Tightening the belt: rewarding revenue efficiency

A sell-off in public markets, starting in late 2021, was the first effect of the compounding set of factors that changed the macro environment. As these macro factors have compounded and driven further change in sentiment and capital reallocation, the sell-off has continued and does not, yet, show clear signs of having bottomed out. This sell-off has seen the median enterprise software multiple of enter– prise value to forward revenue decline from a peak of 10.9x to just 5.8x. High growth software compa– nies are valued on the basis of their forward-looking cashflow generation and investors are currently placing a higher discount on the future value of upcoming cashflows.

The shift away from the market’s long standing appetite for growth-at-all-costs towards a focus on growth efficiency is reflected in what is now correlating with premium multiples in the public mar– kets. The market is prepared to reward companies that are growing quickly and generating strong cashflows, as seen here by the multiple premium, at 8.8x, enjoyed by companies in the top quartile for revenue efficiency (defined in this case as unlevered free cash flow margin to revenue growth). At the point of publication, multiples on both a median and top quartile basis are trading below their 10-year historical average.