Software M&A Trends in 2022
News, insights and updates from the team at Bloom Equity Partners
Founders, Operators, and Investors! Happy Friday!
This week, we’re sharing some insights into what metrics SaaS investors are focusing on in 2022. With shifting market dynamics and a lot of economic uncertainty ahead, this is a great read for software founders and capital allocators.
2 metrics that software investors are looking for in 2022
This year has been wild ride for both public and private markets. With rising interest rates and 40-year high inflation, the uncertainty surrounding valuations is at an all-time high. This has forced investors to change their priorities and focus in order to adapt to the market conditions.
The Software Equity Group, recently conducted a survey with the top PE software investors, and here are the 2 metrics that they are focusing on this year:
Gross profit margin
28% of investors ranked this as their top quantitative metric for evaluating software companies.
It’s one of the top efficiency metrics that investors look for and it’s a demonstration of healthy operational practices and proper unit economics.
During recessionary times it’s important for teams to focus on their highest gross margin products and pour resources into bringing revenue to these products.
We see average gross margins of 75-85% as the benchmark and recommend aiming for a gross margin of 85% or higher. A gross margin below 70% could indicate your software implementations are too complex, time-consuming or costly or your customer support processes may not be as efficient as they should be.
Gross Revenue Retention
31% of investors ranked this as their top quantitative metric for evaluating software companies.
Gross retention and net retention are both important metrics but a strong sales team can make up for poor retention.
SaaS companies should aim for a 90% or greater gross retention.
In an uncertain environment, if an investor is buying an asset for future revenue growth, they’re less sure that growth will materialize. They do know if the company has strong retention and is integral to the daily operations of their customers, those customers likely aren’t going anywhere. This creates a baseline for growth.
Fellow SaaS investors, a question for you: What metrics do you focus on during recessionary times?
What We’re Reading and Listening To…
📚 Working Capital Series: Introduction
📚 Software Market Insights: Navigating Economic Uncertainty
Favorites from the Ecosystem
Investors👇…..
Founders👇…..
Operators👇….
News from the Industry: deals, deals, and more deals 💰
Roper Technologies to buy Frontline Education in $3.7 bln deal
Light Street Capital to vote against Zendesk's $10.2 bln go-private deal
Thoma Bravo targeting $729m Nearmap acquisition
End Note 🔚
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About Bloom Equity Partners
Bloom Equity Partners is a lower mid-market software-focused private equity firm, leveraging deep operational and commercial experience to create enduring market value for the benefit of our investors, founders, and their companies.