WTF is a Market Dislocation?

4/20/25 Benchmarks for Operators

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Market Dislocation 101

Hello, howdy, hi, welcome back to the finance and business newsletter where I ask “the stupid questions” so you don’t have to. It’s the burden I bear.

So WTF is a market dislocation? And how does it impact company valuations?

TL;DR: A market dislocation happens when prices stop making sense.

More technically, it’s when financial markets get knocked out of whack and asset prices disconnect from what the underlying fundamentals would suggest. Stocks might tank while earnings hold steady. Bond yields could spike while inflation is flat.

These dislocations can be triggered by sudden economic shocks (think COVID), surprise policy moves (see: new tariffs), or just investor psychology turning manic. Liquidity dries up. Confidence gets wobbly. And the usual pricing machinery starts to misfire.

The key thing to understand: it’s not that the assets are broken.

It’s that the market is too confused, or too scared, to price them properly.

Few things reflect a dislocation better than bond yields. They’re the economy’s speedometer, representative of the credit market, which impacts everything from your ability to get a mortgage to venture debt for your company. And when they start bouncing around, everything from car loans to startup valuations start recalibrating.

Back in 2008 and again in the early days of COVID, we saw textbook dislocations. Credit spreads blew out. Equity prices collapsed. But the selloffs weren’t always tied to business performance. They were about liquidity disappearing and fear taking the wheel.

We are experiencing a dislocation right now. Investors can’t agree on how to price risk.

When the market’s dislocated, it’s a little like playing in traffic. You can still cross the street… but the signals don’t work, the lights are flashing yellow, and no one’s quite sure who has the right of way. It doesn’t mean you freeze. But it does mean you look both ways twice, and maybe keep a foot on the curb. Because the folks who treat dislocations like business as usual? They’re the ones who get blindsided by an Amazon van doing 70 in the slow lane (to your defense, the new blue electric ones are wicked quiet and kinda blend in).

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📉 Dislocation ≠ Recession (But They Sometimes Hang Out Together)

What broke my brain is trying to separate dislocations from recessions. I started to draw a Ven diagram thing with my daughter’s crayons. Here’s what I came up with…

Dislocation means the market’s pricing mechanism is busted.

Recession means the broader economy is contracting.

You can have one without the other… but sometimes they roll as a duo.

Dislocations without Recessions

• Flash Crash (2010): No recession, just algo chaos.

• Meme Stocks (2021): Pure market mania, macro was solid.

• UK Gilt Crisis (2022): Rates spiked, pensions panicked, economy chugged along.

Dislocations with Recessions

• 2008 Financial Crisis: Subprime triggered a total pricing freeze and a deep recession.

• COVID Crash (2020): Health shock tanked markets and the economy.

• Dot-Com Bust (2000–2002): Tech got ahead of itself, dragged the economy down with it.

Think of a dislocation like a car hitting black ice; it spins unexpectedly.

If it keeps driving down the road after, TBD.

Tappity tap

A recession is when the whole road is broken.

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Not a Crisis, But Eyes Open

This isn’t panic mode. We’re not in a recession. Unemployment’s low, earnings haven’t cratered, and credit markets still work (despite being spooked). But things feel… twitchy. The kind of twitchy that makes CFOs quietly model a downside case on a Saturday morning (many are prob doing that as I write this).

When stuff doesn’t quite add up, it’s normal (and smart) to be a little paranoid. Not doomscrolling (guilty as charged), but hyper aware.

I’m not saying sound the alarm. But in the sage economic advice of rapper Benny the Butcher:

“Figure we walk this tightrope with a feline's agility…

I can never leave the scene without checkin' my mirrors visually”

-Benny the Butcher, Johnny P’s Caddy

Check ya mirrors twice these days when you pull out of the driveway. Because somebody moved the stop sign in your neighborhood.

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Data source: Koyfin

TL;DR: Multiples are FLAT week-over-week.

Top 10 Medians:

• EV / NTM Revenue = 13.4x (DOWN 0.1x w/w)

• CAC Payback = 30 months

• Rule of 40 = 52%

• Revenue per Employee = $391k

  

  Data source: Koyfin

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Data source: Koyfin

• Figures for each index are measured at the Median

• Median and Top 10 Median are measured across the entire data set, where n = 111

• Population Sizes:

  • Security: 18

  • Database and Infra: 14

  • Backoffice: 16

  • Marcom: 16

  • Marketplace: 15

  • Fintech: 16

  • Vertical SaaS: 16

Revenue Multiples

Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.

NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.

Data source: Koyfin

However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.

Reasons may include:

• Recurring mix of revenue

• Stickiness of revenue

• Average contract size

• Cost of revenue delivery

• Criticality of solution

• Total Addressable Market potential

From a macro perspective, multiples trend higher in low interest environments, and vice versa.

Multiples shown are calculated by taking the Enterprise Value / NTM revenue.

Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash

Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.

Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.

Efficiency Benchmarks

Companies that can do more with less tend to earn higher valuations.

Data source: Koyfin

Three of the most common and consistently publicly available metrics to measure efficiency include:

• CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?

CAC Payback Period is measured as Sales and Marketing costs divided by Revenue Additions, and adjusted by Gross Margin.

Here’s how I do it:

• Sales and Marketing costs are measured on a TTM basis, but lagged by one quarter (so you skip a quarter, then sum the trailing four quarters of costs). This timeframe smooths for seasonality and recognizes the lead time required to generate pipeline.

• Revenue is measured as the year-on-year change in the most recent quarter’s sales (so for Q2 of 2024 you’d subtract out Q2 of 2023’s revenue to get the increase), and then multiplied by four to arrive at an annualized revenue increase (e.g., ARR Additions).

• Gross margin is taken as a % from the most recent quarter (e.g., 82%) to represent the current cost to serve a customer

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• Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.

Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)

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• Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and EBITDA Margin. Netting the two should get you above 40 to pass the test.

Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %

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A few other notes on efficiency metrics:

• Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.

• Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.

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Operating Expenditures

Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.

Data source: Koyfin

The most common buckets companies put their operating costs into are:

• Cost of Goods Sold: Customer Support employees, infrastructure to host your business in the cloud, API tolls, and banking fees if you are a FinTech.

• Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools.

• Research & Development: Product and Engineering employees, development expenses, tools.

• General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead.”

All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.

Please check out our data partner, Koyfin. It’s dope.