This blog has traditionally focused on the intricacies of operating sub-scale Saas businesses. Only rarely have posts centered on what public markets can teach us about that endeavor. But in countless conversations throughout 2026, software owner-operators have asked the Lock 8 team a version of the same question regarding public markets’ views on software: what does this mean for me? It’s a great question, to which I haven’t had a tidy answer.
But my partner Tim Blomfield does — or at least he has done the work to get closer to one. He has translated this work into the kind of post that I would have wanted to read in April, and which holds timeless truth. Tim reads the data like an investor and interprets it like an operator. His conclusion, which I’ll let him share properly below, is that the gap between the valuation multiple your SaaS business has and the one you want it to have is a growth or performance gap, not a mood gap. That distinction can be valuable and instructive for operators of sub-scale SaaS business.
Tim — thank you for writing this, and for kick-starting this blog after a recent hiatus! Please take it from here.
Benjamin Graham left us with the parable of Mr. Market — the excitable business partner who knocks on your door every morning and names a price for your shares. Some days he is euphoric and will pay almost anything; other days he is despondent and will practically give his stake away. Graham’s lesson was never that Mr. Market is right. It was that he is there to serve you, not to instruct you.
Graham’s parable has rarely made its point as vividly as it has this year. Between last November’s peak and April 10, public software fell roughly 40% — the deepest drawdown in a decade, by Meritech’s count — then rebounded 38% in 34 trading days, the fastest recovery in a decade. By spring, research notes carried titles like “Software is Dead?!” By Labor Day, Jamin Ball’s Clouded Judgement — required reading at Lock 8, and the most current scoreboard I know of for public software — had the median company back to trading at 4.4x next-twelve-months revenue, (up from about 3.5x when I first drafted this post in July). Dead, buried, and resurrected inside of five months. Mr. Market has had quite a summer.
Whenever the public markets swing this hard, the founders and CEOs I speak with in the lower-middle market – the sub-scale, high-potential SaaS businesses that are Lock 8’s whole reason for being – ask a version of the same question: What does this mean for me?
It’s a good question, and the answer is more layered than either headline. This post is my attempt to work through these layers:
• What the public data actually says
• Why the lower-middle market shouldn’t read it too literally
• What has genuinely changed beneath the multiple
• What to do if you’re weighing a raise or a sale
• And, as always, what we can actually control
Mr. Market is having a moment (several, actually)
The rebound was pronounced, but it was narrow. Meritech found that just 10 companies — AI and security winners like CrowdStrike, Datadog, Palantir, and Snowflake — accounted for roughly 80% of the market cap regained off the April lows. Per its latest Pulse, only 14 public software companies trade above 10x revenue; 64% still trade below 5x.
Two more numbers are worth carrying around. Growth is now 4.1x more strongly correlated with valuation multiples than free-cash-flow margin; and two companies with the same Rule of 40 can trade at 11.4x or 4.2x depending on which half (growth or profit) supplies the “40.” The market isn’t rewarding the Rule of 40 so much as its first component (growth) — which makes harvesting margin at the expense of growth a poor trade for most sub-scale businesses.
The read-through, and its limits
The temptation is to take the public tape and mark your own privately held business up or down with it. Public comps do matter: they are the gravitational field within which every private deal gets priced. And when they move, private multiples follow with a lag. Ignore that and you’re negotiating with yesterday’s data — which, this year, can mean last quarter’s.
But here is the most useful thing I’ve read all summer, from Meritech: on a growth-adjusted basis, the median software multiple is 0.31x — right on top of the pre-ZIRP median of 0.30x. The market is not applying a “software is dead” discount. It is paying a perfectly rationalprice for growth; there just isn’t much growth to pay for (the median public company is projected to grow 13%). The gap between the multiple you have and the one you want is not a sentiment gap that closes when Mr. Market cheers up. It is a growth gap, and it closes when you grow.
