Software Index

State of the Market

2023 proved to be a banner year in the stock market, with the NASDAQ surging more than 43% and the S&P 500 rising more than 24%. The NASDAQ 100, led by the magnificent seven, experienced a remarkable increase of over 55%. The Scalar Software Index’s top 10 median next-twelve-month (“NTM”) revenue multiple rose 2.7% month-over-month to 15.4X.

The Bureau of Labor Statistics reported a 3.4% increase in the consumer price index (“CPI”) for the 12 months ending in December, while total non-farm payroll increased by 216,000, with the unemployment rate remaining unchanged at 3.7%. The 10-year treasury rate ended 2023 below 4%, and the average 30-year mortgage rate fell below 7% by the year's end.

According to Pitchbook, U.S. venture firms invested more than $170B in private companies in 2023, marking a decrease of ~29%, and U.S. venture firms raised $67B in 2023, a ~60% decrease from the previous year.

Looking ahead to 2024, we anticipate three distinct outcomes unfolding in the private markets. First, later-stage companies, experiencing nominal revenue growth and having last raised capital in late 2020 and 2021, are inevitably poised for recapitalization through downrounds or the initiation of an M&A process. In cases where M&A is pursued, many final sale prices will fall below liquidation preferences, leaving common shareholders with no value in transactions lacking a management carveout.

Second, for later stage companies with good to great revenue growth, we will see a bell curve of outcomes, with the most likely being reductions from the post-money valuations seen during the zero interest rate policy (“ZIRP”) era. Despite the infusion of fresh capital, the repercussions of these funding rounds will pose additional challenges to the venture ecosystem, extending timelines to achieve liquidity (through sale, merger, or IPO) by three to five years. This extension is anticipated to impact the recycling of venture capital and influence the returns reported by venture funds.

Third, for early-stage companies, newly formed start-ups, or growth companies that avoided inflated valuations, their capital structures offer investors and management teams greater flexibility to operate without the unintended consequences of ZIRP. These companies are seen as more favorable investments due to the absence of liquidation overhang, thereby eliminating the need for additional negotiations with private company boards of directors to secure new funding rounds.