By Supantha Mukherjee
STOCKHOLM (Reuters) - The amount of money invested in private cloud-computing companies in Europe, Israel and the United States dropped 42% in the third quarter of 2022, indicating an industry in the midst of a "reset", showed a report from venture capital firm Accel.
While 51 cloud software developers raised funds at valuations of over $1 billion in the first quarter of 2022, only three did so in the third quarter, Accel's 2022 Euroscape report showed.
The valuation of publicly listed cloud companies has also dropped to $1.2 trillion from $2.8 trillion in the last 12 months, Accel said.
Valuations have dropped at software firms as varied as Microsoft Corp (NASDAQ:MSFT) and Shopify Inc and across areas such as data analytics, security and collaboration.
Among software-as-a-service (SaaS) companies, U.S. data analytics software maker Snowflake Inc has the highest enterprise value-to-revenue multiple over the next 12 months. Last month, however, the multiple was 20 times versus 61 times in September last year, the report showed.
"After several explosive years of growth, it's clear that a major reset is underway... Rising interest rates and climbing inflation has led to contracted software valuations," said Philippe Botteri, a partner at Accel.
"But we firmly believe that strong secular trends, like the shift to cloud, will continue to propel European and Israeli SaaS forward."
Still, the migration of local software operations to the cloud has not lost momentum and spending on automation and digital transformation is likely to rise to $2.8 trillion by 2025 from $1.8 trillion in 2022, Accel said.
Companies' low valuations also increase the potential for mergers and acquisitions, with software deals likely to reach $101 billion on an annualised basis this year, it said.
There is around $770 billion available to buy cloud companies, with $440 billion of cash on the balance sheets of strategic investors and $330 billion of dry powder from technology-focused private equity funds, Accel estimated.