October 25, 2023
THE SAAS SECTOR ROLLERCOASTER
Translink SaaS Valuation Index launches
By Marc Irisson, Partner at Translink Corporate Finance in France and head of Translink’s TMT Group
The SaaS sector has experienced a rollercoaster ride of extreme highs followed by a period of uncertainty, driven by changing market conditions and investor expectations. Yet, it remains one of the most promising and dynamic sectors for M&A.
SaaS: The ups and downs
The exponential proliferation in SaaS was fuelled by a broader phenomenon: the cloud. The strong development of cloud infrastructure, and its vast adoption worldwide, meant companies were ever keener to switch from CAPEX to OPEX. SaaS software surfed the wave and benefited from this deep economic trend.
SaaS has revolutionised the way companies pay for software solutions, moving away from upfront payments and towards a subscription model with a monthly cost. SaaS vendors have successfully promoted this business model as the best solution for everyone, highlighting its flexibility to adjust to the right volume of users (up and down), ease of updating solutions, and ability to introduce new features. Consequently, SaaS has quickly become the norm in the software industry, with companies competing to develop their SaaS solutions or modernise their old on-premise solutions.
One of the biggest advantages of SaaS compared to older on-premise solutions is its remarkable scalability. This model offers recurring revenue through rapid growth, as everything is virtualised. As a result, mature businesses can become highly profitable, achieving +50% EBITDA margins. This “magic” formula has made SaaS one of the hottest sectors on the market, attracting significant investor interest.
The popularity of SaaS has also made it a major source of M&A activity, which reached new heights in 2021. In both the USA and Europe, the software industry and SaaS market accounted for approximately 14% and 10% of deal flow, respectively. This surge in activity coincided with record-high valuations, reflecting the strong demand for SaaS businesses.
In 2022, this completely changed.
2022: Bye bye free money
Global unrest catalysed a tumultuous worldwide financial market during 2022, causing the stock markets and private equity to take a big hit, which meant trouble for the SaaS sector. The surging interest rate spelled the end of ‘free money’ as investors turned from being growth-to-profit focused. This stopped many SaaS unicorns in their rapidly-scaling tracks.
Moving from a world where it was easy to raise equity and grow as fast as possible, to a world where you must prove you can generate cash flow isn’t an easy task. It requires a strong change in management, plus possible restructuring. We’re seeing this in global retrenchments right now, from many of the big players. Translink Corporate Finance can play a pivotal part in walking this journey with SaaS players.
There are still many challenges facing the SaaS sector, from talent retention to making it more sustainability-focused for the long-term. In this industry, there will always be new verticals and processes to digitise. SaaS is still a dynamic market, and there is continued appetite for SaaS businesses that demonstrate strong growth potential or a niche solution that can be easily integrated into a broader software system. At the end of H1 FY23, the deal flow in the SaaS market was already back to pre-pandemic level, showing good resilience.
2023 and the coming year: Finding opportunity
Translink Corporate Finance has a team of experts who can help entrepreneurs and larger companies adjust to shifting market conditions and optimise the best possible deal structure. Going forward, we can still expect to see robust M&A activity as incumbents accrue critical talent and competencies. In this environment, where valuations are back to pre-pandemic levels, Translink Corporate Finance is here to help organisations navigate this new world, devise a viable business plan to shape a new future, or make themselves attractive to the market to entice a strategic buyer to help sustain the business. Many opportunities will arise for solid SaaS businesses: learn more about the value of your SaaS company with the Translink SaaS Valuation Index.
Translink Corporate Finance is a global market leader in M&A in the smid cap segment. With deep expertise in the SaaS sector, we’ve helped many SaaS entrepreneurs across the globe fund their expansion, sell their business or acquire new ones. We developed the Translink SaaS Valuation Index to provide our clients and other SaaS entrepreneurs with a better targeted set of metrics, while most other indexes focus on upper mid-market and large cap B2B SaaS players.
The index consists of 136 SaaS companies listed in Europe, the USA and the rest of the world (RoW). Differentiated from other indexes, the Translink Saas Valuation Index provides an ideal benchmark for private small-to-medium-sized B2B SaaS companies in Europe, with 60% of the total sample of constituents matching this profile.