5 Metrics Every SaaS Company Should Care About with Salesforce Ventures (Workshop Wednesday)

If you want to list in the chat where you are dialing in from, we love to see how global this audience is. We are headed to Singapore over the next week or so, so love to see this global audience. All right. Welcome, everyone. Thank you so much for joining. Again, as you are joining, please put in the chat where you are joining from. We have a lot of people coming in fast. Great to see such a big group today. Um, and I am going to get things started as we continue to grow. All right, welcome back everyone. If this is your first Workshop Wednesday, welcome. If this is your 15th or so at this point, welcome. We really appreciate you returning week after week to hang out with us every Wednesday. If this is your first Workshop Wednesday, these sessions are super interactive. They're meant to make the most out of your Wednesday. And we'll have a SaaS expert come walk us through a topic and really engage with each of you. So get your questions ready. If you have questions throughout the session, put them in the chat. We want to hear from you, and we want to make this the best use of your Wednesday. Today, we are going to hear from Jessica Bartos, investor at Salesforce Ventures. She will be talking about 5 metrics every SaaS company should care about for success in any market conditions. Uh, really timely session, and really excited to get this conversation started. So Jessica, welcome.

Thanks so much for having me. Um, thanks so much for organizing this and inviting me along.

Yeah, of course. We're so excited to have you here today. Um, Jessica is coming from Europe, so, uh, if you're wondering about her location, um, it's quite late for her. So great to see people here from all different time zones, etc. Jessica, we normally get this started with a few questions to warm you up before you dive into your content. So first question, what is the— is one of your favorite investments you or your firm has made in 2022?

One of our favorite— my favorite investments in 2022 that I got to work on in the early part of the year was our investment in the Series B of Balance, which is building B2B payments infrastructure specifically for B2B trade. We were really excited to back this company alongside Forerunner Ventures, as well as Ribbit and Lightspeed and some of their existing investors. They're a great company out of Israel that has noticed the sort of big difference between the capabilities available for B2C payments, i.e., buying some, one of us buying something in a traditional e-commerce environment versus when businesses are buying from each other. A lot of that commerce is still stuck in kind of, you know, email, phone, fax machine land, as opposed to being more digital. And they're trying to solve for that with their B2B payments infrastructure.

Great. Okay, sounds like a great investment. And we'll have to look at that after this. What has most surprised you about venture capital this year?

This has been an incredible year. I'd say the number one surprise that I think is still playing out and is still unraveling in the industry, and I'll talk about it later, is basically the return of a real substantial interest rate, uh, which implies a real discount rate on future cash flows and future growth. And the implications that's having for investing in high-growth companies. I think we're, you know, with Fed raising rates this year, they're not going to bring them down. We're back in real rates environment. That is having real ramifications throughout the industry that have been fascinating.

Yeah, it's been a super easy, super cookie-cutter year, I'm sure, for everyone.

Yeah.

And then lastly, who is one of your favorite co-investors?

We've worked with ICONIQ on a couple of investments. I got to know them most in our co-investment in Miro in 2021. And that's a team that's recently built out a big London presence and is very bullish on investing in Europe. So I love working with them, particularly in EMEA and across the globe.

Great. OK. Well, Jessica, with that, I am going to let you take it away. Reminder to everyone during the session, add questions to the chat so we can get to them at the end.

