PVC SaaS Index™ | Q1/25 – Market Uncertainty

A Practical Summary:

• The PVC SaaS Index™ now trades at just 5.7X EV / LTM revenue, well below historical multiples. The relative underperformance of SaaS vs. software reached 10-year lows at the end of 2024.
• The “Liberation Day” tariff announcements brought on 3 days of market chaos. Equity prices, the US dollar, crypto markets, and corporate spreads all traded off sharply.
• Since early February, our equal-weighted PVC SaaS Index has dropped by 31%. The Index has made no progress since Feb 2020.
• Several companies pulled their IPO roadshows this month (Klarna, StubHub) and M&A activity has remained muted.
• Secondaries are becoming a permanent part of the exit landscape.

This post is an update in a quarterly series of posts that tracks the PVC SaaS Index™, a basket of publicly traded US-listed SaaS companies.

Software as a Service (“SaaS”) has been around longer than the cool new cloud. Although the SaaS category shares some aspects of cloud computing, its focus tends to be clearer: SaaS is the delivery of software applications over the Internet from a server hosted by the SaaS provider somewhere far away.

The first big SaaS IPO was Salesforce (NASDAQ: CRM) in 2004. Almost 20 years later, we have 93 pure-play SaaS/cloud companies in our proprietary PVC SaaS Index™. These companies all trade on the NASDAQ or the NYSE. They derive most of their recognized revenues from long-term contractual commitments (12 months or greater) and recognize those revenues periodically over the life of those contracts.

In this index, we have removed several SaaS companies that have gone below $500M market cap, essentially becoming broken IPOs or “zombies” in the public markets, with low liquidity, high volatility, and uncertain public company prospects. Those companies are Aspen, OneSpan, Agora, Presto, Domo, Expensify, Everbridge, Smartsheet, Squarespace, Zuora, WalkMe and CS Disco. This leaves us with 93 publicly traded SaaS companies in the US.

IPOs have stalled, M&A activity has dropped, and secondaries are becoming a more common exit route.

“Liberation Day!”

One day, your children might ask you where you were on what President Trump called “Liberation Day” – April 2, 2025, when the Office of the United States Trade Representative tariff announcement roiled through the markets. Over the next 3 trading days, markets were thrown into turmoil. The NASDAQ Composite dropped by 11% over 3 days and, as of market close on April 7, experienced a 22% drawdown, putting it into an official bear market. The “Mag Seven” tech stocks closed down 17% from their March 25 peak, the tech-laden NASDAQ Composite Index dropped 15%, and the S&P 500 was down about 13%.

Typically, in times of turmoil, the US dollar acts as a safe haven and strengthens against other major currencies, but over those trading days, the USD weakened by about 3% against a basket of foreign countries as interest rates fell and several major banks upped their odds of a US recession (which would be negative for the US dollar and US equities). Goldman Sachs raised their estimate from 20% before the announcement to 45% and JP Morgan set their probability at 60%.

Not only did equity markets fall, but corporate bond spreads widened in a way we hadn’t seen since 2020. The USD also sold off as investors lost confidence in US markets and worries about a recession mounted.

Both the substance of the tariffs and also the market surprise and chaos of the rollout unnerved markets. The proposed tariffs would increase consumer costs and result in one of the largest tax increases in US history – $6T over 10 years or about 2% of GDP, the highest increase since the Revenue Act of 1951.

Initially, the market responded favorably, up more than 1% when Trump referred to “reciprocal tariffs” in his Rose Garden speech on April 2. It was only when he put up a chart showing the actual tariffs that the markets plunged. We can infer from this response that market participants are supportive of the administration using tariffs as a tool to lower the asymmetrical tariffs of our trading partners. However, the markets are highly concerned with tariff levels set well more than a corresponding country’s levels.

I have posted separately that these “reciprocal tariffs” were not reciprocal. They used a mathematical formula to determine the “Trump tariff” that made no reference to the tariffs of our trading partner; instead, they punished countries that were running goods-related trade surpluses with the US. In some cases, the US arguably runs a trade deficit because the counterparty has high trade barriers. For instance, China has banned major US companies like Google, Meta, X.com, Snapchat, and Reddit, and it also employs various non-tariff barriers (NTBs) to restrict imports by using quotas, complex rules of origin, and quality/sanitary conditions. But this trade deficit formula also caught many trading partners off guard that are US allies and maintain open markets via trade agreements with the US. Israel, for instance, no longer has any tariffs on the US, yet now faces a steep 17% tariff. Taiwan was hit with a surprise 32% tariff rate. Venezuela and Afghanistan, on the other hand, face only 10% tariffs.^[1]

Dozens of countries that are (a) allies of the US, (b) have trade agreements with the US, and (c) run deficits with us STILL face a 10% tariff (e.g., UK, Singapore, Australia).

