How much will the changing valuation profile of software companies impact the highest-flying private unicorns? Also, why hasn’t Databricks gone public yet? The answer to the former might be the answer to the latter.
TC has spent ample time since the end of 2021 tracking changes to the value of software revenues. To catch you up: A number of factors commingled to create a climate in which software companies are worth less now than they were during much of 2021 when valued on a revenue-multiple basis.
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One outcome of this particular matter has been concern that many startups that raised capital last year at a high price will struggle to defend — let alone advance — their valuations when they next raise capital. And since it is not expected that the startup asset class will suddenly become cash-flow-breakeven, more funds will be needed. This sets up an awkward situation in which external observers — which include potential employees, mind — cannot tell which startups that attracted external capital at an aggressive valuation are hollow and which are not.
But there is a particular class of company to consider, a subset of the high-priced startup cohort: the mega-unicorns. These companies — private-market former startups that have the highest valuations — are in theory those closest to going public.
My question this morning is just how the change in market valuation conditions impacts this small set of companies. So let’s go back to our prior work on Databricks, which most recently raised $1.6 billion at a $38 billion valuation, and see what the new reality can tell us.
What’s Databricks worth today?
A few data points to remind you of where the company stands:
- February 2021: Databricks raises $1 billion at a $28 billion valuation against ARR of $425 million.
- August 2021: Databricks raises $1.6 billion at a $38 billion valuation against ARR of $600 million.
- February 2022: Databricks announces that it closed 2021 with more than $800 million worth of ARR.
Those work out to revenue multiples of roughly 66x, 63x, and 47.5x.
While we don’t know precisely when Databricks reached each revenue milestone, and we are not able to know exactly how far ahead of $800 million in ARR the company was at the close of 2021, we can infer that the company was adding around $50 million in ARR per month in the final quarter of last year. As it has been nearly four months since the start of the year, we can loosely say that Databricks should be at the $1 billion ARR mark today, more or less.
That brings the company’s revenue multiple down to a far more modest 38x. Our question is whether that number makes any sense.
