Redpoint Venture - State of the Market '24 Report Review

Live from Schenectady, New York, it's SaaS Talk with the Metrics Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, independent consultant, EIR at Balderton Capital, and the author of Kellogg.

And together we are the Metrics Brothers.

And we go together like Jolly and Roger.

Ah, so we're pirates today, matey.

Arrr, that's cack to you, Growth.

Growth? Well, some people call me because I'm Ray Reich.

Arrr.

So I thought you'd like that. Whose ship are we boarding today?

Ah, matey, we're going to be boarding the USS Redpoint. Logan Bartlett, a partner there, shared on X a great kind of state of the market deck that they use at their annual general meeting or AGM. And I thought it'd be fun to highlight it and walk through it today.

Well, shiver me timbers, we're reviewing a VC deck.

We are, Ray, but before we shiver Ray's timbers, we need to hear, we need to hear a word from our sponsor.

The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Grootewright Have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave at Kellogg and Ray on LinkedIn at Ray Reich. Thank you so much for listening to the Metrics Brothers podcast. Okay, Dave, let's talk a little bit about the deck, where it came from, and just kind of provide your initial high-level perspective on the deck.

Sure. How are your timbers doing, Ray? They still shivering?

Aren't you funny?

You know that expression? I had to look it up. It comes— it's obviously a pirate expression, and it's from running aground. So when you run aground, the timbers of the boat shake, and that's so— so it's an expression of surprise. They're like, oh, we hit the bottom.

Yeah, running aground is the perfect metaphor for what's happened to the SaaS industry the last 2 years.

Shiver me timbers indeed. Um, so this deck was written by a guy named Logan Bartlett, who's a partner at Redpoint. They shared it at their annual general meeting. It looks like they have an advisory committee if you see it on the title slide. It's about 2 months old at this point as we speak here on May 1st, 2024.

Okay, so I know one of the first things they shared was the NASDAQ value and what's been going on. But Dave, I want to remind everyone, we don't provide investment advice.

Yeah, once again, we're going to be talking about things related to valuations and stock and listen to our end of episode disclaimers. But yeah, we don't give financial advice, but we'd I like to look at this because the public markets set the tone for the private markets. And if you're a private company, as most of the companies Ray and I work with are, these numbers eventually reflect on your fundraising strategy.

So on slide 2 of this deck, he just highlights the NASDAQ since February 19th. And he went through February 24th because this report is about 2 months old, and he had NASDAQ at 16,092. It's down a little bit today, Dave, here on May 1st when we're recording this, I think it's like around 15,900. So it's down about a little over 1% right now.

All right, cool. Yeah, so, so that's probably the, the slide that's most vulnerable to the passage of time. Um, you know, overall I like this deck. At first I think it's a well-made deck for metrics. Let's just comment there. It's got one chart per slide. Typically when there's 2, they both need to be there. Uh, it makes simple points. So just as a piece of work that presents numbers, I actually think this is a pretty good deck. The other thing I'd say is it provides a nice high-level take on where the market is, which we're going to talk about in a minute. And I'll just jump in here, Ray, and lead us off here. I'm on slide 4 in the deck, which talks about high-growth cloud software multiples. And what he's showing is that basically, if you go back to February of 2019, high-growth software companies were typically valued, median valued at 10x revenues. At the peak of the craziness, they were valued at 25.1x revenues. And then as the roller coaster hit at the trough in December of '22, a little less than a year later, we were down to 7.2x. And that's not a median for all software companies, that's a median for 30%+ growers. So that was a heck of a ride down there. And the answer is we seem to have bounced back to normal levels here. The slide doesn't go back far enough in time to really give you a real sense of history, but I think that high-growth software companies are typically valued around Around 10x. I think just all growth software companies are typically median valued around 6.5x. So I do think we're kind of back to normal on valuations.

I agree. And I wanted to highlight, you mentioned that 6.5x at median. And we talked about this during our pre-recording episode. And that is, we're still not paying for low growth though, because those companies that are growing less than 15% per Jaminbalt, did I pronounce it right? Jamin?

I think it's Jamin. We looked this up on pronouncenames.com, Ray. We know how to do this.

But if you're growing less than 15%, that multiple is 4.2x on forward-looking revenue next 12 months. So the market still is paying a premium for growth, Dave.

Yeah, absolutely. And you can see it just in these multiples. 10x to me is always a— I'm a little bit old-fashioned, but I view that as a rich valuation for a software company. Uh, and the reason you're getting it here is because you're a high So let's move on. By the way, median growth rates, I think, are around 11% in the software business, just to give you an idea of how good these companies are. I think the median company's growing around 11%, and these are the people who are growing 30+. So—

Yeah, let me add something to that, Dave.

