Software Index

State of the Market

The NASDAQ increased by 8.9% in November, and the Scalar Software Index's median next-twelve-month (“NTM”) revenue multiple improved to 5.4X, marking a notable 6.2% month-over-month increase. The top 10 companies in the Scalar Software Index experienced a substantial surge, with their NTM median multiple soaring by 26.7% to 14.9X.

According to the Bureau of Labor Statistics, the total nonfarm payroll increased by 190,000, resulting in a slight dip in the national unemployment rate to 3.7%. Additionally, the Consumer Price Index (“CPI”) inched up by 0.1%, with a year-over-year increase of 3.1%.

Following the recent Federal Open Market Committee (FOMC) meeting, the board members have adopted a dovish stance in their public statements. Despite the Federal Reserve's decision to maintain the Federal Funds Rate, the rhetoric from its members has triggered a decrease in the 10-year treasury rate from 4.67% to 4.22%. Moreover, this move in the 10-year treasury has resulted in the 30-year fixed mortgage rate dropping to 7.22% as of November 30, 2023.

In a surprising turn of events, Openview Venture Partners announced a cessation of new investments and laid off a significant portion of its workforce. This move has raised speculation about the fate of other venture capital funds, given that many invested heavily at peak valuations in 2020 and 2021. With public equity market multiples returning closer to their historical averages over the past decade (excluding 2020 and 2021), the equity valuation of numerous private companies now fails to surpass their liquidation value. Consequently, these companies face the challenging prospects of raising funds at reduced valuations, selling below their liquidation preferences, or even considering the possibility of winding down operations. The reverberations of these outcomes will directly impact some venture funds, potentially hampering their ability to generate returns for their limited partners and raise subsequent funds.

Amidst the dovish sentiment from the Federal Reserve and market anticipation of multiple rate cuts in 2024, we believe that the Scalar Software Index median NTM revenue multiple could experience an accelerated upward trajectory through December. However, this optimism remains tempered by ongoing global conflicts and persistent macroeconomic headwinds. Our outlook remains cautious, with the belief that accessing private funding will prove challenging, prompting investors in both public and private equities to adhere to a 'flight to quality' investment strategy.