So far this year, SaaS and enterprise software companies have raised $4.7 billion in seed- through growth-stage financing, per Crunchbase data. That puts 2024 on track to come in far below last year’s $17.4 billion annual tally — which was itself the lowest total in years.

For perspective, we charted out funding and deal counts from 2019 through 2024.

A tough week for enterprise software stocks

Startup funding declines come amid what is shaping up as a challenging period for publicly traded SaaS and enterprise software companies.

On Thursday, Salesforce 1 shares were down more than 20% after the company lowered guidance for the current quarter, citing cooling demand from customers who were taking more time to complete orders.

At the same time, shares of process automation software provider UiPath dropped by around 30% following a disappointing earnings report and downwardly revised quarterly forecast.

More broadly, it’s been a tough month for enterprise software. The Bessemer Cloud Index, which includes many of the most prominent public SaaS businesses, has sharply underperformed the Nasdaq and S&P 500 and is now in negative territory for 2024. The Bessemer index saw a particularly steep decline beginning in late May.

Some big startup rounds are still closing

Even amid a tougher fundraising environment, we are still seeing some large financings for SaaS and enterprise software this year.

The biggest by far is cloud security provider Wiz’s $1 billion Series E earlier this month, co-led by Andreessen Horowitz, Lightspeed Venture Partners and Thrive Capital. The round set a $12 billion valuation for the 4-year-old company, which was founded in Israel and is headquartered in New York.

Another large financing went to Silicon Valley-based Glean, which markets AI-powered work assistants to enterprise customers. The company raised $200 million in a February Series D.

In the food service market, meanwhile, Irvine, California-based Restaurant365 landed $175 million in an early May financing led by Iconiq Growth. The company sells software to restaurant operators for managing and optimizing finances and staffing.

Not like it used to be

While funding hasn’t evaporated, we’re seeing far fewer megadeals in SaaS and enterprise software than a few years ago.

Over the past 12 months, 21 deals of $100 million or more have closed, per Crunchbase data. By comparison, during the peak year for deal-making — 2021 — there were 147 such financings.

For 2024, year-over-year investment totals are also quite a bit lower due to a single large 2023 round: the $6.5 billion Series I for fintech unicorn Stripe. That’s the largest financing in the space ever, per Crunchbase data, and thus obviously a tough comp to match.

Going forward, we’ll be looking to public markets to see if earnings outlooks improve for SaaS heavyweights and if investors regain their enthusiasm for the space. In private markets, meanwhile, investment remains subdued, albeit with a steady flow of deals still getting done.

Related Crunchbase Pro query:

• US SaaS And Enterprise Software Startup Funding

Related reading:

• The State Of Saas: After A Positive Start To 2024, Founders Can Find Success In A Reset Market
• 3 Strategic Steps Toward SaaS Profitability 

Illustration: Li-Anne Dias

Over the past 25 years, two historic downturns stand out as possible comps. One is the financial crisis of 2008 and 2009. The other is the dot-com bubble, which popped in 2000 and 2001.

For tech investors wishing the current cycle would reverse, a repeat of the financial crisis doesn’t sound too bad. Tech stocks bottomed in early 2009, and by 2011, the tech-focused Nasdaq 100 index was back at its highest point in five years. After that, tech valuations went mostly straight up for the next 10 years. 

A replay of the dot-com bubble, on the other hand, looks more worrisome. After peaking in March 2000, it took the Nasdaq 15 years to get back to that level. 

Even the most enduring brands were slow to recover. Qualcomm stock took 20 years to get back to where it was in early 2000. It took Microsoft roughly 15 years. Cisco Systems has never retraced its bubble-era highs. 

As for the hot startups of the day, a large share have been relegated to the dustbins of history, alongside their sock puppet mascots, automated grocery delivery offerings, and next-gen fiber optic networks. 

Is this a downturn or a popped bubble?