Please.

Because I know a lot of times we're talking about we're returning to normal, right? Not in the ZIRP era. But I also did a little additional research on median growth rates back in 2015, '16, '17. And I did just want to highlight it, even back then for public companies, the median growth rate hovered around 30%. So even though we've reverted back to median multiples, we sure are not back to historic median growth rates for public companies.

Yeah, and I'm guessing we'll get to it in 2 slides. I'd love to know what the median free cash flow was back then too, because it's going to take us to the Rule of 40 conversation.

Hey Dave, I'm growth. I only worry about growth. Okay, fair enough.

Says the former sales leader. Now let's talk about the relative weighting of growth and profitability. This is a topic we talked about in our episode on the Rule of X from Bessemer, or what software equity group SEG calls the growth-weighted Rule of 40 score, where you basically take growth and weight it 2 to 1 relative to profit in calculating Rule of 40 scores. The increasingly popular way to look at that— one way to look at that kind of metric, it's not the exact same thing— is to do a 2-factor regression and look at the relative power or weight of growth relative to profit. And as talked about in the prior episode, in the peak at around August 2021, growth was 11 times more important than profit in determining valuations. At the trough, it was 2.2, and, and it typically hovers between 2 and 2.5, or actually between 2 and 3. Um, I think if you will pick a single number, people go 2.3. I personally just use 2. I use the Software Equity Group's, um, weighting. But in any case, what you see when you look at the chart 5 here in red points is that the relative importance of growth to profit has kind of come back to normalcy once again, running between 2 and 3 and down from the kind of crazy peak of 11.

Yeah, and that's on slide 5 of the deck, you know, the Redpoint deck we're talking about today. It shows the 2.9 premium on revenue growth versus free cash flow margin. But Dave, I look at slide number 6 of the deck And that's showing growth rates. And I don't know if it's premature, but can we talk a little bit about the trending of growth rates versus FCF?

Sure. This is the most interesting slide in the deck, in my opinion, Ray. Um, this slide, slide 6, basically shows median growth versus median free cash flow from March 2021 to today. And just to make it easy for those not looking at the chart, in March 2021, the median growth was around 25%, the median free cash flow was around 5%. And companies have basically— these are Meritech, this is Meritech's data, so these are public SaaS companies. These companies have kind of reconfigured their profile from 25/5 to 14/14, meaning that the median revenue growth is 14% and the median free cash flow is 14%. Now the interesting thing about this chart, so you imagine 2 lines kind of just kind of converging on 14. They start out, one's at 5, one's at 25, and they kind of come together at 14. The interesting thing here is the Rule of 40 score basically doesn't change. 25 plus 5 is around 30, right? These numbers are approximate. 14 plus 14 is around 30. Let's just say it's close enough. So the Rule of 40 score effectively has not changed, which is interesting, because if you think Rule of 40 is a predictor of value, it means valuation multiples should not change, which, by the way, they haven't. I think if you go back, there's a lot of up and down along the way. But the interesting thing here is if you're a believer in the Rule of X, that this is a worse profile, right? The Rule of X score starting is 2 times 25 plus 5, which is 55. And the Rule of X score today would be 2 times 14 plus 14, which is 42. So if you believe that growth is truly more valuable than profit and you use either the Rule of X or a growth-weighted Rule of 40, the industry has basically reconfigured itself to be less valuable, which I find pretty amazing.

Dave, I, I still cannot get my head wrapped around this because slide 5 shows that growth is valued, and they say here, 2.9 times higher than free cash flow. But then the next slide, which shows that growth is down from 25% to 14%, but free cash flow is up to 14%. Have we, uh, as an industry over-rotated to profitability because we thought that was what Wall Street wants? However, Simultaneously, Wall Street is still paying a premium for growth. It seems incongruent to me.

Yeah, the mystery of Mr. Market, I guess. Uh, I, I don't— I can't explain it. Um, I, I think I could just observe it, that, that, look, if you believe in growth-weighted Rule of 40, these companies are, are worth less than they started out in terms of revenue multiple, uh, because they've reduced their Rule of X score, their growth-weighted Rule of 40 score. So, um, I can't explain all of it. I, I do I do think some of it, Ray. Look, cash flow went from 5%, which is almost nothing, to 15%. And I think some of it might just be absolute values. I remember at some point, Ray, we saw that provided— I can't remember what it was, but provided your free cash flow was above X, growth got rewarded. Remember that chart? It was in some prior episode. That's what I feel like when I look at this, that the market's actually saying, hey, provided your free cash flow is above 10, then we're going to value you on growth. And if it's not, We're going to punish you. Maybe that's what's going on.

