Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
This week shares of SaaS and cloud companies reached new record highs as investors bid their equities higher following an earnings cycle that came in better than some expected.
SaaS stocks, as measured by the Bessemer-Nasdaq cloud index, closed at a 1,484.93 yesterday, a record, and just a hair under its intraday high of 1,491.59.
The raw numbers matter less than the index’s movement. From highs of around 1,400 in March, the index dropped to 892.60 during the early-year market selloff. Since then, SaaS and cloud companies have come roaring back. This is reflected in the new, higher valuation multiple that the companies are priced at by investors today, namley an enterprise value/revenue multiple of 14.7x.
So let’s take a look at why the SaaS cohort is the apple of Wall Street’s eye. There isn’t a single reason, but we have two that are worth considering. (Also up ahead: Notes on a chat with Alteryx’s CEO and a working definition of socialism. It’s Friday, let’s have some fun.)
Briefly, we observe movements in the value of public SaaS and cloud stocks because they inform private market investors about possible exit values for startups. This helps VCs price venture rounds. So, in a somewhat slow mechanism, public values of a stocks help price startups. Given the portion of venture capital dollars and the amount of startup effort that goes into the SaaS space (AI companies are often built using SaaS models, lots of consumer apps are SaaS, and business software is lucrative), we care a lot about the value of SaaS and cloud stocks.
So is the run-up in SaaS stocks, therefore, good for startups? Yep. Now let’s get into why clouds shares are going up.