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a16z Podcast | Valuing Today's Fast-Growing Software Companies

316 views|5 years ago
💫 Short Summary

The video discusses evaluating SaaS companies based on revenue multiples and Billings, highlighting the challenges and differences in financial metrics compared to traditional models. It emphasizes the importance of understanding customer acquisition costs, customer retention, and long-term profitability in the SAS industry. The shift to recurring revenue businesses requires a new mindset and valuation methods, focusing on customer longevity and profitability over time. The speakers advocate for alternative valuation approaches and thank the participants for their time, promoting a holistic view of assessing the success of SAS companies.

✨ Highlights
📊 Transcript
Evaluation of SaaS companies and potential bubble talk.
Revenue multiples and expected losses are key factors in evaluating SaaS companies.
Traditional metrics like revenue and EPS may not apply due to subscription-based revenue model.
Revenue spread out over time, covering costs from initial license sale and ongoing maintenance fees.
Different revenue structure challenges conventional evaluation methods for company performance.
The profitability of SAS models is not immediate but comes over time as customers become profitable.
Traditional models involve upfront payments, while SAS models spread payments over months or years.
Costs for acquiring customers are realized upfront in SAS models.
The focus on Billings provides a more accurate view of contracted revenue over time.
Highlighting the importance of looking beyond simple revenue and EPS metrics.
Importance of Billings as a Leading Indicator of Revenue
Billings provide predictability and visibility into future cash flow for investors.
SAS is preferred for its ability to predict cash flows compared to perpetual licenses.
Castlight's IPO valuation was driven by Billings rather than revenue.
Billings backlog assists investors in forecasting future revenue and growth rates, ensuring confidence in achieving revenue milestones.
Importance of Deferred Revenue on a Balance Sheet in SaaS Companies
Deferred revenue reflects billing changes and growth or shrinkage in a SaaS company.
Acquiring customers in SaaS involves upfront costs, leading to initial negative income statement.
Long-term goal is customer retention and potential upselling.
SaaS customers expected to stay longer than traditional license customers, resulting in more revenue over time.
Importance of understanding customer acquisition cost and lifetime value for long-term profitability.
Acquiring and retaining customers are two different sales processes, with metrics like churn rate indicating customer longevity.
Initial negative cash flow when acquiring customers needs to be balanced with reaching profitability by accelerating growth.
Investors struggle with balancing customer acquisition costs and profitability but recognize the value of becoming a market leader early on.
Discussion emphasizes the balance between spending money on acquiring customers and achieving profitability for sustained growth.
Contrasting perpetual license models and SAS models in customer retention.
SAS models promote customer retention with constant product updates and decentralized purchasing decisions.
Decentralization in SAS models allows vendors to sell directly to specific departments like marketing.
SAS products are appealing due to ease of use and user interface, attracting more users within departments.
Traditional ERP products lack the appeal and user adoption seen in SAS models.
Importance of cross-functional collaboration in the software industry.
Collaboration between marketing, engineering, and sales departments is increasing, leading to the spread of systems within organizations.
Software as a Service (SAS) businesses may face cash flow issues when acquiring new customers rapidly.
NetSuite's example demonstrates that investing in customer acquisition can boost revenue growth, even with initial negative cash flow.
Emphasizing the renewal of existing customers is crucial, as they are more cost-effective to retain and contribute to higher profit margins in the long term.
SAS companies take 10-15 years to establish a large customer base and strong margins.
Public companies show margin improvement over time, indicating growth paying off.
SAS businesses have higher gross margins, allowing for investment in sales, marketing, and R&D.
Economies of scale benefit SAS companies, with multi-tenancy leading to more R&D leverage.
Models involving hosting, storage, and networking benefit from multi-tenancy in cloud deployments.
Importance of Shared Infrastructure Costs.
Sharing infrastructure costs among multiple customers allows for leverage and spreading expenses.
Initial Fixed Costs Necessary.
Incurring initial fixed costs for equipment and software is essential before generating revenue from customers.
Revenue and Expenses Misalignment.
Revenue and expenses may not align initially, requiring time for revenue to catch up.
Crucial Initial Investments.
Infrastructure can scale as the business grows, but initial investments are crucial.
Benefits of Multi-Tenancy in Enterprise Software.
Multi-tenancy in enterprise software eliminates the need for maintaining multiple software versions and prevents issues like Microsoft's deprecation of XP causing global issues.
Contrasting enterprise software with SAS companies.
Enterprise software requires maintaining different versions for multiple customers, leading to higher costs and complexities.
SAS companies offer a single version to all customers, resulting in economies of scale and improved profitability over time.
SAS companies use a subscription-based model, emphasizing customer retention and steady revenue streams.
This business strategy is seen in industries like AT&T and Comcast, with hefty marketing budgets and efforts to retain customers.
Transition to recurring revenue model requires new understanding of financial statements.
Revenue and costs realized in different periods impact profitability.
Traditional income statement model may not accurately value SAS businesses due to timing issues.
Challenges include upfront costs, lifetime value projections, and customer acquisition costs.
Estimating factors based on financial statements is crucial for assessing SAS companies' success.
Importance of alternative valuation methods and helping people.
Emphasis on looking beyond traditional methods.
Gratitude expressed for the time and participation of Pretty Cats Ready and Jamie McGuirk.