Awesome. Thank you so much, Caitlin. So I— thanks so much all for your time and for coming. This is my session on the 5 most important SaaS metrics. In any market environment. Just a little bit about me. I'm with Salesforce Ventures, which is a multistage investor in all things B2B software and B2B fintech. We are the VC arm of Salesforce, but we operate with an independent mandate to back the very best of enterprise software around the globe. I've been with the firm for about 1.5 years. Prior to that, I spent a couple of years with a firm here in the UK called Albion VC, which, uh, where I was also investing in B2B SaaS, um, at the earlier stages, so seed and Series A. Um, a lot of my background is informed by 5 years I spent with Rothschild in tech, media, telecom investment banking, uh, doing mergers and acquisitions advisory. So my principal job there was, was all about figuring out the right value for companies, whether you're buying or selling them, whether they're private or listed. So that informs a lot of how I think about valuation when it comes to SaaS. It was also when I got most excited about SaaS, when I realized sort of the beauty of the enterprise software or B2B software business model compared to all the other types of business models out there. So just to kind of set the stage a little bit, I originally gave this presentation last June. At SaaStr Europa in Barcelona. And at first I wrote the last quarter has not been kind, and then you kind of needed to update it for the last year, and then it now it's the last 18 months. So I always thought, you know, in this kind of public market environment where it looks like there's this great SaaS crash that is persisting, how do we get back to the fundamentals and find the things that are great about SaaS in all the sort of numbers and metrics that you can measure in software that will help you raise funding and help people see, you know, the value of your business. And just to put some imagery to that, this has been the EV to next 12 months sales multiple for software companies over the last 7 or so years. And we can all see the last 18 months have been tough. Driving that principally has been what I alluded to at the top, which was essentially the increase in interest rates by the Fed in a way in order to fight inflation. And as a result, you know, high-growth companies where a lot of the prospects of shareholders seeing cash flow for that company, from that company is very far in the future. And you're really buying into the future growth of the company. When the overall interest rate is higher, the, you need to discount those future cash flows back to the present to understand the value of the company today. And higher interest rate will mean a higher discount rate, which means all that future growth is less valuable today. Than it would be in a lower interest rate environment. So just to show that we've entered a kind of structural change thanks to the change in the overall economy and the overall interest rate environment. But nevertheless, there are, I think, 5 things about software companies and SaaS companies that will make them very attractive, in fact, more attractive than other industries or other types of business models. And I think if startups are nailing these metrics and look healthy on these metrics, they should be able to attract capital and to get fair valuations for their businesses. So still, I think these fundamentals make SaaS very attractive. The first one I want to highlight is growth. I think, you know, in, in the years running up to the SaaS crash, everyone was chasing growth at all costs. I would say growth is still the number one metric, and here I mean revenue growth or ARR growth, but I would just say it's just not the only one. The thing about attracting venture investment is that you're, you're going to need to be able to convince investors that you're going to be the outlier company generate the outsized returns that returns that venture capitalist's fund. So you need phenomenal growth in order to convince them of that. So even while, you know, you're hearing a lot in the market, oh, we want efficient growth, we want profitable growth, those sorts of, those sorts of things, and a big more of an emphasis towards profitability, You're always going to need phenomenal growth, particularly at the early stage, in order to attract venture investment. You have to be an outlier. Um, you know, at the, uh, at the earliest stages of looking at a business, so Series C, A, B, um, growth, uh, really shows product-market fit. It shows GTM to market fit, um, shows the market for an innovative product that may be very new or a category that's only being created now is real. So these are— it's just an important indication that the overall product and GTM is working. What we typically like to see, you know, at the earliest stages, we like to see that you go from launch to a million of ARR in, in around 12 months or maybe less. And then from there, you're doing what's called the T2D3. So tripling doubling for another 3 years. And this is a catchy way to think about it because it's, it has been achieved in the past and sometimes even faster. And it's an achievable path to $100 million of ARR in 6 or 7 years. The other thing that's been incredible about looking at some of the public software companies out there is that they're is that we've also seen that