The diagnosis is gradually being established in the exchanges between investors, managers and analysts: tech has entered a phase of normalization, with contracting multiples, rarer IPOs, and hardening arbitrage.
At first glance, the sector seems to have lost part of its dynamic, however this observation deserves to be qualified, especially since the fundamentals of software, the economic heart of tech, remain remarkably solid. Thus, sustained growth, high margins, largely recurring revenues, the structural indicators do not signal a weakening, but rather a form of maturity.
A sector still performing well, but differently perceived
Large software companies continue to display characteristics rarely found at this level in other industries: annual growth around 17%, gross margins above 70%, and above all revenue visibility which can reach 80 to 95% within one year, thanks to the generalization of subscription models. (Gartner)
These elements have long justified high valuations, and continue, in theory, to support them, yet the software sector now trades at levels comparable to, or even lower than, those of the rest of the market. This decorrelation between fundamentals and valuation suggests less a questioning of the model than a change in the way in which it is interpreted.
The end of a narrative cycle
For more than a decade, the valuation of tech has been based on the promise of sustainably higher growth, capable of compensating for sometimes low or even non-existent levels of profitability. While this narrative has not disappeared, it is now framed, and investors seem to place more importance on the ability of companies to convert their growth into tangible financial flows. The multiples are compressed, not because the prospects disappear, but because their economic translation is examined with more rigor. Software is gradually being analyzed as a productive asset.
The Rule of 40 hasn’t disappeared, but it has changed roles
For a long time, the Rule of 40 served as a compass for SaaS: adding growth and margin made it possible to quickly judge the balance of a model. In an environment dominated by growth, this metric provided sufficient reading. However, this is no longer entirely the case, because although the Rule of 40 remains used, it no longer, on its own, structures the analysis. Two companies with an equivalent score can today be perceived very differently by the market. What changes is not the formula, it is what it does not capture, starting with the quality of income which becomes decisive, as well as the capacity to generate real cash, beyond accounting margins. Some recent approaches also favor indicators directly integrating free cash flow, such as the “Rule of Profile”, which combines growth and cash generation.
Thus the Rule of 40 now acts as an entry threshold, where it previously constituted a decision-making tool.
Artificial intelligence as a differentiator
In this context, artificial intelligence plays an ambivalent role. It is often presented as a disruptive force, capable of redistributing established positions, but the available observations invite a more nuanced reading.
A majority of companies believe that their current software suppliers will be the main beneficiaries of AI. The impact appears differentiated, because solutions based on generic, easily substitutable functionalities are more exposed. Conversely, systems integrated into critical processes, subject to high regulatory or technical constraints, tend to strengthen their position. The observation is that AI introduces less a uniform break than a sorting effect.
The return of the question of sustainability
This change highlights a criterion that has long been present, but often neglected: the sustainability of income. In an environment where growth remains significant but less differentiating, the ability to maintain stable flows becomes decisive, and this translates into increased attention paid to retention, depth of use and integration of products into customer operations.
Software is no longer evaluated only for its ability to grow, but for its ability to last.
A gradual transformation into infrastructure
And as software becomes part of all economic activities, certain product categories evolve in their nature. Thus applications become essential components of daily operations, and their absence no longer only slows down an organization but blocks it.
It tends to be seen as infrastructure, andIn this framework, its value is based as much on continuity as on innovation.
Market expansion still ongoing
This repositioning comes even as the market continues to grow. Global spending on software exceeds $1.4 trillion, and developments linked to artificial intelligence could generate an additional market of around $3 trillion. The scale of opportunities remains considerable, however their development no longer relies on the same mechanisms.
A convergence of investment approaches
In this context, traditional distinctions between investment models tend to become blurred. The logics of venture capital, centered on growth, coexist with those of private equity, more oriented towards profitability and optimization. Some strategies now combine these approaches, seeking to improve the performance of existing assets as well as supporting new entrants.
A recomposition rather than a slowdown
The ongoing transformation is not just a slowdown in tech, but more of a recomposition. The sector maintains its capacity for innovation, driven in particular by artificial intelligence. At the same time, it is part of logics increasingly close to those of mature industries, where the stability of flows and the quality of execution play a central role.
An evolution more than a rupture
Tech does not stop being a growth industry, but eit is gradually becoming an industry where the capacity to generate sustainable, predictable and integrated flows into economic operations counts as much as the speed of development. This change does not yet result in a new single model, but in a transformation of the criteria based on which the sector is observed, financed and valued.
French unicorns cling to suspended valuations
This change in evaluation criteria finds a particular translation in the French ecosystem, where the question of valuations is now posed in different terms.
Large scale-ups, like Doctolib, Mirakl, Qonto or Contentsquare, continue to display high valuations, often between 3 and 6 billion euros. But these levels refer, essentially, to towers made between 2020 and 2022, in an environment marked by the abundance of capital and high growth expectations. Since then, few operations have come to update these valuations, and if they hold, they no longer really evolve.
A price inherited from another cycle
In an active market, valuation is a meeting point between supply and demand, continually adjusted by transactions. However, in the case of French unicorns, this mechanism reaches a glass ceiling.
The absence of significant IPOs, the rarity of large-scale fundraising and a still limited secondary market reduce the opportunities for “price discovery”. Valuation then becomes a historical benchmark, more than an updated indicator, and this discrepancy does not necessarily mean that companies are overvalued. Rather, it suggests that their value is no longer regularly tested.
A stability that questions
At first glance, this stability can be interpreted as a sign of resilience, but it can also be read as the expression of an in-between, where fundamentals evolve without the market immediately translating them into prices.
At the same time, the new evaluation criteria (financial discipline, cash flow, income sustainability) are not always fully integrated into valuations constructed in a previous cycle. This results in a potential gap between the value displayed and that which would emerge in a more liquid market.
An ecosystem faced with a lack of reference
This situation creates a form of uncertainty for all stakeholders. For managers, raising at a lower valuation would constitute a delicate signal, while the absence of financing can slow down certain trajectories. For investors, portfolios remain marked at legacy levels, in a context where public comparables have been readjusted.
An open question
In this context, the question is no longer only that of the level of valuations, but of their validity. What would these companies be worth if they were faced today with a fully liquid market, integrating the new evaluation criteria?
The response will largely depend on the reopening of markets, the return of financing operations and the ability of scale-ups to demonstrate their alignment with a new regime, more demanding in terms of profitability and sustainability.
Frenchtech is today stuck in an in-between space, where the stability of valuations masks, in reality, the absence of an active market to redefine them.