Fast-forward a couple decades, and we see elements of history repeating. If we look at the past few quarters, much of what we’ve seen appears more reminiscent of the dot-com implosion than the financial crisis. Some of the key characteristics:

• Hot tech and tech-adjacent companies didn’t just go up incrementally. Many saw market caps increase several-fold over the course of just a year or two. Tesla, for instance, increased tenfold(!) between March 2020 and November 2021. Nvidia shares saw a sixfold increase over that time. Apple more than doubled. Google nearly tripled. And these were all already tremendously valuable companies before that.
• Companies debuting on the public markets were awarded bonkers valuations. Rivian, an electric carmaker with no mass-market product yet, went public at a valuation soon exceeding that of GM and Ford. Embark, a pre-revenue developer of self-driving truck technology, did a SPAC deal at a valuation over $5 billion before shutting down this year. Affirm, the buy now, pay later platform, debuted at 8x its current valuation … and the list goes on.
• Venture capital was on a historic binge. Global venture capital investment topped $643 billion at the peak in 2021, up 92% year over year. A whopping 586 new companies joined The Crunchbase Unicorn Board.

So when things went down, they had far to sink. If we’re in a popped bubble, that’s bad news for those hoping to just wait out a recovery. 

Not quite Bubble 2.0

Bubbliness aside, this isn’t shaping up as a replay of the dot-com bubble. 

Spiking asset prices weren’t only happening in tech. At the market peak in late 2021, companies in numerous sectors were way up, including asset managers, energy and real estate.

Another difference: Several of the biggest tech companies have avoided steep declines or even increased in value in recent quarters. Apple, for instance, is still pretty close to its record high, as is Microsoft. And Nvidia just broke its record high, after a stellar earnings report last week. 

So, history won’t repeat itself exactly. But when it comes to the long list of relatively solid companies in SaaS and other sectors that saw valuations skyrocket to unsustainable levels, it wouldn’t be surprising if recovery was a long, slow slog.

Illustration: Dom Guzman

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Kenvue’s shares traded at $26.90 each when the market closed on Thursday, a 22% jump from the company’s original asking price of $22, which was in the high end of the range. When it debuted, shares were trading at $25.60.

The company sold 172.8 million shares — an increase from the 151 million it planned on selling. Kenvue raised $3.8 billion from the offering and its valuation jumped from $48 billion at the start of trading to $50 billion when the market closed.

Back in 2021, Johnson & Johnson announced it would split its pharmaceutical brand from its consumer health division, marking one of the biggest changes to its 100-year history. Kenvue, the consumer health arm that owns a slew of household names like Tylenol, Band-Aid and Neutrogena, announced last week it would brave the icy public markets and go public. 

Johnson & Johnson is still a majority shareholder in Kenvue, representing a 90.9% stake in the company and owning 1.7 billion shares of common stock.

Sign of a bustling public market ahead?

Kenvue’s blockbuster debut may be a sign that the public markets are thawing. There was an unprecedented number of startups that went public in 2021, but the market chilled considerably in 2022. 

Last year, Getty Images raised $1.9 billion when it debuted back in July, while marketing platform System1 raised $518 million a few months earlier in January. They were part of a mere 91 startups that went public in 2022, per Crunchbase data. By comparison, over 400 startups debuted on the stock market in 2021 and 190 debuted in 2020.

In 2022, several companies scrapped or paused their IPO plans as the economic health of the U.S. became more uncertain, but it’s clear many are waiting for the right time to go public. Both fast-fashion retailer Shein and fintech platform Stripe are reportedly in talks to explore IPO options no later than 2024.  

Startups, after raising huge rounds at high valuations in 2021, are looking for ways to extend their runways. And the banking crisis that killed Silicon Valley Bank and rippled out is only causing more uncertainty for risky startups that don’t often meet banks’ loan requirements. 

Related Crunchbase Pro query:

• 2022 U.S. IPOs

Illustration: Dom Guzman

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Yesterday WeWork filed to go public, releasing an S-1 document and forcing every business publication in the world to scramble to figure out how its books work. Good luck.

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Now that the initial wave of posts are out (here my first, second, a third by Jason, and a podcast with Kate, in case you want more on the matter), I wanted to ask two questions of the company’s current situation. Here they are:

• Are WeWork’s gross margins high, or low, for its business category?
• What do public competitors say regarding WeWork’s implied value at IPO, given what we learned about its gross margins?

