Software exit market is not dead, but valuations drop
By Daniel, March 11th, 2009If you, like me, are interested in what goes on in the software sector in terms of investments and M&A activity, an interesting source of information is Ridgecrest Partners, a technology investment bank in San Francisco. They release a newsletter on a regular basis tracking recent investments and acquisitions as well as public company data which provide good comperative data on valuation multiples and exit values. The focus is primarily US but also deals from the rest of the world are included.
Looking at their latest newsletter, one can see that there have been quite a bit of M&A-activity with 100+ transactions between December 2008 and February 2009. However, the exit values are in general low (or not even disclosed which oftens means small exits). Also, company exit values are in the range of 1-2 times revenue (usually referred to as P/S-multiple: price for the company versus either current or forecasted revenue) or even lower.
So, it’s quite clear that in general one cannot expect very high valuations for software companies in the near future.
Tags: M&A, Ridgecrest Partners, Software
March 16th, 2009 at 11:59 am
Most interesting post Daniel. It is truly an interesting time right now with the valuation of start-up software companies. One can wonder if it is even motivated for an entrepreneur to put his time in the software industry for the moment? To start up a software business and/or a VC funded software business it is a true challange today according to the essense of your post. If the goal is to make money with an exit… well is it worth the effort? If there is, there should be a very fast-time to business and probably be based on a business modell without any need for seed-capital at all. The software business shaping up!
March 16th, 2009 at 3:51 pm
I agree that the data doesn’t look very appetizing for software companies, but the situation is similar in many sectors at the moment.
IF you have the kind of business model that you describe, I think that it actually could be a good time to start a software company right now. Distribution is cheap, man-power will be cheaper or at least easier to get access to and Saas-models (Software as a Service) may even be more attractive since customers are shying away from capital investments.
Also, the companies that manage to build a solid and growing business during the recession may come out as winners (with more attractive valuations) in the early stages of an economic recovery. The problem is that we don’t know when this will happen so the important thing is to make sure that you don’t run out of cash before. And unless you can show that you have a very scalable business model in terms of sales and delivery, it will be very though to raise money.
April 8th, 2009 at 6:02 pm
Hello !!
My name is Piter Kokoniz. Just want to tell, that your blog is really cool
And want to ask you: is this blog your hobby?
Sorry for my bad english:)
Thank you!
Piter Kokoniz, from Latvia
April 9th, 2009 at 12:20 pm
Hi Piter,
I guess you could say that the blog is semi-hobby, semi-professional.
We felt a gap between VCs and entrepreneurs and was hoping that our blog could help shed some lights on our industry as well as providing insight and tips for entrepreneurs.