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^[1] I have also argued elsewhere that these tariffs may be illegal. The US Constitution reserves the exclusive authority “to lay and collect Taxes, Duties, Imposts, and Excises” to Congress, which is why the biggest tariff bills that the US has ever imposed (e.g., the McKinley Tariff Act of 1890; the Smoot-Hawley “Tariff Act of 1930”) are the result of Congressional legislation. The President has invoked his tariff authority by pointing to the International Emergency Economic Powers Act, enacted in 1977, which does not explicitly mention tariffs. In 2022, the Supreme Court ruled that when an agency acts on a matter of “vast economic and political significance,” Congress must clearly authorize such action and the agency cannot rely on broad statutory language to justify its actions. See West Virginia v. EPA, 597 U.S. 697 (2022).

Software Multiples Got Whacked in March

All of this economic uncertainty also managed to hit software multiples. At the end of day Friday (April 4), the median software NTM multiple (“enterprise value” divided by the next 12 months of revenue) for all public software was 4.8X. Going back 10 years, we’ve only hit that level twice! Once was in February 2016, when the median multiple fell to less than 5X and stayed there for ~3 weeks (with a low bottoming out at 3.8X). The second instance happened for about a week in November 2022, when we bottomed at 4.6X.

SaaS multiples contracted as well. At the end of Q4/24, the median multiple in our PVC SaaS Index had risen to 7.4X, after the US election and the Republican sweep of Congress. Optimism and good cheer pervaded the markets, and several SaaS companies and digital banking unicorns began planning for IPOs. CoreWeave, Wiz, Revolut, Chime, Klarna, Canva, and others quietly began planning 2025 IPOs.

But software and SaaS were especially hard hit in the last week of March and into early April. In the days preceding the US election last year, an equal-weighted basket of the stocks in our PVC SaaS Index outperformed, rallying by 23% from early September 2024 to mid-November. They edged higher by another 9% and peaked on January 28, just a few days after the Inauguration.

Since then, our index has been down by 31%, with most of that happening in the first 3 trading days of April. At the end of Q1/25, the median SaaS multiple dropped back to just 5.7X, lower than anything we’ve seen since 2016. The figure below shows the historical EV / TTM (“Enterprise Value” to “Trailing Twelve Months” of revenue) going back to 2013.

On a relative basis, SaaS stocks have underperformed the broader market and the tech sector more broadly. The relative underperformance of SaaS vs. software reached 10-year lows at the end of 2024 and has continued to deteriorate in the wake of the tariff announcements.

Why Do Tariffs Affect … SaaS?

Why would software companies trade off on tariff news?

After all, they don’t rely on imported inputs and don’t have physical supply chains impacted by tariffs. Well, true. Perhaps the downdraft was overdone. After all, it does seem odd that (say) MongoDB would drop by as much as Nike, Tesla, or Apple, yet all are down 15-17% from April 1.

I think that there are a few explanations:

1. Most importantly the markets went risk-off – and they did it in a hurry. When markets trade off risk, the riskiest assets get hit hardest. That includes unprofitable tech stocks and crypto assets.

• Every CIO is nervous now, and as budgets tighten, growth-oriented companies will likely suffer. As growth expectations change, multiples contract.

Markets abhor uncertainty and that’s especially true of higher-beta tech stocks. A sign of the extreme volatility that seeped into the markets last week was the spike in the CBOE Volatility Index (“VIX”), which is often referred to as Wall Street’s “fear gauge.”^[1] This measure shows the market’s expectations of price volatility over the next 30 days, as measured by the price of stock options. It soared from the high teens in the days preceding the announcement to close on April 7 at 46, a level that we’ve only seen 3 times in the past 3 decades (fall 2008; Feb/March 2020; and fall 2011).

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^[1] VIX is a volatility index derived from S&P 500 options for the 30 days following the measurement date, with the price of each option representing the market’s expectation of 30-day forward-looking volatility.

Q4 Earnings Recap

Here’s a brief recap of the Q4 earnings season, which is now behind us. The overall software universe quarterly YoY growth has come down meaningfully from its highs and has started to stabilize. The figure below shows the results of the earnings season for cloud businesses; this is a subset of the overall SaaS index and includes 60 companies (not an exhaustive list, but still comprehensive) that all reported quarterly earnings sometime between January 29 to April 1.

Q1 earnings season will be interesting. Q1 results aside, investors will pay attention to Q2 guidance. It will be very easy for CFOs to guide EXTREMELY CONSERVATIVE and “kitchen sink” the guide and blame macro conditions.

Another important metric to evaluate in mature, public SaaS businesses is profitability. For many years, one of the big criticisms of the industry was the fact that profits were scarce. But over the past year, most SaaS businesses in the public markets have shown the ability to generate cash. The “FCF margin” is the result of dividing operating cash flow and subtracting capex and capitalized software costs, then dividing by revenue.