growth doesn't have to decelerate that quickly even as you scale. So we're seeing what's called, what some venture capitalists like Bessemer have called growth endurance. So even say you're at $50 million of ARR, in the next year, your growth, if you grew 100% in year 1, we could see growth endurance such that you're growing 80% in year 2. And you're continuing to grow it at really high rates, even at great scale. I'd note that when looking at the companies today in the public markets that trade for over 10 times next 12-month sales, they're continuing to grow at very high rates at scale. So they're adding $100 million of net new ARR per quarter on average. Um, which is, which is pretty phenomenal growth. Um, and all this kind of speaks to essentially software markets are often bigger than analysts expect, so growth tends to endure. Um, and the advice I would give for companies raising at earlier stages, so seed, Series A, B, C, is that especially right now, your, your most recent trading, so the last month, the last quarter, is really, really critical to show your momentum. Because what we've seen, at least in B2B SaaS, is that as the overall economy has slowed down, as the tech, public tech companies are shrinking or focusing on profitability, or are having their share prices sort of punished in the public markets, they're buying less software from each other. And so, uh, we're seeing less demand and difficulty hitting numbers in the most recent quarter or in the most recent months. So if you've got figures that show that you're bucking that trend, that you're gaining momentum actually in your latest trading, that's, that's something to be highlighting to investors about your own growth. So the second metric that I, that I love in SaaS is net dollar retention. This is essentially defined as taking all of your, your existing ARR at the beginning of, at the beginning of a period, adding on any upsell or cross-sell, subtracting out any churn. And then seeing what the ending ARR there is, i.e., like excluding new logos that you've won, and measuring that ARR over where it was at the beginning of the period. So this should be a number greater than 100, and it's typically measured as a percent. This, I think, captures SaaS's best qualities in one metric. So number one, it captures the kind of— predictability of SaaS revenue because it's subscription revenue. And that's reflected in how, how this metrics captures churn. And then it also captures the kind of built-in growth that SaaS has, which is that it's much easier to sell something to a customer that you're already working with, i.e., to expand to expand a contract or to cross-sell a new product to somebody who's already buying from you than it is to win them again and again and again. And that's the kind of built-in growth that comes with, uh, having a subscription relationship with your customer. So I like that this captures both churn and upsell. Um, and what we're typically looking for in net dollar retention is over 120%. For enterprise-facing companies and over 110% for SMB-facing companies. What we do not like to see is anything below 100%, because what that is telling us is that your churn is so tough that essentially you have to win new logos just to stay in the same place, which when you've got a subscription relationship with your customers and they're loving your products, shouldn't be the case. They should be sticking with you. And you're just— every new customer, every new cross-sell or upsell, that's all incremental. What's typical out there at the moment in the markets is that we see the median of listed SaaS is around 119%. And this really ranges from the best in class like Snowflakes, the Snowflakes of the world, which is at 165%. Down to some, some companies that are below 100%. One is, for instance, 95%. What is interesting here is that we're seeing companies experiment with consumption-based or usage-based pricing models, which is something like a Snowflake does, or like a Datadog or New Relic do, because people end up consuming the product a lot, especially if it's like a data product or a developer tool product, something that's leveraged to a high volume metric. And then you can get incredible NDRs and very high contract values through that high consumption, high usage. And it's a nice alignment of pricing to the value you're delivering to your customer. Where we— so that's one way to drive a super high NDR when it comes to pricing and packaging. When we do see seat-based pricing, That also has its advantages. But, you know, especially now when there's a lot of big companies cutting seats in general, and especially seats that will trickle into software seats. So you are sometimes at risk of contraction as tech companies themselves shrink and have fewer seats to buy software. So This one can be very much driven by the type of pricing model out there. My third metric that, that I think is just so important for underpinning what's great about SaaS is gross margins. So the beauty, I think, of software as a business model is its asset-light nature. When you're building software, you're selling bits, not atoms. So incremental, an incremental sale costs nothing, you essentially have very, very low COGS. And you should have very high gross profit margins, you know, in the 70s, 80s%. This is just completely unlike other types of businesses, say a services