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Be Like Mike
8/21 OpenView Capital Markets Roundup
At long last! The Last Dance is on Netflix. I was too young to truly remember Michael Jordan in his prime (and since I’m now a Boston sports fan, there has been plenty to keep me preoccupied vs. something that happened in the mid-90s - sorry everyone).
That said, I sure do remember wanting to Be Like Mike. Watching the mini-series, I couldn’t help but think about how in a lot of things there is one god-like all-time great that is instantly associated with the activity. Tennis has Serena; football has Brady; hockey has Gretzky, and of course enterprise software has Salesforce.
Salesforce: the enduring 20%+ growth, ~20% free cash flow margin monster.
Every enterprise SaaS company wants to Be Like Salesforce.
If you believe that a company is worth the present value of its future cash flow then when historical cash flow data is lacking, it is easy to underwrite to enterprise SaaS becoming Salesforce based on the assumption that Salesforce is what “mature SaaS” looks like. If XYZ keeps growing they’ll get to $100M in revenue, 20% growth, 20% FCF margins. This is rationalized by investors into “I can pay whatever price I want today because it’ll grow fast and then be Salesforce.” But it is lazy to generalize that any SaaS business - or any business of any kind - will generate similar margins to mature peers. And it is essentially impossible to crystal ball margin profile 20 or more years out in venture capital. Alas, that hasn’t stopped many Bay Area investors from pretending that any company emitting a faint odor of enterprise SaaS is predestined to eventually Be Like Mike. And don’t just take my word for it. The evidence is piling up.
2 months ago we were talking about flat round is the new up round; today, people asking “what happened” if you didn’t get preempted to A. There’s a growing split between seed investors that move quickly and are not valuation sensitive, & investors that help meaningfully beyond capital. Current valuation rule of thumb right now for competitive momentum Bay Area Series A & B deals right now: growing $1 to $5M in less than 6 months? $150-250M post money. Post-money valuations for competitive Series A & B deals in Bay Area since shelter-in-place are very high. Price doesn’t matter. Sequoia investing in dbt at north of 200 pre and ~200x revenue multiple.
What concerns me is that not many players (companies) have actually been like Mike.
Perhaps Kobe is Workday and Lebron is Atlassian. But the all-time greats in everything are few and far between. Call the market what it is right now: frothy, exuberant, irrational. Most companies (even public ones) aren’t Salesforce yet. As Bruce Greenwald says, in the long run, everything is a toaster. Despite what we’re being led to believe by the narrative of market sizes expanding and enterprise SaaS spend increasing, not every company will be like Salesforce. This narrative is pushing the cost of capital lower though, and this is manifesting in venture as higher valuations. But the risk profile of venture investments, despite narrative, is entirely unchanged. In a few years, this will come out looking like depressed IRRs for ‘19-’20 fund vintages for some firms. Sure, venture investors don’t need to hold on until a company is Salesforce, but 3x’ing from a $200M valuation for a sub-$5M ARR company is not a very high probability outcome, even in enterprise SaaS.
The Latest From OpenView
There was tons of great content coming from OpenView this week, but Blake Bartlett and Kyle Poyar both had “must reads” I want to highlight. Blake shared a conversation with Kipp Bodnar, CMO at Hubspot. In the podcast, Blake and Kipp unpack:
(1) How a self-service journey fundamentally changes B2B marketing.
(2) Kipp’s view that anyone can introduce a new self-service tool to a team.
(3) Hubspot's secret to collaboration between marketing and growth.
Kyle shared an “oldie but goodie” with new data as of August 2020: Can’t we do better than NPS? NPS is good I guess, but it needs to be paired with metrics that better predict customer satisfaction, advocacy, and stickiness. Check out the post for more!
The S&P 500 broke above its late-February high and notched a fresh all-time high this week. PMI data (more below) excited the market, but lack of new government stimulus kept performance in check. Notably in the linked, and as we’ve said before, much of the gains since March lows were driven by Tech: “It would be constructive for the overall health of the market if we started to see wider breadth and other sectors showing strength…We’ve had a few minor rallies in cyclical value-oriented sectors off the March lows but none that have been sustainable.” Key indices generally performed well this week (SaaS +3.97%, Dow +0.00%, NASDAQ +3.50%, S&P 500 +0.72%).
My favorite resource from the week is this “Track the Recovery” website.
The website allows anyone to explore key economic data - including spending, business data (revenue, openings), employment data, and even public health data. One interesting takeaway from data on the site today: the recession has nearly ended for high-wage workers, but job losses persist for low-wage workers (latter is partially driven by declines in high-income spending, which led to significant employment losses among low-income individuals working in affluent ZIP codes in the country).
There was a jump in unemployment claims this week. “The modest jump is a stark reminder that claims will likely encounter some turbulence as they fall rather than gliding in for a soft landing.” Elsewhere, rumblings of hyperinflation, and a housing surge to recovery. Between housing and PMI reaching its highest since early-2019, optimism is returning. But remember rule number one: get the virus under control, return to a normal economy.