The good news for startups is that growth premiums are coming back
How are software companies performing today? It’s going to be a busy earnings week, so we’ll have a lot of Q3 data to pore over to find out very soon, but it appears public-market investors have already made their minds up.
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Investors have sold off cloud stocks to the point that they are in bear-market territory when compared to 2023 peaks. As a result, the value of software revenue is now in the pits, which has led revenue multiples to reverse from where they were earlier this year.
Still, the news is not all bad. New data indicates that startups are winning back their growth premiums with a vengeance. Late-stage startups that traded growth for cash may find it hard to accrete value, but early-stage startups that are growing quickly may have something to point to when they go out to raise money and ask for a better valuation.
From a correction to a bear market
The Exchange tracks the value of the Bessemer Cloud Index ($WCLD), carefully because it’s a useful barometer for the cloud software industry in general. The index peaked at 34.93 this year before falling to just 26.93 today — that’s a nearly 23% drop.
A price swing of that scale is quite large. To earn the moniker “correction,” an index needs to post a 10% decline from recent highs. At 20%, you enter bear-market territory, and that’s where SaaS companies find themselves today.
