We’ve seen quite a bit of volatility in the valuations of publicly traded software companies over the last 5 years. In 2014, the average software company traded at 7.7x forward revenues - the sum of projected revenues over the next 12 months. Two years later, that multiple dropped 57% to 3.3x. Today, we’re exactly where we were in 2013, at 5.4x, which is coincidentally, is the average over this time period.
Harry Stebbins published a podcast with David Beisel this week in which they discussed the importance of voice. David says, “Voice is the most natural user interface possible.” I think the biggest challenge for voice is the skepticism and cynicism engendered by a decade or two of poor experiences. It’s no longer the technology.
One of my partners recently switched from an iPhone to an Essential phone and was stunned by the accuracy of the voice interface Google offers. Voice has become far more sophisticated than just a few years ago, and we are quickly moving past the stage of toy applications.
The cash conversion cycle is a key metric for startups, but one that often isn’t talked about until a business hires a CFO. Once a business established product market fit, the cash conversion cycle is a key metric of a company’s cash efficiency - how quickly a company can convert a dollar of investment into a dollar of cash flow.
To calculate the cash conversion cycle for a software company, the formula is
“Would you compare a bootstrapped SaaS company to a seeded company? At what point does the bootstrapped company have to raise if it’s profitable, if ever?” One founder asked me this question recently.
I hesitate to compare and contrast bootstrapped and venture backed businesses, because I’m a venture capitalist and it’s very easy to dismiss any analysis as biased in favor of venture investment. As I’ve said countless times, there are many ways of building a very successful business.
Invest Like the Best is one of my favorite podcasts. Hosted by Patrick O’Shaugnessy, Invest Like the Best profiles investors from many different disciplines. Recently, New York seed investor Jerry Neumann spoke on the show and talked about three key ideas on the technology innovation cycle.
First, he discussed reading Carlota Perez Technological Surge Cycle. I first read Perez’ book after Fred Wilson wrote about it. Jerry describes the theory very well in about 10 minutes. The key idea is each technology cycle lasts 70 years, and is broken into two phases installation and deployment.
At some point in the life of most SaaS companies, the business will be faced with the question, when should we move up market? The strategic question might be catalyzed by increasing cost of customer acquisition in the core SMB segment. Alternatively, a surge of large customers paying for the product might trigger the question. Or account executives might raise it. Whatever the reason, this is a key strategic question.
Moving upmarket is an experiment. It’s a new sales motion. Very few businesses have clear demonstration of success in enterprise sales cycles without effort. The first step in deciding when to move up market is an asset allocation question.
Last week, I wrote about the decline of investments in San Francisco startups. On Hacker News, this post engendered a lengthy conversation on the challenges facing founders and start-up employees in San Francisco. In short, the cost of living in San Francisco and the Bay Area has reached untenable and unacceptable heights for many.
The average one-bedroom apartment in San Francisco costs $3500 per month. That is simply astronomical. It’s 30% more expensive than Manhattan.
Just where is the US venture market relative to the rest of the world? After most US analyses I publish, a few founders in other geographies ask questions about their own. These inquiries made me wonder, how has the global market evolved?
The chart above shows the compound annual growth rate of venture investment rounds A through D in ten fastest growing venture markets plus the US from 2010-2016. The USA is slowest growing market across that six year span at 12% CAGR. Meanwhile, Korea, China and Japan take the top three spots. Brazil, United Arab Emirates, and Ireland follow at four, fix and six.
Tell me three numbers and I can estimate the amount of capital your startup will need to raise. Which figures are those? The startups’ revenue target, the average revenue per customer and the average cost of customer acquisition.
For example, I’d like to estimate the cost for my SaaS startup to reach $100M in annual recurring revenue (ARR). My typical customer pays $25k average contract value (ACV) and my cost of customer acquisition (CAC) is $29k. I estimate a 14 month payback, which is the average according to the 2016 PacCrest survey. To calculate CAC, we take the 14 months of payback divide by 12 months and multiply by the ACV. To reach $100M requires 4,000 customers. Each of the 4,000 customers cost on average $29k. This math implies spending $116M to acquire those customers.
During every person’s working life, there comes a time when you have a question that could be answered by having access to the right data. Unfortunately, the time and effort required to find that data, package it the right way, and send it to an analytics or business intelligence tool present a formidable obstacle to answering the question. Two years ago, Redpoint partnered with Dremio to solve this problem. This morning, after an enormous amount of hard work from the team, the company has made its product publicly available.