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E56: Upfront Ventures' Mark Suster on Fund Management and the Exit Landscape
"Turpentine VC" | Venture Capital and Investing
Challenging VC myopic focus on software investing
The valuation of software companies has been significantly inflated over recent years, with peaks reaching 25 times next 12 months revenue in 2021 compared to a stable 10 times over the previous decade, leading to unrealistic growth expectations. The long-term average valuation has hovered around 6 times, indicating that many companies today trading at low multiples may not be as overvalued as perceived. While high net dollar retention in Software as a Service (SaaS) generates predictable cash flows, recent trends indicate potential shifts in the market dynamics, with possible consolidation among platforms geared towards enterprise buyers. Additionally, the role of AI in enhancing company margins may not sustain the previous growth patterns seen over the last 10 to 15 years, suggesting a need for cautious optimism in software investments moving forward.
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