Novice Investor #15 - Tech Repricing, Scaling to the US and Jewellery NFTs
Happy April All!
Winter and wintery spring are officially over and the ever-lengthening days are bringing a smile to my face. March was a fun month. I managed to a get trip back to Ireland and even visited an English Vineyard, which I did not know existed until last week.
March was also a good month for face-to-face networking. At Kennet, we hosted Kennet’s Scaling Companies Internationally Breakfast Event. Check out the highlights below. I also attended The Up Group’s London Board and Investor Dinner and the IRL Tech Drinks, which is a new recurring informal meet up for CEOs and investors that I highly recommend checking out. Sign up here if you are interested in coming to the next one.
Tech Repricing
I am sure most of you have noticed the substantial repricing of public tech companies in the past 6 months. Companies like Shopify have dropped by over 50% in value (called it last June 😎). To gather some insights, I did some back of the envelope, not very intellectual, analysis of the companies in the BVP Emerging Cloud Index. This index is a good peer group of SaaS and Cloud companies. In the past 6 months, the Mean Total Enterprise Value / LTM Revenue (‘TEV/LTM Revenue’) multiple has contracted by 29% from 21.2x to 15.0x.
Looking at the underlying performance of the companies over the same period, the operational statistics have not changed significantly. It seems the repricing is driven by the market and future estimates, as opposed to poor operational performance by tech companies.
This repricing has started to make its way into private markets. With a considerably less attractive IPO market, later stage crazy ARR multiples (50x plus) will become less frequent. Rumours are circulating that large funds are moving away from pre-IPO deals. This repricing is trickling down into earlier stage deals, contracting valuation multiples. However, will all tech company’s ARR multiples contract equally?
Probably not. At least in the public markets, the largest multiple contractions have occurred in companies that were growing the fastest. TEV/LTM Revenue multiples contracted by 37% for companies growing at over 60%, while companies growing at below 20% only suffered a 7% contraction on multiplies. It is clear that the growth premium has been reduced.
The other factor that has an impact on multiple contractions is EBITDA margins. Companies with positive EBITDA margins experienced multiple contractions of 21% vs 30% for companies with negative EBITDA margins.
Finally, by classifying companies by their valuation category in September 2021, we can see that those valued at below 10x, suffered the least severe multiple contractions compared to companies valued at over 10x. While the higher end of the market shows mixed contraction levels, these valuation categories were significantly more impacted than < 10x valuation companies.
With the growth premium taking a significant hit and negative EBITDA margins being further penalised, “Growth-at-any-Cost” might not be the best company building strategy over the medium term. If you are interested in capital-efficient and sustainable growth, it just so happens Kennet Partners has been helping companies with this strategy for the past 20 years!
Kennet’s Scaling SaaS Internationally | Breakfast Event
As mentioned, we held a breakfast prospecting event during the month of March. Jeremy Roche and Natalia Panowics joined us for a fireside chat on scaling B2B software companies into the US. I managed to record some of the highlights below:
I am aiming to schedule another event in May/June. Reach out if you want to be on the invite list.
My NFT Project
I set out at the start of the year with the goal of releasing an NFT by March 31st. I am happy to report, I have achieved that goal. I feel like I have definitely stretched myself a bit too far on the side project side this quarter, but in hindsight, it was worth it. I have learned a tonne about the NFT space, developed some hard skills and really enjoyed spending plenty of time on a hobby.
During the quarter, I came across a lot of sketchy NFT projects that sold basic jpg images and promised the world in terms of future, not so tangible, benefits. I decided to steer clear of this strategy and release my digital jewellery NFT as a wearable on Decentraland, with zero lofty promises. People who purchase the NFT can actually wear it on their avatars in the metaverse on day one. Plus, they get a physical piece of jewellery with the purchase. Here’s my Decentraland Avatar rocking the Metaverse’s latest digital jewellery.
You can find the NFTs on the Decentraland marketplace here.
Books
Why We Sleep - Matthew Walker
I find books like this a little bit funny. From a simplistic point of view, looking at the title, you can probably guess that the key learning is that you should sleep more. Well, you are perfectly correct. So why bother reading it when you already know sleep is important?
I guess spending 10 hours learning about sleep does create more motivation to change habits, at least in the short-medium term. Generally, if you are interested in biology and neuroscience, it is a really interesting and enjoyable cover. The other not so obvious points I picked up were as followed:
As you get older, you still need 8 hours of sleep, you are just biologically worse at getting sleep.
If you are not a morning person, don’t try to be one. You are fighting an uphill battle against your natural circadian rhythm. Instead, you should get your additional productivity done in the evening.
Our performance at just about everything collapses when sleep deprived. This unfortunately includes our ability to tell whether or not we are sleep deprived (perhaps it is worth tracking).
Naps are great (before 3pm) and sleeping pills are bad.
I have been positively motivated to focus more on sleep. I invested in a few items to make it easier and even pushed my wake-up time by 45 minutes to have a more consistent wake-up approach across weekdays and weekends. Overall it was a great read, but probably contains everything you already know.
Kennet Partner’s Investment Target
Kennet Partners is a Growth Equity investor with over 20 years of experience partnering with European and US SaaS companies. If you know any companies which fit our criteria, please reach out.
Investment size: $8m - $30m
Maturity: Over $3m in ARR
Growth: > 30%
Type: Bootstrapped and capital-efficient B2B SaaS businesses
Geography: Europe & US
Disclaimer: None of the content in the Newsletter should be taken as financial advice.