“The median forward multiple for SaaS companies has fallen from about 16x forward revenues to roughly 6x today,” Battery general partner Dharmesh Thakker told us.
Multiples haven’t only shrunk, but they have also range-compressed, with fewer rewards for the fastest-growing companies compared to slower-growing ones. There are many factors at play, but the gist of it is that profitability seems to matter again to the markets.
As a result of that, we’re seeing the revenge of some old rules. “Adjusted for growth,” Thakker said, “companies today that show efficient growth as implied by the Rule of 40 (i.e., companies with a growth rate + free cash flow margin greater than or equal to 40) are trading at a premium to those that are growing without regard to profitability.”
Note that it’s not either growth or profitability: It has to be both, and the bar to please investors seems to be getting higher and higher.