business where the cost of the people to deliver the service needs to go in your COGS, and you say have gross margins maybe in the 40-50% range, or a manufacturing type business where you're selling an actual device or piece of hardware or real thing, where of course, like, all your costs of manufacturing and materials all have to play in. Um, I, I love this metric because it really shows companies that are true SaaS versus fake SaaS. So say services companies or services delivered digitally or with a digital layer, but actually are a services business where a human is necessary to deliver it, or a piece of hardware like when Peloton was being branded as a tech company back in, in the days. Um, where the bike is expensive, you know, so your gross margin, that will be low. And I mean, what's great, the high gross margin will flow down into essentially high profitability margins. So high cash flow generation and high EBITDA margins because you as the company essentially control how much you're investing in product via R&D or growth via sales and marketing. And you can kind of flex those up and down and control really healthy— control your profitability margins and generate a lot of profits and a lot of cash flow kind of whenever you want. So that's what makes software such a, such a cash flow generative kind of business model. I also like this because this metric trickles into other SaaS metrics you'll hear, you'll hear talked about, like CAC payback, magic number, or LTV to CAC. When we look at these SaaS metrics, we are usually adjusting them by your gross margin. So, you know, let's say you were looking at your magic number, and you were looking at the ARR you won in a quarter, and you were, you know, dividing that by how much you spent on your sales and marketing in the prior quarter. For us, we would look at that on a gross margin adjusted basis. So we'd, we'd take that, that revenue and multiply it by, by the gross margin, which would reduce the magic number. So you want this gross margin as high as possible to make your other unit economics metrics stay healthy as well. Yeah, and what good looks like here is that for the listed SaaS companies out there, it's 77% is the median. So these 70%, 80%+ figures are what we're typically looking for. Oh, so rule of 40 is my fourth metric here. This one is having a bit of a moment. Um, uh, in the public markets and in analysis, uh, out there as well of listed SaaS companies. So, um, what Rule of 40 is, is it's the sum of your ARR growth rate or your revenue growth rate plus your— either your EBITDA margin or your free cash flow margin. So it's essentially the sum of your growth rate plus your profitability margin, and it should add up to 40 or better. What's interesting to know about this is this is not just in software. Like, when an analyst is looking at any stock, multiples will often be driven by that combination of growth plus margin to be deemed like a healthy business, and it will drive multiples depending on sort of where they are on that spectrum, um, on their Rule of 40. So this is not just software, it's, it's all types of businesses. But what's great about software businesses is that your Rule of 40 can be very high, partly because number one, you're a fast-growing business because you face the software markets, which are, you know, in a secular growth phase. And two, because of that high gross margin, and you're— you've got naturally occurring kind of high EBITDA margin or free cash flow margin, uh, depending on how much you decide to spend on R&D and, um, and sales and marketing. So this can be very high, uh, for SaaS companies. Um, and what we're seeing in the public markets today is that, say, you know, great companies like Snowflake are in the sort of 70 to 80% on their Rule of 40. Uh, Bill.com at 100%, Datadog at just under 100%. So these can get very high, you know, as I mentioned. Historically, and the other point to make here is that they're also highly correlated with what kind of multiple you'll get in the public markets these days. It used to be that your EV to EBITDA, or sorry, EV to sales multiple was mostly determined by how fast you were growing. And it has recently shifted such that this is now more determined by your, uh, how you're doing on Rule of 40, which is what, uh, Jimin Ball, who's an analyst at, uh, Altimeter Capital, um, is noting here. Uh, this slide also kind of illustrates the same point, um, bringing it back to the interest rate environment, that essentially, um, this bottom line here is the correlation, um, between, uh your revenue, the multiple you'll get, your valuation multiple, EBITDA sales, and how you're doing on Rule of 40. And the other one is the dark blue line is your EBITDA sales multiple and how you're doing on just straight revenue growth. So you can see at first it was more about revenue growth. That's why this dark blue line is on top. And then since about, yeah, since sort of the beginning of 2022, maybe around March, April, these things are crossed over. And now it's much more about how you're doing on Rule of 40, which just shows that, you know, in the public markets you're getting more highly valued if you're showing that you're both fast growing and profitable, or, you know, becoming more profitable. Oh, sorry, Caitlin. I'm seeing some questions in the chat. Would you want me to address those now, or should I save that?