Sub-scale SaaS was never priced like a hypergrowth darling on the way up, and it shouldn’t be treated that way on the way down — or the way back up. It has always traded on durability, net retention, cash generation, and a balanced Rule of 40, not on “narrative” and or total addressable market (“TAM”). A profitable, deeply embedded vertical application growing 20% with 115% net retention is a good business in any rate environment. Mr. Market’s mood doesn’t change that; it changes what he’ll pay for it on a given morning, which — this being the entire point of the parable — is not the same thing.
I recently spoke with a founder who was considering a sale of his business. He opened our conversation by anchoring on the valuation a peer raised capital at in 2021. Understandable! Also expensive. The comp he wanted wasn’t a comp anymore; it was a memory.
What really changed
AI put a question mark over the one assumption software valuations were quietly built on: terminal value. For two decades SaaS businesses were priced like an annuity because the market assumed retention and relevance would hold more or less forever. But if an agent can rebuild a thin workflow over a weekend, why should that revenue compound for another decade? One answer is “it shouldn’t,” which is how you get to a 2.8x valuation multiple.
Activant lays out the bear case as well as anyone in Software is Dead?!, and the framing is worth borrowing: the danger to software valuations isn’t any single blow but “death by a thousand cuts” — seat compression, vibe-coded substitution, a swarm of AI-native entrants, and disintermediation by whichever model becomes the operating system for work, all at once. Their own conclusion, though, is that none of these individually justified the apocalypse the market priced in the spring; and the summer largely agreed: Salesforce beat, raised guidance, and reported $1.5 billion of Agentforce ARR; and the big systems of record have proven far sturdier against vibe-coding than the “sell now, ask later” crowd expected.
But the fear is not evenly distributed, and this is where sub-scale operators should lean in. The durable moat in software was never the data; it was the hundreds of workflows wrapped around the data, sitting in the critical path where nobody wants to touch them. Disintermediation risk shrinks in proportion to the value your system adds to the data it holds. Operational depth in a narrow, mission-critical vertical is a far better defense than breadth in a generic horizontal one. The uncomfortable corollary: businesses that “amount to little more than some CRUD operations with a nice UI” will struggle.
If you’re weighing a capital raise or a sale of your business
1. Reset your anchor — in both directions. The 2021 term sheet is not walking back through the door; neither, if you’re buying, is April 2026. Underwrite your plans (and your expectations) to today’s tape, not to a number a neighbor printed three years ago or a low print from five months ago.
2. Know which bucket you’re in. The chasm between ~18x and ~4x means your growth rate and net retention are doing almost all of the work in setting your valuation. Be honest about which side of the line you’re on, and whether you can credibly move.
3. Sell a fundamentals story, not a multiple. You can’t control the multiple; Mr. Market sets that. You can control the durability of your growth, the quality of your retention, and your cash generation. Premium businesses in this market are the ones that make the buyer’s underwriting easy.
4. Mind the timing you can influence. This year’s window opened and shut in weeks. A quarter of clean, capital-efficient growth is worth more today than it has been in years, precisely because it has become rarer — and the market won’t wait for you to produce it.
What we control
If you’ve read this blog before, you know where we land. The multiple is exogenous — rates, sentiment, and a genuine debate about the future that none of us controls. The fundamentals are ours to control, and the public medians are a useful yardstick: ~110% net retention, ~76% gross margins, ~21% free-cash-flow margins, and a median CAC payback that has improved to 31 months from a rather sobering 44 in July. Every one of those is a number a focused operating team can improve upon.
That is the whole thesis behind injecting operating DNA into a small-scale investment strategy. We don’t get to choose Mr. Market’s mood — and this year he has had severalmoods. We do get to build businesses whose worth is so plain in the fundamentals that hismood matters less. A reset is painful if you were counting on the multiple to do your work for you; for operators already doing the work, it is closer to a forcing function — and, quietly, an opportunity. More on how we’re helping our companies seize it in future posts. Thanks for reading — and please come back.
Figures are drawn from Jamin Ball’s Clouded Judgement (September 4, 2026), Meritech Capital’s Software Pulse (August 28, 2026) and 2026 SaaS Rebound (June 2026), and Activant Capital’s Software is Dead?! (1 of 2) (May 2026), and will have moved by the time you read this. Nothing above is investment advice, though “stop anchoring on 2021” is free, and worth every penny.