Today is the anniversary of Spotify IPO, which was the first direct listing of a technology company. It was championed by Barry McCarthy, the former CFO of Netflix and the current CFO of Spotify. Since then, Slack has also listed directly. And the combination of these two events has created a groundswell for more of them.
In the past few months and quarters, I’ve been learning as much as I can about this topic. Here are my notes and sources.
Dr. Daniel Kahneman features on the latest Farnam Street podcast and it’s a surprising episode. Kahneman wrote Thinking Fast and Slow. I admire Kahneman a great deal. Not for his Nobel or for his work, which are both impressive, but for his humility.
Some of the key tenets of Kahneman’s work in his famous book were disproved. And he owned up to it, both in print and on the podcast. That’s the hallmark of someone with great integrity, and it’s a sign to trust someone more.
We are very excited about open source software. Open source is a powerful distribution mechanism to get software and people’s hands early and easily. In an era where SaaS customer acquisition cost increases monotonically, open source can be a powerful antidote.
The other area that we are spending time in is open source at the application tier. Mattermost is our latest investment there, and we continue to look for others. They tend to be very capital efficient, fast growing businesses that can be quite disruptive.
We’ve all seen the data on the average increases in round sizes over the last four or five years. Startups are able to raise larger early rounds because of the financial environment.
One way of thinking about the early-stage fundraising market is as a collection of financial products. In 2008, there was a $5M series A product and a $10M series B product. Those were the most popular. As I’ve written about before, there’s now a continuum of financial products available to startups at the early stage.
In a recent interview, Sid Sijbrandij, the founder of Gitlab observed something about remote teams that I think is absolutely true. I’ve seen it in many of the remote/distributed companies we work with. He said:
Remote forces you to do the things you should be doing any way earlier and better
As companies scale, they need to develop infrastructure to successfully manage and coordinate large numbers of people. But in the early days, by virtue of being close to each other physically, it’s easier to delay some of these investments.
Over the weekend, there was quite a bit of press about the challenged state of startup IPOs this year. I was curious about the real trends in share prices, so I gathered the data on some of the more salient IPOs.
The chart above shows 11 IPOs at different points in their life cycles. The leftmost column is the price of the shares at IPO, followed by the share price on the first day close, followed by Friday’s price.
Next week, on the 9th of October, Redpoint will host Office Hours with Nick Mehta. Nick is the iconic CEO of Gainsight, the leader in customer success. Nick and his team created the category and know the best practices of the world’s leading customer success organizations.
Customer success is evolving quickly and we’re seeing different models of the practice evolve in our portfolio. Nick will talk about the trends he’s seeing and take questions from the audience.
I’ve been searching for a great history of the venture capital industry since before I joined Redpoint. There are a handful of books that are pretty good. Done Deals. eBoys. Creative Capital. But there’s a great one called VC by Tom Nicholas.
Nicholas traces the history of the venture capital industry back to whaling. They weren’t called venture capitalists back then, but they serve the same role. Men would broker relationships between wealthy individuals and adventuresome captains.
I’ve gotten to know Marc Randolph as a fellow board member at Looker. Marc has helped many companies get off the ground, but the most famous is Netflix. Marc founded the business and served as its first CEO until Reed Hastings took the helm in 2003. In That Will Never Work, Marc recounts the early days of the $130B market cap company first started in Santa Cruz and it’s a remarkable story. One in which Redpoint partner Tim Haley has a cameo (Tim led the Series A.)
Last week, SaaS stocks fell by about 18% on average. The chart above shows the most recent enterprise value to forward multiple for a basket of next-generation software companies. The red line is the value and the blue line is the median over the same time frame.
As of Friday, the median forward multiple is 9.3x which is a 11% drop from the previous high of 10.5x. The current valuation level is still top decile across this time period, despite the drop. In other words, the valuation environment is still at elevated levels.