Opportunity or Risk Pt. 2

8/28 OpenView Capital Markets Roundup

Michael Burry wrote in a 2001 investor letter “$1 selling for $0.50 one day, $0.60 the next day, and $0.40 the next day somehow becomes worth less than $1 selling for $0.50 cents all three days… the ability to buy at $0.40 presents opportunity, not risk.” Conversely, in “When Genius Failed”, the partners of hedge fund Long Term Capital Management are noted to have argued that “Risk is a function of volatility.”

Per my roundup “Volatility or Risk” from April - which perhaps more appropriately should have been titled Opportunity or Risk - risk is in the eye of the beholder.

Last week I wrote that the risk profile of venture is unchanged, which spurred some good debate. The counter to my claim is “don’t we live in a world where markets have more resolution, buyers understand options, and unit economics are more clearly defined resulting in less uncertainty, or less risk?”

I tend to side with Burry. A dollar selling for more than a dollar is always risky.

That said, whether an equity is available for more or less than a dollar is purely subjective. As with risk, so too is intrinsic value in the eye of the beholder. All investing involves creating detailed but subjective forecasts about future company fundamentals. Venture investors pay more than a dollar because their operating value driver forecasts - namely revenue growth - are so great that what looks like a dollar is really more like fifty cents in a year. But to reinforce the point from last week, investors are paying much more for $1 than they ever have before. Higher prices are countering perceived “reduced uncertainty” provided by visibility into future growth.

Venture investments are still just as risky.

And it isn’t just venture investors paying more for a dollar. Look no further than Salesforce which closed up 31% this week after a “blockbuster” earnings report. Salesforce didn’t even beat its original guidance from the beginning of the year! Last quarter, Salesforce reduced its revenue guidance to $20B from $21.1B. After “crushing” this quarter Salesforce raised full year guidance to $20.7-20.8B. So revenue went from $21.1B to $20B to ~$20.75B (below original guidance, still) yet the stock, which was already up 67% from March lows before earnings, is up another 31% after continuing to disappoint vs. original FY2021 guidance?

Now sure, I can believe “expectations changed” because the pandemic has been a real concern for new sales, but that concern wasn’t reflected any other SaaS stock, and Salesforce’s 67% bounce off lows before earnings implied strong expectations for the stock despite the guidance reduction. Investors are paying more for the same “dollar” that is Salesforce. BigCommerce, which went public at $24 share on August 5th, is now up 446% in the 23 days since (this is on a narrow float, but it’s still a large, large gain in 3 weeks). Fastly (which still can't even give the market a good retention figure) has produced venture like returns this year and is up ~4.75x from $20.07 to $94.67 / share (and is finally acquiring with that stock, so like, buying companies for essentially free). It took Apple 42 years to reach a $1T market cap. It took 2 for it to add another trillion. Every dollar in the stock market costs more than a dollar right now!

The multiple expansion we’ve observed this this year is volatility and while that doesn’t necessarily mean risk, paying more than a $1 for $1 does. Paying increasingly more than $1 for just $1 is even greater risk. It is possible that there are 65+ public software companies with durable competitive advantages and 20+ years of runway for value creation. And any of us can go and build a 20 year discounted cash flow model to justify valuation with that in mind. But I can’t help but feel that there is a qualitative component of pure irrationality and lack of sophistication at play. The coin keeps turning up heads. We can all generate returns without being right, I suppose.

The Latest From OpenView

The Future of Product Led Growth Might Be Hiding Where You Least Expect. PLG is everywhere… but how many security businesses can you think of that have truly embraced the model? How does a company demonstrate value, extract revenue for the value delivered, and do so without any sales in an industry where just “swiping a credit card” goes against the grain for any end user who is trained in proper risk management and compliance? I enjoyed how my colleague Sam Richard unpacked the past, present, and future of product led growth in security and beyond.

Speaking of PLG, we enjoyed this quote from Jfrog’s S-1 filing (more below):

Importantly, we’ve never sold it. It’s always been bought, and to this day we haven’t made a single field sales outbound call to a prospective customer.

Market Updates

Friendly reminder: Workday remains my bear case.

This was the week of the S-1. 4 enterprise software companies filed to go public including Sumo Logic, Asana (which will likely direct list), Jfrog and Snowflake. Between SPACs, Direct Listing, and traditional IPOs the public markets are busy.

Private markets are as well though - we’re hearing of more activity (M&A processes that are underway and seeing strong traction) as companies look to get ahead of any potential “second wave” of COVID and the Presidential election (risk of changes to corporate tax rates). We’re also hearing that strategics are increasingly competitive. While at one point many couldn’t compete in processes against their more nimble and capitalized private equity friends, as private equity firms stepped back to focus on their portfolios and couldn’t access credit for new deals in the Spring, strategics have been able to step into the void and take their time evaluating M&A targets. All indices finished up this week (SaaS +5.54%, Dow +2.59%, NASDAQ +3.81%, S&P 500 +3.26%).

Economic Data

On consumer confidence: “Consumer confidence is moving backwards as more companies announce layoffs, jobs get harder to find and the coronavirus pandemic continues to wreak havoc on the economy,” per Dion Rabouin. “The big picture: The low readings on consumer confidence have persisted despite the skyrocketing housing and stock markets, which typically boost sentiment by driving the wealth effect.”

On the economic outlook: “I do believe the recovery is going to be a slow one,” Cleveland’s Fed Chair noted during an interview with CNBC this week. Mester also claims that economic data should reflect growth in the third quarter as businesses reopen but that doesn’t mean the economy is in the clear, and expects more pain out there that the Fed is going to have to support the economy through. This is great news for the markets as continued “Fed Fracking” will buoy asset prices for the foreseeable future.

What Else We’re Reading

Closing time: take our 2020 SaaS Benchmarks Survey here. The public SaaS companies we track closed the week trading at 13.5x 2020E revenue at the median (+0.8x vs. 12.7x last week). In Defense of the IPO and Why Entry Multiples Don’t Matter. A Few Things We Learned In Q2 - with an emphasis on the coverage of enterprise software!