overview:

To say there was a shift in the growth sector this quarter is an understatement. The Nasdaq has been hovering near double-digit correction territory. The $QQQ, mainly cloud stocks, is down 9%. Cloud stocks led the repricing with an overall valuation median EV/NTM at 9.3x down from 15.62x only a few months ago. This volatility is driven by the uncertainty with the Russian-Ukraine conflict, rising inflation, and a hawkish fed policy.

                                                         Graphs provided by Litquidity and Clouded Judgement.

Private Market Overview:

There are two different ways I am thinking about how the private market is reacting to the public pullbacks. The two ways are what I am hearing vs. what I am seeing. What I am hearing anecdotally is that late-stage venture capital is sitting on the sidelines. Companies with high customer acquisition numbers that burn a ton of cash are correcting 60%-70% on price if they are getting term sheets. It has been reported that the cross-over funds such as Tiger Global and Alkeon are re-trading or pulling term sheets in the late stages.

The founders seem to be very confused about what to believe in the early stage. They have had peers raised 15-20x only a few short months ago, and they want the same valuation. What is worse is that their current investors are compounding this belief with their own buyer’s remorse.

There have been several times I have given offers to founders that their current boards try to jump in and convince me why the price should be higher. Instead, they deflect the market correction conversation stating they feel like valuations will hold because of the influx of capital in the markets. This seems to be more of prayer than an outlook. Many of these companies I tried to put offers out on that were rejected are now coming back looking to re-negotiate.