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You shouldn’t skim over gross dollar retention • ZebethMedia

Welcome to The ZebethMedia Exchange, a weekly startups-and-markets newsletter. It’s inspired by the daily ZebethMedia+ column where it gets its name. Want it in your inbox every Saturday? Sign up here. For SaaS companies, net dollar retention is on investor radar more than ever. But it shouldn’t eclipse gross dollar retention: If you are not tracking both metrics, you could be fighting to add new customers into a leaky bucket. Let’s explore. — Anna Gross dollar retention is “what protects you during really challenging times” “Gross retention really speaks to the true stickiness and health of your customer base. It’s what protects you during really challenging times,” growth stage VC Rene Stewart said in a sponsored talk at ZebethMedia Disrupt in 2021. And yet, the co-head of Vista Equity Partners’ growth-stage Endeavor Fund added, most VCs she talked to “probably only care about net retention.” However, her comments were made in 2021, not 2022. “Challenging times” have come upon us since then, making investors and founders more mindful of business fundamentals. Alex and I have already written about the importance of net dollar retention when efficient growth is the new holy grail. But how does it differ from gross dollar retention, and how has the latter been faring at most tech companies? Let’s dive in.

SaaS and alts • ZebethMedia

Welcome to The ZebethMedia Exchange, a weekly startups-and-markets newsletter. It’s inspired by the daily ZebethMedia+ column where it gets its name. Want it in your inbox every Saturday? Sign up here. As much as I like spotting new trends, it is just as important to get confirmation on previous predictions we made or heard. This week brought us some fodder in that regard, on two sectors that are pretty high on my radar: SaaS and alts. Let’s explore.  — Anna Shrinking SaaS multiples, hard times for IPOs Alex and I spent quite a bit of time this week diving into Battery Ventures’ “State of the OpenCloud 2022” report. It brought some forward-looking data to our attention — for instance, on cloud adoption — but also confirmed something impossible to ignore: That SaaS multiples — enterprise value compared to revenue projections — are shrinking. “The median forward multiple for SaaS companies has fallen from about 16x forward revenues to roughly 6x today,” Battery general partner Dharmesh Thakker told us. Multiples haven’t only shrunk, but they have also range-compressed, with fewer rewards for the fastest-growing companies compared to slower-growing ones. There are many factors at play, but the gist of it is that profitability seems to matter again to the markets. As a result of that, we’re seeing the revenge of some old rules. “Adjusted for growth,” Thakker said, “companies today that show efficient growth as implied by the Rule of 40 (i.e., companies with a growth rate + free cash flow margin greater than or equal to 40) are trading at a premium to those that are growing without regard to profitability.” Note that it’s not either growth or profitability: It has to be both, and the bar to please investors seems to be getting higher and higher. A more demanding market is a worrying picture for the many unicorns waiting to IPO, as well as for their peers who already went public but struggle to maintain their market cap. Let’s also spare a thought for Alex, who may not get his hands on another juicy S-1 before Q2 2023.

Should early-stage startups join in on the cloud marketplace fun? • ZebethMedia

Welcome to The ZebethMedia Exchange, a weekly startups-and-markets newsletter. It’s inspired by the daily ZebethMedia+ column where it gets its name. Want it in your inbox every Saturday? Sign up here. From the future of cloud management to cloud spend in the age of machine learning, our latest cloud investor survey has given me lots of food for thought. It once again came to mind when I read a new report on cloud marketplaces. These have consolidated as a new revenue avenue, but is it ever too early for startups to go that route? Let’s look into it. — Anna Where the money’s at The sky’s the limit for the cloud market. If Alphabet’s earnings missed expectations in Q3, it is certainly not because of Google Cloud, whose revenue grew 37.64% year on year last quarter, from $4.990 billion to $6.868 billion. Meanwhile, Microsoft’s “Azure and other cloud services” grew 35%. One of the key factors that make cloud revenue resilient even in a more morose macroeconomic context is committed spend. This creates tailwinds not just for AWS and its competitors, but also for independent software vendors selling through their marketplaces.

Could machine learning refresh the cloud debate? • ZebethMedia

Welcome to The ZebethMedia Exchange, a weekly startups-and-markets newsletter. It’s inspired by the daily ZebethMedia+ column where it gets its name. Want it in your inbox every Saturday? Sign up here. Should early-stage founders ignore the never-ending debate on server infrastructure? Up to a point, yes: Investors we talked to are giving entrepreneurs their blessing not to give too much thought to cloud spend in their early days. But the rise of machine learning makes us suspect that answers might soon change.  — Anna Bare metal, rehashed If you had a sense of déjà vu this week when David Heinemeier Hansson (DHH) announced that Basecamp’s and Hey’s parent company 37signals was leaving the cloud, you are not alone: The debate on the pros and cons of cloud infrastructure sometimes seems stuck on an infinite loop. It is certainly not the first time that I heard 37signals’ core argument: That “renting computers is (mostly) a bad deal for medium-sized companies like ours with stable growth.” In fact, both DHH’s rationale and its detractors strongly reminded me of the years-old discussion that expense management company Expensify ignited when it defended its choice to go bare metal — that is, to run its own servers. However, it would be wrong to think that the parameters of the cloud versus on-premise debate have remained unchanged. As Boldstart Ventures partner Shomik Ghosh noted in our cloud investor survey, there’s more to on-prem these days than running your own servers. Debate aside, I think most of us can agree that bare metal is not for everyone, which is why it’s interesting to see a middle ground emerge. “In terms of terminology,” Ghosh said, “I think on-prem should also be called ‘modern on-prem,’ which Replicated coined, as it addresses not just bare metal self-managed servers but also virtual private clouds, etc.”

Pay as you drive, or pay how you drive? • ZebethMedia

Welcome to The ZebethMedia Exchange, a weekly startups-and-markets newsletter. It’s inspired by the daily ZebethMedia+ column where it gets its name. Want it in your inbox every Saturday? Sign up here. Having talked to many insurtech investors lately, I found myself thinking about usage-based insurance (UBI, which in this case doesn’t refer to universal basic income). On a surface level, this approach makes a lot of sense: For instance, why should drivers pay the same premiums regardless of how many miles they drive? But differentiating users also raises all sorts of questions on what’s fair, and where UBI is heading next. — Anna Stop paying for others? “There has been a lot of noise around UBI […] over the past few years. It was supposed to be the next big thing, but it hasn’t really taken off yet,” New Alpha Asset Management associate Clarisse Lam told ZebethMedia. AV8 VC‘s partner Amir Kabir concurred with Lam, noting struggles among startups and legacy insurance providers alike: “Early startups operating the UBI space had a hard time creating meaningful moat,” he said. Meanwhile, he added, “incumbents have been operating in the UBI space for decades and have yet to see major adoption.” Coincidentally, or perhaps not, one of the insurtechs that was most badly hit by the stock market sell-off was Metromile, which went public in 2021 and saw its valuation decline over 85% before getting acquired by fellow former startup Lemonade. Metromile’s focus was pay-per-mile car insurance, a self-explanatory concept in which drivers get charged less if they drive less.

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