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Attorneys witness the changes in the fundraising market from a unique vantage point. Consiglieri to startup founders and investors alike, attorneys assist in the negotiation and are privy to the terms of investment. Fenwick & West, one of those law firms, released data this morning detailing the evolution of financing terms for Q4.

I’ve reproduced the most salient difference in Q4 compared to previous periods above. The median growth in startup valuation has fallen from a high of 74% in Q2 2016 to 39% in Q4.

Join me for SaaS Office Hours on February 22 in New York at the Axial headquarters. This is the first time we’ll be hosting SaaS Office Hours on the East Coast, and there will be more to follow.

Given the volatility in the market and the number of inbound questions about the implications, this SaaS Office Hours will be focused on fundraising and the venture capital outlook for 2016.

Most modern data architectures employ many different data stores and processing engines. Hadoop, Cassandra, HBase, Spark, Storm, Phoenix. Data analysts looking to unearth insights within these data stores must move data back and forth between different systems and different data formats. As the number of new open source projects continues to grow geometrically, this data fragmentation is likely to splinter further.

There are several forms of venture debt. Convertible notes are the most common, today. Most startups raise seed rounds using convertible notes. Startups that have substantial working capital requirements often employ lines of credit/revolvers. Last, many startups take out term loans. They borrow money for several years and repay it over time. Venture debt can supply additional capital for a startup to grow at a lower cost of capital than equity. And the difference can be material.

When we discuss payback periods in SaaS, we implicitly mean customer payback periods. How much time does it take for us to recoup the capital outlay we invest in acquiring a new customer? But, there’s a second and equally important payback period – the payback period on hiring a new account executive.

Let’s take a hypothetical SaaS startup that sells a $20k product at a 75% gross margin. Clients pay monthly and commissions are paid monthly. The company hires a new account executive in month 1. The AE has an on-target-earnings (OTE) of $60k base/$60k commission and a quota of $600k. The AE is given 5 months to ramp to full quota: 0% in the first month, 25% the second, 50% in the third, etc.

As the fundraising environment changes, some SaaS companies will look to reach cash flow break even on their existing reserves. Founders may reduce staff, particularly in recruiting or new projects that the company prefers not to finance. But there are three other ways to become profitable that limit reductions in force, enable the company to continue to grow with greater efficiency and increase the value of the company in the process.

Mr. Market is a fictitious character imagined by legendary investor Benjamin Graham in The Intelligent Investor. Graham describes Mr. Market as emotional, irrational, moody - and is in the short run a voting machine, in the long run a weighing machine. It might sound like a children’s story, but Warren Buffett lauded the book as the greatest book ever written on investing. So, has is halving of SaaS multiples the work of irrational Mr. Market or a change from the voting machine to a weighing machine?

What a difference a month makes. I wrote a post on January 10, 2016 called The Downward Pressure of Public Markets on Startup Valuations that depicted the slow decline of SaaS multiples in the public markets. Since then, multiples have compressed markedly.

The chart above shows the forward revenue to enterprise value multiple of all public SaaS companies. Remember the heyday in March 2014? We’re 57% below that high at 3.3x forward revenues. A month ago, the market traded these businesses at 4.2x, so a 21% fall in four weeks, punctuated by a 40%-50% decline in LinkedIn and Tableau* last Friday.

Leverage. It’s the key to negotiating. Classic negotiating books like Getting to Yes define the BATNA, the Best Alternative to Negotiated Agreement. If you were to walk away from a conversation, what’s the next best choice? The BATNA singlehandedly creates leverage in negotiating.

Over the last few years, startup founders have exerted tremendous leverage in the fundraising market by taking advantage of the supply/demand imbalance. Too much capital chasing a sliver of exceptional startups. When demand exceeds supply, valuations and round sizes balloon. A fast-growing startup’s BATNA had been the other investor waiting in the lobby, term sheet in hand.

When buying machine learning enabled software, it’s easier to sell like Ironman than Robocop; a product that complements and augments the user’s skills rather than a true replacement. As machine learning continues to become a key differentiator among SaaS products, a secular and positive trend, startups are learning how to sell the promise of the software better and better. These are some of the objections customers raise during those sales pitches.