Written by Parabellum Investments
21 Jun
Rami Cassis has spoken out against the complicity of the enterprise tech ecosystem in the “collective delusion” of start-ups in the space and their VC backers valuing themselves on revenue multiples or, worse still, multiples of forecasted revenues.
He says the bubble of over-valuations in the sector – driven by VCs pumping excessive capital into start-ups and chasing unsustainable revenue growth – is starting to pop, prompted by a combination of the poor economic backdrop and recent bank failures.
His comments have been picked up in coverage by the Wall Street Journal. Read the article here.
Rami Cassis said: “The result is that valuations in the enterprise tech sectors are starting to go back to being based on cash-flow and EBITDA multiples – rather than multiples of revenues.
“For the last few years, in discussions with enterprise tech start-ups and VCs, you had this bizarre situation where they were valuing themselves on revenue multiples or, even worse, multiples on forecasted revenues.
“The whole tech ecosystem seemed complicit in this collective delusion, and it’s right that there is now a serious correction.”
He argues the shock collapse of SVB has served as a wakeup call and is accelerating the popping of the valuations bubble.
Many venture capital firms came into enterprise tech start-ups at very high valuations and have been under intense investor pressure to keep that valuation number climbing, creating a trend that is unsustainable.
Cassis continued: “I feel bad for many founders who are, in some cases, still trapped in this hype cycle. Their VC backers entered at a very high valuation, and they have been under severe investor pressure to keep that valuation number climbing.
“It is particularly difficult to keep valuations climbing in the enterprise tech software space, where it is operationally more difficult to scale a business than in the consumer tech sector.
“It is operationally more difficult principally because the sales cycle for an enterprise software business is longer and more complicated. You’re servicing a very difficult, demanding, and bureaucratic customer base, so it’s not just a case of throwing more cash at marketing or advertising.”
The current macroeconomic environment, a tightening in investment appetite, and more cautious consumer spending, especially in Europe, which is having knock-on effects on big enterprise’s software budgets, is making it even more difficult for these VC-backed start-ups.
Cassis predicts that we will now see many enterprise tech start-ups pivot away from VC to private equity and family offices that will return to a focus on sustainable operational profitability.
He said: “By setting a very high bar in terms of initial enterprise tech valuations, VCs set a trend that could not be sustained indefinitely.
“Many of these enterprise tech founders are now trying to pivot and move away from headline revenue growth to profitability, but their hands are still tied by the VCs who are holding out for an IPO.
“These founders are looking for options. I think private equity and family offices will start to receive knocks on their front door shortly, with founders asking whether it’s possible to structure a deal that buys out their VC backers. That’s already starting to happen.”
