The Exchange – Page 2

What’s the right NDR target for SaaS startups? • ZebethMedia

By zebethcontrolPosted on November 8, 2022Posted in EC Newsletter, EC venture capital, Enterprise, openview, SaaS, Startups, The Exchange, VentureNo Comments

Why are software companies valuable? Put another way, why have we spent so many years valuing software companies using revenue multiples, instead of the profit multiples that are more common in other industries? There are several key reasons. First, software companies have very strong gross margins; software is cheap to sell once you’ve written the code. Secondly, and more to the point today, is the fact that modern software companies are set up to sell more of their product to existing customers over time. This is often achieved through selling more seats (individual use licenses) to extant accounts or, in the case of on-demand pricing, more total usage of a service over time. Regardless of the method, what matters is that software companies today tend to see limited gross churn (customers dropping their contracts) and positive net dollar retention (the sale of more product to existing customers over time). The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. Net dollar retention (NDR) is, essentially, gross churn from existing customers plus upsells from the same, measured over a set time period. The resulting metric, measured in a percent of prior revenue, helps investors understand just how much built-in growth momentum a company has. The greater net dollar retention that a software company has, the more efficient its growth will be (selling more stuff to already-landed customers is cheaper than securing net-new accounts). NDR matters, and investors, focused on more efficient growth than last year, are likely putting more emphasis on the metric. So, what should startups target when it comes to NDR results? Even more, do those expectations match what startups are actually reporting? And who has better net retention, public software companies or their startup rivals?

Maybe we were valuing software companies the wrong way all along • ZebethMedia

By zebethcontrolPosted on November 7, 2022Posted in EC Newsletter, EC venture capital, jason lemkin, Startups, tech valuations, The Exchange, VentureNo Comments

‘I honestly didn’t think it could get worse’ What’s a software company worth? It’s not an idle question, but one that underpins a huge amount of private-market investment and human effort. In 2021, the presumed value of software revenues grew, adding to a longer upcycle that pushed tech companies’ valuations into the stratosphere. Since late 2021, however, a decline in tech valuations in private and public markets has entirely shaken up the game. And then, after quarters of declines, tech stocks took another gut punch Friday, with a key index tracking the value of cloud and SaaS stocks reaching a fresh 52-week low. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. To paraphrase SaaS investor Jason Lemkin in the wake of the selloff, we didn’t think that it could get worse. So much for that misplaced optimism. The recent selloff is news in and of itself, but past examining the latest contractions, it’s worth asking the question lurking at the back of the entire software revaluation saga: Were we using the right valuation metrics all along? Maybe not. And if not, we’re not only seeing a reevaluation of software companies, but perhaps a new era of tech valuations more generally. It won’t be one that is attractive to startups. Public tech companies are also running afoul of the shift.

SaaS and alts • ZebethMedia

By zebethcontrolPosted on November 5, 2022Posted in alternative assets, Enterprise, Fintech, SaaS, Startups, TechCrunch Exchange newsletter, The ExchangeNo Comments

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.

Why Robinhood and Coinbase gained ground after reporting earnings • ZebethMedia

By zebethcontrolPosted on November 4, 2022Posted in coinbase, Crypto, EC Cryptocurrency, EC Fintech, EC Newsletter, federal reserve, Fintech, Robinhood, Startups, The ExchangeNo Comments

You’d be forgiven for expecting public fintech companies that facilitate consumer trading to be under pressure this week. And yet, after reporting earnings, the share prices of two pandemic-era highfliers gained ground. Coinbase and Robinhood up? In this economy? Yes. Of the out-of-fashion tech sectors, consumer trading has to be among the most out of favor. And yet. ZebethMedia wanted to better understand investor response to results from both Coinbase (crypto-focused) and Robinhood (equities-focused) to figure out what drove each company’s shares higher in the wake of their reports. The answers, it turns out, are partially related. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. In an ironic twist, some of the forces that have made consumer trading less attractive are the very same impulses helping the two companies derive more revenue from a previously less-critical part of their business. The Federal Reserve taketh away, and the Fed also giveth some back.

Amplitude’s earnings show what you need to report to survive in today’s market • ZebethMedia

By zebethcontrolPosted on November 3, 2022Posted in amplitude, EC Enterprise, EC Newsletter, EC venture capital, Enterprise, Startups, The ExchangeNo Comments

The U.S. Federal Reserve raised the price of money once again yesterday. Investors expected the move, but shares dove after the Fed declined to tell investors that it intends to slow the pace at which it raises interest rates in the future, as some had hoped. While shares of many U.S. companies fell in the wake of the news, tech stocks took a particular whacking. And then a few tech companies reported earnings. You have to feel for them to some degree — reporting earnings during a down cycle for your sector right after market conditions just became more difficult is not the stuff of CEO dreams. The opposite, really. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. But the earnings news was not all bad. Despite a weak advertising market imperiling the Snaps and Metas of the world, and in contrast to slowing cloud growth more generally, there were a few green shoots amid yesterday’s earnings reports that are worth our time. Why? Because when we see public market investors react warmly to smaller-cap tech companies’ results, we can get a vibe for how unicorns might be valued if and when they do go public. Robinhood, the consumer trading platform, is up around 9% this morning after its own earnings report, worth around $10 billion. And later this afternoon, Coinbase will report results.