Dave, that's really good recall because that was another Meritech Capital chart from many episodes ago. And the maximum enterprise value to next 12 months revenue multiple was for companies that were 30% or higher growth in between 10% and 20% free cash flow margins. But at the same time, the market started penalizing companies that had a free cash flow margin over 20%. Because they didn't think they were reinvesting in growth.

Yeah, all of life is not a linear regression, right? There's sometimes other, other things come into play, much as we might like it to be. Uh, the other one you found, Ray, I don't know if you talked about this already or it was in the warm-up, but the breakpoint on, uh, Jamin Ball's data on enterprise value to revenue as a function of, uh, as a function of growth, actually. Yeah.

Yeah. And in fact, just so, in Clouded Judgment that Jamin does, it's great, he does it weekly. But if companies he considers high growth, 27% and above versus 30% in his deck, so very close, that the enterprise value to the next 12 months revenue multiple is 11.0. For 15 to 26% growth, we're still paying a 10x multiple. But if you're less than 15% growth, that median multiple is only 4.2x. So we are Really punishing low growth as defined as less than 15% X. Wow. 15%.

So as usual, Ray, I can't see the timer on my computer. I don't know why, I never can. So you're gonna have to keep us honest on time. Uh, I'm gonna move through to slide 7 here and just say this is another Jermaine Ball slide that, uh, the, uh, the Redpoint guys took for their deck. And it basically says— and I like to just remind people of this, you know, if you feel like it's tough out there, it is. Uh, this slide is showing median net new ARR growth year over year. And in Q2 '21, the median was 71% net new ARR growth. Wow. And it's just been in a kind of monotonic dive since then. It goes by quarter: 53%, 45%, 22%, 9%, -10%, -14%, -27%. And then it bounces in Q1 of 2023. It comes up to -10% in Q2 of 2023, up to 1% in Q3. And I think it's not on this chart, but it goes back down to -10%. So it has been a rough ride down. I think we may gotten what I think they call a dead cat bounce. So we had a little bit of a bounce, but we didn't come all the way up. So I think it is tough out there. Driving growth is hard.

It is very hard, but I've seen a couple of Wall Street analysts predict that Q4 is gonna be the magic turning point. But I also heard people saying that was gonna be Q3 and Q2 6 months ago.

So if growing is hard, Ray, let's talk about something else you like to talk about, which is also hard, which is making quota.

Ah, yeah, let's talk about that before we actually talk about the time between rounds. But let me just go to that because I believe that's slide 8 of this deck. And what it shows is quota attainment by quarter for software sales reps. Back in Q4 2021, 53% of people were making quota. Q4 of 2022, which was when we really hit the, the middle of the SaaS-icure, only 23% of reps were making quota. Q4 of 2023, we were all the way up to 29%. And they say in this report, and it says the source is Bravado Network, we're up to 41% of sales reps are making quota. But I question it because number one, I don't know the methodology. But having set quotas for 25-plus years, Q1 quotas were always lower. I ramped them as the year went up. So my belief here is this is selection bias because the lowest quarter of quota is almost always Q1.

It's a good point. They're comparing 3 years of Q4, and Q4 is typically the highest attainment quarter. So those numbers are actually quite scary. Like, if this is enterprise software, right, you might get 40% of your year in the last quarter or more. And they're showing pretty dismal— I mean, very dismal attainment of 23%, 29% in 2022 and 2023. And you're right, it's non-comparable. You can't compare 3 Q4s to 1 year-to-date. And by the way, it's not even year-to-date, it has to be Q1. Uh, nobody reports quota attainment by week. So—

We should actually dedicate an entire episode to quota attainment because I think what we've done as an industry— and the Bridge Group just came out with some great new benchmarks for private SaaS companies— I think we are shooting ourselves in the foot with the way we're allocating quota. And burning reps out. But that's a whole other topic.

Yeah, and RepView is also producing some pretty interesting data about that as well. So there, there is good material to, uh, to discuss there, Ray. I gotta leave it on you to remind us to get that on the list for a future episode. I think it's a great topic.

We still got about 4 to 5 minutes left, so let's go to funding trends.

