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Founders, CEOs negotiate tough markets amid valuation compression – Analysis

Founders and CEOs eyeing capital markets are focusing on unit economics to weather an environment of sagging valuations, even as some praised the renewed focus on earnings and execution, according to interviews with three CEOs and the head of a tech accelerator.

Acquisitions of US companies, for example, are down in number and deal value through November, with buyers agreeing to pay an average USD 144.22m per transaction this year, down from USD 207.14m in 2021, according to Dealogic.

It was the lowest average since USD 134.27m in 2017.

Companies preparing for the next funding round, an IPO or equity acquisitions, recognize they face new conditions in which even well-run businesses have seen market caps battered, and where buyers and sellers are starting as far apart as ever.

“I agree with the sentiment right now that the bid-ask spread between what…founders and up-and-coming companies are feeling for their value versus the buyers, still has a gap,” said Tamer Hassan, co-founder and CEO of HUMAN Security, a cybersecurity software vendor that is preparing for an IPO once market conditions permit.

That gap notwithstanding, the New York, New York-based firm – which specializes in defending companies against sophisticated bot attacks – has managed to close two mostly equity transactions since late July, as has been reported.

In those cases, the key lay in getting the sides to align on the long-term value they could mutually unlock, rather than near-term price movements, Hassan said.

Acquirer sentiment this year “shifted more and more to unit economics…into sustainable growth versus high-risk, high growth,” he said.

HUMAN completed a growth funding raise of USD 100m in 4Q21, before conditions deteriorated, and secured a USD 100m debt facility from Blackstone Credit as part of one of the equity deals this past summer, as reported.

“The thing that really matters to avoid the short-term trap is the fact that we have enough capital right now,” Hassan said. “We do not have to raise.”

Growth has been strong at WELL Health Technologies [TSX:WELL], a health provider and healthcare IT company in Canada, with expanding operations in the US.

WELL surprised to the upside on revenue (85%) and earnings (47%) for the quarter ended September 2022 – the second consecutive quarter of top- and bottom-line beats.

Still, the company has seen its stock price fall sharply during the downturn, sending its market cap plunging from a high around USD 1.4bn at the end of June 2021, to less than USD 530m by fall of 2022.

“Yeah, if you just look at it until now, it’s pretty discouraging,” Chairman and CEO Hamed Shahbazi told this news service on the sidelines of a conference in Los Angeles.

While the company expects to maintain an assertive M&A cadence and in October added at least its tenth acquisition since the start of 2021, the changing market conditions have WELL approaching deals more cautiously, he said.

In contrast to equity deals on the scale of the USD 287m and USD 164m acquisitions the company executed in 2021, market conditions call for a near-term shift to smaller transactions, closer to the USD 4.2m value of its most recent purchase, Shahbazi said.

Performance of WELL stock has actually been good, relative to the broader basket of stocks that form healthcare, the executive said.

“I look at our performance on a revenue-per-share basis and EBITDA-per-share basis,” he said.

He expects any signal of slowing interest rate increases by the US Federal Reserve to result in a more “constructive mood in the marketplace.”

“I just tell our team, ‘look, let’s just run a great business right now and everything will take care of itself,’” Shahbazi said.

CyberCube, a private vendor of software and risk analytics to enable the cyber insurance industry, is targeting a Series C equity raise sometime around summer of 2023, CEO Pascal Millaire told this news service.

The San Francisco, California firm is an early market leader, serving 22 of the world’s 30 largest cyber insurance companies in a sector where premiums are growing at 25% to 30% CAGR, he said.

Insuretech and fintech stocks have struggled mightily in this year’s fall from the 2021 exuberance, which Millaire attributes to “too many companies…who had loss-making businesses.”

“I think just the whole insuretech landscape has refocused on unit economics and that makes SaaS analytics businesses look, on a relative basis, like a pretty attractive proposition,” he said.

The leadership team at CyberCube is careful to distinguish its unique role in the value chain, strong SaaS metrics and near-perfect subscriber retention.

“Our sense is, yes, there’s valuation compression; yes, it’s no longer a growth-at-any-cost kind of mindset,” Millaire said.

“In many ways, it’s a healthy development,” he added.

At Aliso Viejo, California-based technology accelerator Octane OC – where graduates of the company’s “Launchpad” accelerator have attracted in excess of USD 4.5bn in funding during the past decade – early stage firms face existential decisions about valuations, CEO Bill Carpou said.

Difficult capital markets are putting growing pressure on founders and leadership teams as they weigh their capital needs and forecasts of how long the tough macroeconomic environment might last, he said.

“We’re seeing entrepreneurs have to really be cautious and not give away too much of their company,” said Carpou, a former operating partner at Blackstone.

In the private equity world, there were always earnings from which to derive a multiple, he said.

When dealing with companies with very little earnings or even much revenue, “it makes it more difficult and it makes the valuation more subjective,” Carpou said.