Welcome to the late-stage discount market, where everything is on sale and few folks are buying • ZebethMedia

By zebethcontrolPosted on November 2, 2022Posted in cb insights, EC Newsletter, EC venture capital, startup valuations, Startups, The Exchange, Venture, venture capitalNo Comments

If you are raising money for an early-stage startup today, there’s reason to be hopeful when it comes to the price that you might be able to charge for shares in your company. The later stage your startup is, however, the worse your chances are to raise funds at a price that you like. New data from CB Insights indicates that, on a global basis, the farther along the alphabet a startup’s next funding round is, the more valuation pressure that transaction will be under from a price perspective. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. The data is surprising in how clear it is in trend terms, but not too surprising. Recall that mega-rounds, or venture capital deals worth $100 million or more, have fallen precipitously this year. While median deal size through the third quarter has been flat in the early- and mid-stage startup market, late-stage deals have gotten smaller this year. With that backdrop, falling late-stage valuations are hardly surprising. Venture investor and SaaS aficionado Jason Lemkin had this to say today: My summary of Venture Markets in Nov 2022: Series B and later even worse than looks in data: 85%+ of investing here has simply ceased[.] Lower volume implies less demand; less demand implies less competition around deal price; less competition means lower prices.

Are investors really paying more for profits than growth today? • ZebethMedia

By zebethcontrolPosted on November 1, 2022Posted in battery ventures, cloud, EC Cloud and Enterprise Infrastructure, EC Newsletter, EC venture capital, Enterprise, Startups, The Exchange, VentureNo Comments

What’s better: growing quickly or making lots of money? The answer, in startup terms, is both. But because there is a natural tension between growth (which usually comes with incremental costs, often in advance of new revenues) and profitability (allowing revenue to further extend its coverage of operating costs), most startups lean more on the growth side of the equation. It’s not hard to understand why. Venture investors provide capital that often greatly exceeds a startup’s revenue base, allowing the company to hire and market aggressively — and build, we hasten to add — in hopes of far-larger future scale at the cost of near-term profitability. The tradeoff between growth and profitability is often detailed in the so-called Rule of 40. Indeed, the rubric that combines a growth metric (measured in year-over-year terms) and a profitability result (measured in percent-of-revenue terms) in hopes of the sum meeting or exceeding 40 has generated derivative metrics for companies of a particular age or segment. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. Naturally, the Rule of 40 is not something that applies to, say, pre-revenue startups hoping to raise a pre-seed round. It’s a metric that applies to startups that are generating revenues at a sufficient scale to make the numbers reasonable; no one cares if you can meet the Rule of 40 while tripling your revenue from $1 to $3 per year, but if you are expanding your revenues from $1 million to $3 million per year, the rule is likely something you’ll be measured against. Now that venture markets are in retreat and public markets have been revalued, there’s been some push for startups to change their posture, trading some growth now for smaller deficits. A flight to quality, some call it. We’d call it a rebalancing away from quicker growth and staggering losses toward merely rapid growth and less cash burn. Battery Ventures recently dropped a new report (the “State of the OpenCloud 2022”) that includes some fascinating data on the profit/growth conversation. It’s something that we’ve touched on repeatedly here at ZebethMedia as both venture investors and their public-market cognates have shaken up their valuation models.

It will take a ‘bulletproof’ startup to break the IPO logjam • ZebethMedia

By zebethcontrolPosted on October 31, 2022Posted in EC Newsletter, EC venture capital, IPOs, M&A, Startups, The Exchange, VentureNo Comments

That Intel managed to spin out Mobileye as a public company was good news of sorts for the technology exit market. But a single successful corporate spinout is not a sign that public-market tech debuts are back. Indeed, with news that Instacart is now pushing for a 2023 IPO, the upcoming calendar for tech exits (apart from M&A) is more than weak. It’s moribund. Perhaps that’s why the Twitter-Musk saga — an anti-IPO in that we’re seeing the social media company go private — is consuming so much oxygen: There’s not that much else going on when it comes to fascinating exits. Well, the UserTesting sale aside, I suppose. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. What we care about is understanding when IPOs may return, as they could provide another method by which late-stage startups can raise capital. Currently, there’s concern that some unicorns are uninvestable and will therefore die. More capital to the cohort of billion-dollar startups could alleviate some of those pressures, not to mention help confirm the new pricing chart for startup shares.

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

By zebethcontrolPosted on October 29, 2022Posted in cloud marketplaces, Enterprise, enterprise software, Startups, TechCrunch Exchange newsletter, The ExchangeNo Comments

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.

Twitter just keeps getting more expensive • ZebethMedia

By zebethcontrolPosted on October 28, 2022Posted in EC Consumer Applications, EC Newsletter, Elon Musk, Social, The Exchange, TwitterNo Comments

That Elon Musk closed his buy of Twitter this week has been wall-to-wall news. With the former executive team out, jokes in, and Musk now in control of the social service, a long chapter in technology history has been written. Views vary regarding what’s next for Twitter, be it looser content moderation guidelines or the return of certain banned users. What Musk intends to do with his new company — a corporate entity he, variously, wanted to influence, take a board seat in, buy, not buy, and, ultimately, bought — will come clearer in the following weeks and months. You won’t be able to miss the coverage, given the centrality of Twitter to the news cycle and Musk’s ability to keep the press’ attention. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. But before we wrap up this period of tech history, we’d be remiss to not compare the new value of social companies with the price that Musk is paying for Twitter. It was well-established before the deal closed that Musk was overpaying for Twitter based on the changing value of tech shares since the transaction was agreed on.