Yeah, so on funding trends, there's a couple things this chart, uh, this deck shows. On slide 10, they're showing the interval between rounds measured in months. And the pattern of the chart is basically, I'd say that the norm, well, I believe the norm here is 18 to 24 months, frankly. And I derive that from first principles of, hey, it's kind of a pain in the neck to raise money, so you don't want to do it much more than 18 months. You want to go at least 18 months before you have to go out and raise money again because it's often a 6-month process. So if you're raising money every 12 months, you're almost in a constant fundraising mode. Or the market's so crazy you can raise it very easily, which is what I think happened in the past few years. But I'd say the traditional norm on fundraising is you raise a round, it should last you 2 years, and you're raising money every 18 to 24 months, grosso modo. And this chart actually brings the data starting in 2018. I'm just going to read some numbers to you. So it starts at 10 months, then goes up to 14, then up to 18, then down to 17. Then during kind of ZIRP craze, it's, it's down almost into single digits, 11, 13, 9, uh, in the second And since then it's kind of been building slow and steady from 9, 12, 15, 19, 21, 22, getting back to be what I consider to be the normal between fundraising rounds. In fact, my rule of thumb used to be you can always guess someone's burn rate by dividing their last round by 8. That was one of my many hacks. So if they raised $60 million, you could assume they're burning $2 million a quarter because they want to make it last 2 years. And that pattern was not valid during the ZIRP era, but I think we're coming once again kind of back to normal.

But there is a silver lining in this dark cloud of having more time between rounds, and that is you don't have to raise as a down round. So can you talk a little bit about what the deck says regarding percentage of rounds that are actually down rounds right now?

Yeah, and let me just address the thing you said because, uh, I think there's a couple things. But the extension is, in my mind, a good thing because you're fundraising less often. It's also potentially a bad thing, which is you might want to raise money now but you can't, right, because valuations are down and you'll have to do a down round, as we'll see in a minute. While down rounds are increasingly common, people still don't like them. So some of this, I do believe, is down round avoidance, i.e., put more positively, growing into your last round valuation. And people do that by reducing operating expense. They do it by taking debt, is another popular strategy. They do it potentially by doing an inside extension round. There's a number of ways to try and basically grow into your last round valuation before doing a new round. And those are the reasons why this interval is going up. And again, again, it's going up, but it's, it's coming back to normal at the same time because it got very short. Um, and I think there's a bunch of reasons why that happened, but, but it got quite short.

So Dave, we've only got about a minute left, so do you want to talk a little bit about the shutdown trends?

Yeah, well, no, let me do the down rounds, right? I got— I'll do both actually. I'll cover them both real quickly. So down rounds, look, they're 15% of down rounds here. 15% of rounds have been down rounds this year. Um, that's from, you know, 2021 where only 8% were. I would say the historical average is around 15%, just looking at the chart here on slide 11. Um, it got really high in the internet bubble, it was 53% in 2002. Uh, in the global financial crisis, it was big, 35%, right? Um, but it quite— it got quite low during ZIRP, and it's kind of bouncing back to normal. So my main message here is there's no shame in a down round if you have to do one. I mean, a lot of things worse going to happen to a company than down round, and one of those is shutting the company down. And, uh, this is pretty amazing. This is not normalized to anything, it's just absolute count. So it's not as a percent of total companies or a percent of fundraisings or, or something to normalize it, but the absolute numbers. Typically since 2019 to 2022, between 30 and 40 VC-backed startups that raised more than $10 million shut down. 2023, 122 did.

Wow.

So, and this is something relatively rare in my experience. Venture companies almost never actually died. They kind of become zombies, or they go low growth, or they do an acquihire. But actually shutting operations, in my experience, is pretty rare outcome, um, and, and not so much these days.

Pretty rare. But I'm going to go out on a limb, hot take here on SaaS Talk with the Metrics Brothers from the Growth Guy, that 122 shutdowns in 2023 will be eclipsed Got it.

Okay, well, you heard it here first.

I see so many companies right now that, you know, have tried to preserve cash. They've only got 6 or so months left, and I don't think those are the companies who are going to be raising money because they've slowed their growth down from 30% down to 10%.

I would say, by the way, if you find yourself in that situation or you see that, you know, you've still got $5 or $10 million in the banks, you're not literally going bankrupt, but, but you're worried about the business, you've tried 3 pivots, they're not working, there is a certain honor in just shutting down the business and returning the money to the investors. You don't need to drive the tank to zero if you're sure it's not going to work. It's a better use of your time, uh, to stop and go make something else, and it's a better use of your dwindling investors' money, uh, just to just give them back and throw in the towel. So no shame in that either.

Hey Dave, I see some cannons coming on the horizon out there. I think they want to shut us down for the day. Here with the pirate theme. So that's a wrap to today's SaaS Talk with the Metrics Brothers. Thank you, Brother CAC.

Thank you, Brother Growth.

The Metrics Brothers AI, SaaS, and More is a production of the Metrics Brothers Growth and CAC and a member of the Benchmarkit Podcast Network. By accessing this podcast, you acknowledge that the Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told.

Ray.

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