I've already messaged everyone that we're going to address them after you have completed your session. But if you see anything you want to jump in on right now, feel free to.

Why don't we do the last one, and then we can do them all in a row? Cool.

That sounds good.

Cool. And then this last one also has to do with efficiency. Which is, uh, burn multiples. So this is a handy guide, um, uh, for VCs to look at efficiency and how it correlates to growth. So it's a— it's essentially like your cash burned in a given period, uh, divided by your net ARR added in that period. Um, it can be a good measure of product-market fit for early-stage ones, and, um, it's also a good measure at the time, at times of, you know, go-to-market fit. Because if you're getting lots of ARR for every— for how much you burn on sales and marketing, essentially, then you've got sort of good GTM to market fit. What I like about it is it's kind of a catch-all multiple that can show all of the warts as opposed to that may be across a P&L, or problems when a company is burning too much. For instance, you know, you may be burning too much because your gross margin is too low. It may be because your sales efficiency is not very good. Maybe because you still have to spend a ton on product, on R&D. And that's not particularly efficient, or it's not at the right sort of scale for where you are. So, um, I, I like that it can kind of show all the warts that may be happening in a business. Um, and people like to measure this both sort of cumulatively, of like how much you've burned in your entire existence, and also to measure it, say, month to month or quarter to quarter, like how much should we burn versus earn in a certain quarter or in a certain month, and use it to track, um, you know, more periodic performance. Um, and I just put together a little chart here. This is actually from Craft Ventures of what the broad guidelines are here. Um, you know, for early stage companies, these burn multiples can be high because they're not earning much ARR yet. But once you start to get towards the single digits of ARR, you should be getting this under 2, um, under 1.5, and then ultimately, uh, under 1. Especially as you start to scale up, uh, the ARR. This can also be a good flag for companies that are maybe more like hype and raise a lot of money and burn it, but without generating much ARR. Their burn multiple, especially a cumulative one, will be very high. Um, so, you know, my kind of takeaways from you know, when I first gave this presentation, and then I, I still believe it now even though things are worse in the public markets for tech, which is that like you got to go back to fundamentals. The basics of why SaaS is a great business haven't changed. SaaS is a subscription relationship with the customer, which creates predictability and built-in growth. It's an asset-light type of business, which should make it very profitable. And it, it is a— it's facing, it's facing markets that are in growth mode. Digital transformation is not going away. The rise of, you know, software eating the world is not going away. So you're always facing growth. And but at the same time, you're capable of generating a lot of cash flow. Because of the characteristics of the business model. And I love these little quotes back from early 2022 from two of the great software investors, Orlando Bravo and Bill Gurley, which is that like valuing a company on growth, quality, and sustainability of free cash flow always works. It's universal. And Bill Gurley reminding us that a 10x multiple is an amazing multiple. On sale and that we should not be fooled by run-ups that have happened in the past and should consider things in relation to the fundamentals. So I'll pause there and happy to address the questions.

Great. Thank you, Jessica. Feel free to stop sharing your screen so we can make sure we see everyone and have an interactive discussion here. We have a ton of questions in the chat, so excited to get started with them. Our first question comes from Coleman, if you would like to unmute yourself and ask.

Great, thank you. First of all, thank you so much, Jessica, for the really, really insightful and actionable deck you put together today. I really appreciate it. One of the first points that you mentioned was growth and having that be maybe not all important or a single metric that we're focusing on, but one of many, but of course it's still quite important in the venture space. I was curious to know what that desirability from a year-over-year growth standpoint looks like if you're evaluating from GAAP metrics rather than ARR or MRR. And in this venture environment, are you seeing any sort of movement or shift of leading with those, you know, more conservative metrics rather than, you know, prioritizing more the MRR, ARR?

