Once High-Flying Software Firms Confront Sluggish Growth

Other software startups that raised money in recent years based on expectations of fast growth are also feeling a slowdown. Nearly one-third of startups once valued at $1 billion grew sales less than 20% last year, according to a report last month by Industry Ventures. The firm analyzed 391 unicorn startups, the largest portion of which were enterprise software firms.

At advertising analytics firm Branch, human resources software startup Lattice and Checkr, which sells software to run employee background checks, growth has slowed to 20% or less recently, according to people with direct knowledge of the figures. Each of those firms was valued at $3 billion or higher a couple of years ago.

Software startups selling to businesses are facing many challenges. Investors funded dozens of companies in the early years of the pandemic, so some niches are crowded with multiple competitors. Tech giants such as Microsoft are expanding their software suites to include some of the capabilities those startups offer. Customers, often other tech startups, have laid off tens of thousands of workers, reducing the number of software subscriptions they need. And customers are diverting more of their software budgets toward products related to artificial intelligence.

'Fire Sales?'

The slowdown has vast implications for both startup employees and venture capital firms that may see their once highly valued equity wiped out. Enterprise software startups have soaked up more than 35% of all VC investment in each of the past five years, according to PitchBook and Sapphire Ventures.

“I think we’re going to see a lot of fire sales happen of unicorns that didn’t find product-market fit getting sold for less than 30 cents on the dollar,” said Vivek Ramaswami, a partner at Madrona Venture Group who invests in enterprise software companies.

What’s more, large language models such as OpenAI’s GPT-4 are rapidly changing the calculus for software buyers, making them more cautious about choosing vendors, said Jamin Ball, a partner at Altimeter Capital who invests in enterprise software startups. No business wants to sign a multiyear deal for technology that could soon be outdated, making the buying process “a lot more stressful,” he said.

At Aisera, a seven-year-old startup that sells software to automate tasks like customer support, some customers have stopped buying in favor of using newer products like Microsoft’s customizable chatbots, former employees said.

Aisera, last valued at $638 million in 2022, according to PitchBook, held talks last year with potential acquirers including Salesforce, but the talks didn’t go anywhere, two people briefed on the discussions said. Last month, Aisera’s board replaced CEO and co-founder Muddu Sudhakar; its other co-founder has since left. Aisera and Salesforce didn’t respond to requests for comment.

Growth is also slowing at many publicly traded software companies. In May, UiPath, which sells software to automate business tasks, lowered its revenue forecast for the year, sending its shares plummeting more than 30%. On a call with investors, co-founder Daniel Dines blamed a tough economy for midsize businesses and greater hesitation regarding multiyear deals. “Customers are a bit more cautious, and they do more scrutiny into the deals,” Dines said.

Public investors are valuing software firms whose next year’s revenues are expected to grow less than 10% at the lowest revenue multiple of any time in the past decade, according to Sapphire Ventures.

Waiting in the Desert

For private companies, the repercussions of slower growth are often more subtle. Enterprise software startups might be able to hold on for years without increasing revenue or attracting new investment, thanks to large cash reserves from recent fundraisings and a steady stream of recurring revenue. “You can just wait in the desert as a SaaS [subscription software] company, because revenue is recurring,” said Alex Clayton, an investor at Meritech Capital.

But signs of trouble are emerging. Attentive, which sells email and text message marketing tools for businesses, was valued at nearly $7 billion in a fundraising in 2021. Earlier this year, an Attentive investor tried to sell a $25 million block of shares at a price that valued the company at $2.5 billion, a person with direct knowledge of the sale said. Attentive’s revenue grew about 30% last year to $460 million, a marked slowdown after roughly doubling in 2021. Attentive didn’t respond to a request for comment.

Investors are marking down other once high-flying software startups. Mutual fund giant T. Rowe Price has marked down the value of its shares in Airtable, a no-code software startup, by about three-quarters from the $11 billion valuation at which Airtable raised money in 2021, according to Caplight.

Highly valued software companies that have maintained steady growth have had no problem raising money, often at higher valuations. That group includes HR software firm Rippling, which nearly doubled revenue in 2023 and raised money at a $13.5 billion valuation earlier this year, and data-analytics software startup Databricks, which grew annualized sales about 60% in the first half of this year compared with last year. Both firms are also burning significant cash to expand into complementary software products they can provide to customers of their core offering.

Others are delaying initial public offerings after failing to meet growth expectations. Navan, a travel-management software seller formerly known as TripActions, raised money at a $9.2 billion valuation in 2022. It told investors then that it expected revenue to more than double in 2023 to $700 million, but it fell well short of that number, said a person briefed on the financials. Navan spokesperson Kelly Soderlund said that was “inaccurate.” Navan had hoped to go public in mid-2023, The Information previously reported, but has delayed those plans.

At software startups with more than $200 million in ARR—the size at which they would attract public investors—sales growth has slowed to 30% this year, from 35% last year, according to a study released last week by Iconiq Growth of its portfolio companies.

Only three venture-backed enterprise software firms have gone public in the last three years, including marketing automation firm Klaviyo and cloud backup startup Rubrik. Both companies are trading below their IPO prices, a negative sign for software IPOs. Another is OneStream, a financial software firm backed by private equity giant KKR. The company went public last month, boasting a growth rate of about 37% last year with positive cash flow, and has traded above its IPO price.

“There’s not that many private companies putting up those types of numbers,” said OneStream’s chief financial officer, Bill Koefoed.