The latter question is something that we’ve written about together in the past, so we don’t have to explain it much. We’ll get to it shortly.

The first question might seem a bit odd, so let me explain what I’m aiming for. WeWork as a business likes to emphasize the parts of its business that aren’t the business parts. WeWork’s S-1 is peppered with stuff like “our mission is to elevate the world’s consciousness,” and “philosophically, we believe in bringing comfort and happiness to the workplace.”

Nice sentiments, certainly, but not the sort of thing that you can tot up in an accounting book. Or can you? WeWork also says in its S-1 that it is “committed to providing our members around the world with a better day at work for less.” That’s notable.

On the same theme, the company detailed on page 3 of its IPO filing how much cheaper it is to rent space at once of its facilities compared to building out office space yourself. I agree! But my curiosity then asked if WeWork is charging enough for space. The company certainly offers attractive offices. Does it price the square footage high enough to generate enough gross profit to pay for its business?

Not yet, certainly, but let’s explore the question through the lens of a competitor.

Gross Margins

WeWork has a public competitor, IWG, formerly known as Regus. Happily, as IWG is a public shop we have access to its financial performance.

In its most recent half-year, IWG reported revenue of £1.302 billion and gross profit of £196.3 million. That works out to a gross margin of just over 15 percent. The company also generated operating profit (£50.6 million) in the period and strong net results thanks to a divestiture.

The 15 percent result is useful. Yesterday, during our second look at the WeWork filing, we found that using a line item similar to cost of revenue, we were able to gist out that WeWork’s gross margins a little under 20 percent:

Now that we have a way to calculate gross profit from the company’s buildings, what do the results show us? Observe the following pairings of WeWork revenue, and same-period Location Operating Expenses:

• WeWork H1 2018 results: Revenue of $763.8 million, Location Operating Expenses of $636.0 million (83.3 percent of revenue consumed by location operating costs)
• WeWork H1 2019 results: Revenue of $1.54 billion, Location Operating Expenses of $1.23 billion (80.3 percent of revenue consumed by location operating costs)

As you can quickly sum, WeWork’s kinda gross margins work out to 16.7 percent and 19.7 percent for the two half-year periods that started 2018 and 2019. Bear in mind that these are directional numbers, not absolutes. What matters is that WeWork’s nigh-gross margins are close-ish to what IWG itself reports.

We know that our WeWork gross margin estimate is generous. Therefore, WeWork isn’t much more profitable on a gross margin basis than IWG. And since IWG is net profitable, I’d hazard that it will be difficult for WeWork to argue that its revenue is worth more than that of its rival due to fundamentals.

This tells us that when WeWork prices its IPO, it will have to lean on revenue growth, and not revenue quality, as its key valuation lever; the firm won’t be able to say yes we are growing more quickly than IWG, and we generate lots more margin per dollar of revenue.

And that makes the IWG-WeWork comp all the more pertinent. Now let’s pursue our second question.

Multiple This!

IWG reported £1.3 billion in H1 2019 revenue. WeWork reported $1.54 billion in the same time period. Convert IWG’s pounds to American dollars and you wind up with very similar sums. That’s useful for us.

Yahoo Finance pegs IWG’s market cap at $3.67 billion, giving the company about a 2.3x revenue multiple on its H1 2019 top line. Yahoo Finance itself notes that the company’s trailing price/sales multiple is a conservative 1.37x.

But let’s use our somewhat-neat H1 2019 IWG revenue multiple result as it uses the most recent financial grounding for each company. WeWork, at the same 2.3x multiple, is worth a hair over $3.5 billion. That’s about 7.4 percent of its last private market valuation of $47 billion.

Now, WeWork will not go public at that valuation. The firm’s growth rates of over 100 percent will afford it a higher price. However, IWG has profits to report while WeWork is incredibly unprofitable. How far WeWork will be able to extend its revenue multiple thanks to its growth (with scant help from its gross margins) is the big question in front of it.

We’ll know soon enough!

Illustration: Li-Anne Dias.