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American vs. European Valuation

What are some of the differences you see when you look at American versus European valuation?

This is a question we get a lot when speaking to European founders and entrepreneurs. Given how much valuation and pricing swings we’ve seen recently, the answer to this question is literally a million-dollar question. And as a French-American, this topic hits close to home.

I’ll start by prefacing that historically the gap between US and EU SaaS valuations has been significant, particularly in the public markets. Silverpeak recently published their Q4 2021 public SaaS report with median revenue multiples reaching 11.6x in the U.S. and only 5.1x in Europe.

Looking at SaaS valuations, there’s always been a public to private gap, which has increased significantly with COVID. At this point, I think we’ve seen that this public to private gap has started to come back down, which I think is a good thing and hopefully a sign of decreasing investor exuberance and prevailing rationalism in the markets (AGC Partners’ latest February 2022 report titled “The Big SaaS Correction: From 12x to 22x to 12x: SaaS Multiples Boomerang During COVID” says it all).

Surprisingly, what we’ve seen in the private markets is actually quite different.

While there has been an overall increase in private SaaS valuations, the gap between European and North American private valuations seems to have narrowed a bit.

I think this is a good sign because it shows increasing appetite by American investors for European assets and/or an increasing maturity and quality of European tech businesses.

The other thing that surprised me while looking at our data from conversations we’ve had with founders and dealmakers (both sellers and buyers) has been the broadening scope and interest in what we are defining as “European” companies. I’d say that traditionally, investors when considering European SaaS businesses would focus mainly on English-speaking or Western countries, and to some degree that still holds true today. But in addition, we’re seeing increasing interest for Nordic, Southern European, Central European, and in some cases even Eastern European software companies, with relatively high SaaS valuations to boot.

That should be good news for most CEOs who are contemplating either looking for funding or selling their business.

Is there anything that you found over the past couple of years working in this industry at Razorhorse that others might find unexpected or be surprised by?

I think the main thing is that there is this delusion where some people think that they’re entitled to sky-high valuations because everyone is excited and interested in tech, and will do so without much forethought or simply because they are American investors with too much money and too few options left to spend it on. I think those situations are truthfully few and far between. There’s a lot of tech appetite, there’s a lot of dry powder, but investors and software buyers have remained mostly rational, from my perspective. Ultimately, I think that’s a good thing. You don’t want unhinged valuations, it creates bubbles that ultimately destroy value, warp expectations, and disappoint stakeholders.

Are there other macro factors CEOs and investors should be aware of impacting valuations?

To no one’s surprise, outside of seemingly wave after wave of unprecedented geopolitical events, the biggest thing that we’re seeing from a capital markets standpoint right now is the U.S. Fed starting to raise interest rates. That’s a big deal because raising interest rates should be inversely correlated with the valuation of growth (/risky) assets, which many software companies are. That’s a significant trend because if you have a $10 million revenue business, and the average private SaaS revenue multiple slides from 8x to 5x, that can make a significant difference in deciding whether or not to sell the company, how much your business is worth, etc. despite no intrinsic change in the asset. That said, I think private SaaS companies are a bit more protected than public SaaS companies, given the smaller public to private multiple gap I mentioned earlier. Also, it’s still a bit too early to tell exactly how far the Fed will go, and how quickly, so everyone is still waiting to see how much of a correction or adjustment we’ll see.

Any wisdom you’d like to impart? Anything you’d like to add?

I think it is a great time to be having these kinds of conversations. Tech and software continues swooping across industries. In a sense, it’s still a seller’s market.  Though it’s certainly not easy work, it’s a happy time to be a software or SaaS entrepreneur or founder. I would encourage people to have conversations about a potential exit or fundraise, particularly if you’re a European software founder or leader.

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