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In 2020, revenue growth was the most important factor explaining a public software company’s forward multiple. The formula has changed since then.

Net income has surged to the highest correlate of a public software company’s multiple surpassing revenue growth. Narratives published in newspapers trumpeting the importance of profitability correctly assess investor sentiment on stock exchanges.

Revenue growth & sales efficiency round out the top 3 with gross margin & cash flow from operations margin rounding out the 5 tested metrics.

This year, private equity firms have acquired five public software companies, totalling $38b in value. Seven months into 2022, these figures exceed last year’s totals, something I wondered about last month.

Since these transactions’ details are public, we can use them to infer how the private software market values companies.

In the last decade, a software company’s revenue growth correlated most highly to its valuation multiple.

Messaging has become the bottleneck for growth in web3. The lack of a native messaging protocol prevents apps from communicating with their users.

Today, web3 apps communicate with users on Discord & Telegram. But these social networks aren’t web3 native. My Telegram username isn’t linked to my wallet. Knowing a chat user is the same who bought an NFT remains elusive but important.

These communities don’t help new app developers with user awareness. So developers stuff wallets full of airdropped tokens. They hawk their wares by stuffing them into strangers’ pockets, which is problematic. These airdrops are a novel form of spam for both users & wallets.

How much value does a successful software startup create per dollar of venture investment?

About 10x, though it’s volatile.

Let’s call the value generated per venture dollar the MOIC (multiple on invested capital).

MOIC = value_at_exit / total_VC_dollars_raised

Over the last 30 years, a venture dollar invested in a successful US software startup generated $10 of value.

In the late 90s, the MOIC oscillated between 12-42. After the dotcom crash, the MOIC fell to 5.0, save for a brief period preceding the Global Financial Crisis. Quantitative Easing for the next decade juiced the MOIC to 8.5. In 2021, the figure topped 15 for the first time in ten years.

AWS announced earnings earlier today and reported 33% growth. That concludes this quarter’s IaaS earnings scorecard reports & provides us a complete picture of the infrastructure buyer’s index.

AWS’s growth rate is the slowest of the three largest public infrastructure clouds. With about 39% market share, AWS reigns supreme as the largest provider. Larger businesses face more daunting challenges sustaining higher growth rates, so AWS numbers are expected.

On August 11 at 9:30 AM Pacific time, Office Hours will host legendary sales leader Bill Binch. Bill started his career at Oracle where he rose to VP. He led Marketo sales as EVP of Worldwide Sales. Most recently, Bill led the sales team at Pendo as CRO. Today, he’s an operating partner at Battery.

Over the last few weeks, I’ve been writing about Deliberately Underselling as Sales Strategy. Bill & I have been trading emails about different ways of accomplishing this goal. In addition, many founders & sales leaders have asked questions about the details, the pros & cons, & the alternatives to this strategy.

I’m watching public company earnings to identify early weaknesses in the software market. This week Microsoft, Google/ Alphabet, & Amazon report their figures.

Today, Microsoft & Google revealed the health of their infrastructure business units.

Good news & bad news. Microsoft Azure grew 40% y/y, declining six percentage points from the previous two quarters. The relatively modest decline suggests the cloud market is quite strong.

In Deliberately Underselling as Sales Strategy, I wrote about the importance of sizing contracts below customer needs to ensure customer success.

“A key part of the formula: crafting the right account executive compensation structure to reward this strategy.” I received a pile of questions asking for more detail.

Since then, I’ve spoken to many sales leaders & Lee Kirkpatrick who originally surfaced the concept during Office Hours on how to do this well.

“We need to start doing more with less. Finance told us our budget is decreasing by 20%.”

This sentence echoes in conference rooms across many software buyers today, irrespective of whether the business is healthy. Boards push prudence during a time of recession, which cascades through the organization.

Management teams expect to reduce operating expense by 20% predominantly through headcount reductions or hiring freezes - everyone from sardine startups to public megalodons.

What is the difference between web2 & web3, really? Yes, there are tokens and initial coin offerings and drops and discords. But, today, they resemble each other quite a bit.

Here’s my mental model:

Imagine a startup that sells sports cards. A web2 architecture for this app would have five parts

1. A transaction database: user 1 sold card ABC to user 3.
2. A metadata database: user 1’s first name is Samuel and his profile picture is found at this URL.
3. File storage: the profile picture file is saved here.
4. App server: the code that runs the application.
5. IaaS/CDN (Infrastructure as a Service / Content Delivery Network): the servers that run code.

Compare this image to a web3 architecture with the web3 parts in red.