State of B2B SaaS Investing with Mike Fitzgerald, High Alpha

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In this special episode of SaaS Half Full, host Lindsey Groepper sits down for a fireside chat at BLASTmedia HQ with Mike Fitzgerald, Partner at High Alpha — a venture studio and VC firm specializing in early-stage B2B Saas companies. 

2021 saw an influx of VC money poured into scaling SaaS companies and higher valuations than ever before. Fast-forward to Q1 2022, which saw a nearly 40% decline in investment deals in the sector coupled with signs of a pending economic recession. Mike visited BLASTmedia HQ to talk about what’s causing the changing B2B SaaS investment landscape and signals to look for in your SaaS business to drive decisions during an economic slowdown.

Then (2021) vs. Now (2022)

Before examining what has contributed to today’s downward shift, Mike delves into what drove the 2021 investment influx: cheap money and sky-high public-company valuations. 

“[Those two things] are markers for our proxies in the way that we would think about investing in a company, because if public companies are valued at 20 times revenue, then I can justify paying ten times revenue for your new growth business when you have some revenue,” said Mike. “In an environment like 2021 with money being cheap and valuations being high in public companies…I’m making long-term bets.”

When valuations are high and interest rates are low, investors base their bets on what the portfolio company will do in the next 24-36 months in terms of growth, not immediate gains in the next 12 months. 

On the flip side, the start of 2022 brought these two proxies down to earth. Valuations are now based more on profitability versus growth, and interest rates have soared. As a result, investors are looking at shorter-term gains and positive signals in the next 6-12 months from investment. 

Don’t Panic

When signs of a recession surface, a natural reaction is to halt spending and cut costs. While this may help some SaaS companies get in front of a recession, Mike cautions against buying into the sky-is-falling mentality too quickly and instead advises you read the signals inside your business, starting with pipeline and closed new business. 

Success in those factors is what Mike sees in High Alpha portfolio companies that he believes will perform well in a recessionary environment. And while he understands SaaS companies will have to make some cost-cutting moves, he also recognizes each business is unique.

“I don’t think you can apply [cutting spending] universally,” said Mike. “It’s going to be more difficult to raise money. It’s going to be more difficult to borrow money. You may indeed have some customers who go out of business. Those are all cautionary things, but you have to read the signals of your business in this particular economy.”

Listen to Episode 329 of SaaS Half Full for more of Mike’s insights.

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