(Note that this methodology adds back non-cash expenses such as stock-based compensation, which is controversial in some quarters because stock-based compensation is a real expense. It harms shareholder returns by increasing the number of shares outstanding over time, resulting in shareholder dilution. This is especially true when equity prices fall and companies need to grant additional shares to retain employees.)

IPO Window

When markets are jittery and go risk-off, the IPO window typically closes quickly. IPOs, after all, are the classic risk-on asset class, where speculation on future growth and profits sets pricing and optimism is the coin of the realm. Last week, two of the more promising IPO candidates Klarna and StubHub pulled their roadshows and delayed entry into public markets.

StubHub worried that investors would not have time to meet with the company amid the market troubles. StubHub (an unprofitable ticket reseller) still plans to list on the New York Stock Exchange under the ticker STUB. In 2024, the company sought a valuation of at least $16.5B.

Klarna – a pioneer in the “buy now, pay later” space – had planned to list on the New York Stock Exchange under the ticker KLAR, targeting a valuation of $15B. Klarna was previously valued in 2022 at $6.7B. But it probably wasn’t a good signal that Klarna competitor/comp Affirm has crashed by 46% so far this year.

One silver lining for IPOs is that CoreWeave debuted in March. The AI cloud platform backed by Nvidia targeted an IPO price of $47-55, had to drop the price to $40, but then ripped back 42% after a muted IPO and settled in the mid-40s after the tariff announcement. That suggests that there is still a strong latent demand for IPOs and AI, but the markets will have to settle down before high-quality IPO candidates test the waters again.

The figure below shows the most recent batch of major tech IPOs over the past 3 years and how they have performed. For the most part, IPOs have traded flat to down over the past 2 years, slightly underperforming the major indices. A few have held reasonably well in the after-market (notably ARM, Instacart, Reddit, Rubrik, Astera Labs, and more recently, ServiceTitan). A few of the smaller offerings (such as Webtoon, iBotta, and Lineage Logistics) have traded off.

So it’s a very mixed bag, which suggests that only the higher quality larger offerings will brave the public markets in Q2. Companies like Canva, Stripe, Cerebras, and Revolut are reportedly on file already, and Klarna and StubHub might try again if and when markets settle.

What Does This Mean for Startups?

Public market valuations filter down to the private markets – quickly for later-stage companies and more slowly for earlier-stage companies.

The figures below show how private market round sizes (a good proxy for valuations) have moved over the past 10 years; the correlation with the NASDAQ is very high (0.93 for Series A rounds and 0.84 for later-stage rounds).

The peak median round sizes were set in Q1/22 when SoftBank and Tiger Global were the price setters for roughly a fourth of all VC funding rounds. While earlier-stage VC rounds corrected a bit in early 2023, they have recovered and stayed fairly steady since the bubble burst. Later-stage rounds (Series D and later) have dropped by over 40% and remain well below their 2021 peak.

Secondary Market

Historically, IPOs and M&A have been the dominant exit paths for venture-backed companies. Some years, IPOs dominate. In others, M&A dominates. But in 2024 secondaries captured the large majority. According to Theory Ventures, secondary transactions generated 71% of the 2024 exit value for venture-backed companies.^[1]

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^[1] When a company sells new shares to investors in exchange for dollars, it creates new shares in the company: primary shares. When existing shareholders sell their shares to new investors, we call this a secondary sale. Tender offers to buy shares from employees are secondary sales, as are transactions between one venture capitalist and another.

The IPO market has been largely silent since early 2022. M&A has also been historically quiet. From 2022 through 2024, M&A volume fell to the lowest levels in North America in a decade. That has produced a huge challenge in liquidity. In response, capital markets have responded: capital has flooded into secondaries.

As in private equity, we should start to expect secondaries to become a permanent and significant part of venture capital liquidity for both employees of companies and investors.

By some estimates, secondary volume surpassed $160B in 2024, representing a 35% CAGR since 2019.^[1]

The 2024 market was heavily dominated by a handful of companies. According to SPV provider Sydecar, 77% of their secondary activity since January 2024 flowed to just 8 companies:

• Anduril Industries
• Anthropic
• Groq (not Grok/xAI!)
• OpenAI
• Perplexity
• SpaceX
• Stripe
• xAI

Together, these 8 attracted $481M through Sydecar, a 10X increase from 2023. SpaceX alone represents 17% of all SPV secondary deals on the platform.

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^[1] See Rod James, “Private-Market Secondary Deals Hit Record Levels in 2024,” WSJPro, Jan. 27, 2025.

Conclusion

At the end of Q4/24, the median EV / revenue multiple in our PVC SaaS Index rose to 7.4X, after the US election and the Republican sweep of Congress. That put SaaS multiples just below their 5-10-year averages.

But towards the end of Q1, and especially after April 2, multiples contracted to the lowest point seen since 2016. Several tech IPOs were pulled (including Genesys, StubHub, and Klarna) as markets fell and volatility soared to 5-year highs, and the IPO window is closed for now.