Yeah, no, that's a good point. I think we've settled— so GAAP revenue is the most conservative way to look at it, but with a SaaS business that's fast growing and is a subscription model, it will be a little bit of a lag to ARR growth, just because you won't recognize the GAAP revenue until you've actually delivered the service and say build something for a particular month of delivering a SaaS service. But meanwhile, you could win that ARR and sign a contract and start delivering a service, say you've got a 12-month contract, and the customer pays upfront, you've got, you know, your ARR, monthly ARR booked then in that month. You won't recognize the revenue until you deliver that SaaS through the full year, but your ARR in that month should reflect, you know, the addition of the MRR. What I think people are still looking at, you know, booked and signed ARR live ARR. So this would be software that is, um, you know, in situ being used. Uh, but what people maybe used to look at and are no longer is contracted ARR. Um, I think in some of the hype era when, um, businesses were raising maybe quite ahead of traction, uh, they would be talking about contracted ARR. So maybe they've signed a customer or they're very close to signing a customer, but, um, they— that software isn't live and in use yet. It's going to be in use in 6 months, or they're implementing something, or there's a milestone to hit. I think that is no longer looked at as true ARR. But I think everybody does recognize that, like, in a SaaS business model, GAAP revenue will always lag. So if you want to be looking at sort of the latest and greatest numbers on how someone's doing, people do look at ARR growth.

Great. Thank you very much.

Great.

Thank you. Um, our next question comes from LinkedIn. Is T2/D3 still the expectation in this environment?

Yeah, good question. Um, I do think it's still the expectation, um, but everyone is recognizing it's getting a lot harder. Um, But the bar, I think, is remaining high, especially as VCs are, you know, not as active, not as eager to deploy in this immediate moment. So I do still think it's the standard, but we recognize it's a lot harder to achieve now, especially those years of tripling in the early stages, as just in general the IT market is slowing down. Buying environment is weaker.

Thank you. Daniel, if you want to unmute yourself and ask the next question. Daniel Sharon. Okay. I will jump in. How would you address these KPIs and metrics in usage usage-based pricing company? How would you measure these? And what are the key considerations specifically there?

Yeah, I think usage-based pricing usually can drive the NDR up if you're getting a lot of usage. What you— but I think you want to be cautious around knowing that you're going to get the usage. So what you'd want to avoid is a usage-based pricing strategy where it's— you're not going to hit the level of usage or the types of consumption metrics that you think you're— that you're expecting. And then as a result, you know, your pricing can be a lot more variable instead of that either steady-state subscription per month or subscription plus expansion per month. You know, examples here might be in, in the fintech world, where there's a lot of sort of transaction-based pricing, and volumes of transactions can go up and down in a month. If you're, if you're basing your pricing on a particular transaction or a particular event, you want to make sure you know that event is repeatable every month, and it's going to repeat and expand. So this is why This works well in like, you know, observability companies like the Datadogs and New Relics of the world, or Splunk, like log management companies, because there are just requirements every month to log every event and keep those logs. So the data consumption is constant. Similar with databases. But you don't want to do usage-based pricing and say, let's say you were an office of the CFO type company, and actually people really only log in and use your software when they're closing the books every quarter or something, just to make up an example. So that way you're going up and down depending on more sporadic use.

Great, thank you. If there is any follow-up on that, please let me know. Our next question comes from Zhong. If you would like to unmute yourself. Come on, guys. Okay, I will jump in with this one too. Um, what's your view on prevalent use of non-GAAP metrics? Do you look at these metrics on a GAAP basis or non-GAAP basis?

