Valuation pressure on software startups is easing

Are you tired of bad news for startups? Bored of the layoffs, budget cuts, and sermons from folks who suddenly discovered the efficiency gospel?

Well, how about some good news? I have some for you: Software valuations staged a modest comeback this year.

When we refer to startups, we generally mean tech-focused upstart companies. Sure, there are restaurant chain startups and, I suppose, ceramics startups and all sorts of quickly growing businesses out there. But startups with a capital S mean little tech companies hoping to grow quickly, often powered by venture capital dollars. And that means, in practice, software companies.

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So if software valuations are recovering this year, we can infer that startups, in general, are seeing some valuation pressure roll off their back. Given that we expect that a host of startups — both early- and late-stage — need to raise capital this year, any positive movement in valuation terms is more than welcome; it could smooth the path to more capital for many companies at prices that are less miserable.

Are we seeing a massive improvement in the value of software revenues? No. But given how far valuation multiples have fallen, even a 1x gain is material. Let’s explore.

Up, up, down, down, up

It took less time to deflate the startup valuations spike that we saw through late 2021 than it took to fill it. By mid-2022, it was clear that upstart tech companies were operating in a different environment and that prior prices for their equity were no longer going to wash.