Yeah, we typically look, especially for early stage companies, at non-GAAP type metrics. So Like Coleman's point about, we are looking at typically ARR growth, so live ARR, um, uh, as opposed to GAAP revenue. So, you know, when revenue is recognized will lag. Um, uh, then the other kind of everything else will probably be pretty much GAAP with the exception of stock-based compensation is an important point to think about when you're thinking about your cost structure in your company. Um, you know, there is a lot of cost of employees that can be hidden in stock-based compensation, where in a non-GAAP reporting, um, that, that a company may do, they'll take out of their cost base, you know, the cost of the, the equity that they're giving to their engineers and to their sales guys and to execs. and that will make their cost base look lower. And it is lower on a cash basis because they don't need to pay these guys cash, they're giving them shares instead. But in the long run, this is dilutive to people investing. It's usually more of a problem for like later stage companies as opposed to earlier stage, but that would be the other big thing to watch out between non-GAAP and GAAP.

Sorry, I was on mute. I do have a follow-up question on the GAAP versus non-GAAP basis. As well as SBC that you mentioned that. So with Rule of 40, do you look at the— on the cost side, typically do you look on a GAAP basis or non-GAAP basis? Because for some companies with a lot of non-GAAP cost, the difference could be huge. For instance, Snowflake, 40% SBC, right?

Yeah, that's a very good point. I think the tendency these days is to think about it from a cash flow basis. Let's see if that persists as the market, you know, continues to cope with the downturn in SaaS. But I do still think people think the cash— SaaS is uniquely cash flow generative, partly because of the fact that it can get paid cash up front and have a lot of deferred revenue, which means even more cash potentially available to shareholders. Um, the second is the ability to, to pay for some people in SBC, um, which is another way to reduce cash expenses. So in general, I'd say most people are looking at Rule of 40 on growth plus a free cash flow margin. Um, I think where I have seen people look at it more on an EBITDA margin is in fintech, where people are a little more conservative around margins. For instance, Bain Capital just came out with a really interesting fintech valuation overview, and they did their whole analysis based on growth plus EBITDA margin, regular EBITDA, so as opposed to free cash flow margin.

Got it. And one more follow-up question. In terms of the level of SBC, do you have a general rule of thumb, what percentage would be a reasonable level. Of course, maybe this is a question more tilted toward later-stage companies.

Yeah, I think it's more of a public market type question. I think it's about the kind of what dilution are shareholders willing to bear in the public markets. I think like the appetite for SBC has gone up and down. But I think it's kind of case-by-case basis for the public markets. I'm not sure I have a good rule of thumb.

Got it. Thank you very much, Jessica.

Great. Thank you. Our next question comes from Sumitra. If you would like to unmute yourself. I'm getting unlucky in the chat today. Sumitra, if you would like to unmute yourself.

Oh, hey. Sorry. No problem. I had to turn to my dog. Yeah, I thoroughly enjoyed this presentation. Lots of insightful metrics. But I had a question wearing a finance hat. And she was talking about discounted cash flow. I was on the CAC payback, which is CAC being customer acquisition cost, which is more like cost of sales in my world. I was wondering if the payback is adjusted with the discount rate as well. You know, we call it time value of money, but I wanted to know if that is done at the valuation stage. Yeah, that's an interesting question. We don't typically think about a discount rate Like, I guess you'd be thinking here about, yes, you're paying the CAC today to get value over time, and should you apply a discount rate to that, you know, value in the future? In general, we don't. I think that's partly because of the short periods that CAC payback typically is. We usually see this, you know, under 18 months. So historically, that's been you know, not, not too meaningful, but that's a good point. Thank you.

Thanks for jumping in there. Next question. Things are tougher for a lot of folks today, but do VCs give companies a partial pass on growth? Or is everyone just focused on the 20%, 30% of startups growing even faster today?

I think I think people are very focused on the top echelon because, uh, and unless you're an existing investor in a company that already has conviction and is doing, say, extension or bridges or working to pull together internal rounds to make sure people have runway to get through tougher times, um, I think a new external investor leading a price round is is looking for the very fastest as opposed to giving passes for growth that wouldn't be an appetite.

Great. If there's any follow-up on that, please let me know. Ben, if you would like to unmute yourself and ask your question.

Hey, guys. Happy Wednesday. I'm a fractional SaaS CFO, help a lot of early-stage SaaS companies in the less than $10 million. And I had one company say, hey, our board wants to start measuring the burn multiple. I was just curious, the technical aspect of it, because I found month to month it's all over the place, and we need these metrics to be meaningful. So do you smooth that over— smooth that out over longer time periods to make the multiple more meaningful?

Yeah, I think month to month, I agree, is really lumpy. I think, um, quarterly is good. Um, and, uh, I think quarterly is kind of the best if you're looking at it periodically, because sales guys should be also thinking to like a quarterly cadence of hitting in the quarter. And that will smooth basically the net new ARR that you're adding each quarter. So that's probably the best approach.

Okay, thanks a lot.

I also think like just one more point, I guess, is that 12-month, because things are changing so fast quarter to quarter in the IT buying environment, 12 months can also be a little deceptive because 12 months ago things were really different, different environment sales guys were facing.

Yeah, yeah, makes a lot of sense. Thanks.

Great. We have a question in the chat from David. If you would like to unmute yourself, let me know.

Sure. Yeah, thanks, guys. Hi, Jessica. So on the note of growth rates and the T2/D3, where do you typically start that? Is it like from zero? Is it from their most recent investment round? What does that look like?

I start that from 1. So when you hit a million of ARR, then go 1 to 3, 3 to 9, and then doubling.

Okay. Okay. And then after that third doubling, what's the expectation from there?

Then you should be almost at a million, actually, or sorry, $100 million. Um, so then you're kind of in a public company land. Where I think at the moment growth rates for companies that are getting over 10x multiples in the public markets is in the sort of 40%-ish range. So that's the sort of rate that they're growing at, but those are companies with a lot of revenue. There was a really helpful— if you're curious about this, a fund did a great deep dive into what it takes to be a 10x company today in the public markets. And they looked at, on average, those companies have over a billion of ARR and they're growing at sort of 40%-ish. Fantastic.

Thank you. At the beginning, you mentioned that new valuations are being discounted because of the interest rates. How far out are you modeling those interest rates to carry on and whether they're growing or shrinking?

Yeah, so the way I think an early stage investor would approach this would be pretty different from a late stage investor. So first to the early stage, what they're thinking about is, okay, when I exit this business, what kind of valuation can I achieve for it? So they're going to look at the, you know, let's say I model out, um, at the business for, for 5 or 7 years, 5 or so years. Say, and then what will that business be worth? And then what they're looking at actually is how much will my stake be worth and that exit value, and is that enough to kind of return my fund? So they're slightly less worried about discounting back cash flows. They're more worried about what will my stake be worth in that scenario, and is that enough to justify an investment? For a later stage investor that's looking at a shorter investment horizon, and maybe like a public markets exit for sure, as opposed to an M&A exit, then I think they're, they're valuing shares with a kind of typical corporate valuation approach, like a combination of maybe a short-range DCF, because you've got a really mature company that you can model, and they'll use a kind of market discount rate. There. They'll probably combine that as well with a multiples-based approach based on comparable companies. So they'll use a more traditional corporate venture capital— or sorry, corporate finance approach to valuation with a kind of market interest rate, but it's over a shorter investment horizon.

Okay, great. Thank you.

All right, I think that is it for questions. I know we are way over time. If you do have a final question, please let me know in the chat. But if not, thank you so much, Jessica. This is incredibly helpful. So many questions in the chat, so many questions about if this session was recorded, where are the slides? People cannot get enough of it. This has been recorded. It has already been livestreamed onto YouTube, so you can find this session on YouTube directly after if you want to go and watch it again. All right.

Thank you so much.

Yeah, of course.

Thank you for joining. Really appreciate it.

Yeah. See everyone back next week. We will have another great session, 5 Lessons Learned: Evolving from a Sales-Led to Product-Led Go-to-Market Strategy. And that will be with Plan Day. So see you all next week.

Thank you. Thank you.