a16z Podcast | Valuing Today's Fast-Growing Software Companies | Summary and Q&A

TL;DR

Evaluating the value of SAS companies requires a shift in mindset and an understanding of metrics beyond revenue and EPS.

Key Insights

• 📈 Revenue and EPS are not sufficient metrics for evaluating SAS companies due to the timing of revenue and the investment required for customer acquisition.
• 🥺 Billings provide a leading indicator of revenue growth and visibility into future cash flows.
• ☠️ Maintaining a low churn rate and high renewal rate is crucial for long-term profitability in the SAS business model.
• 🥺 SAS companies can achieve economies of scale in R&D and infrastructure costs, leading to improved margins over time.
• ❓ The shift in mindset from perpetual licenses to recurring revenue models requires a reevaluation of valuation parameters.
• 📽️ Customer acquisition costs and projected lifetime value are important metrics to consider when evaluating the value of SAS companies.
• 😵 The stickiness of SAS customers is enhanced by decentralized budgets and cross-functional collaboration within organizations.

Transcript

hi this is a Scott Cooper from injuries and Horowitz and I'm here with pretty casa ready and Jamie Mukherjee from our corporate development teams and we want to talk today a little bit about sass evaluation so I'm gonna kind of start it off you know for me if your watch any of these you know news programs you know in the morning on all of our favor... Read More

Questions & Answers

Q: Why are people questioning the valuation of SAS companies?

People question the valuation of SAS companies due to high revenue multiples and expected future losses, which lead to concerns about a potential bubble.

Q: How does the evaluation of SAS companies differ from traditional models?

Traditional evaluations focus on revenue and EPS, while SAS evaluations require a deeper understanding of metrics such as Billings and customer acquisition costs.

Q: How do SAS companies maintain profitability despite incurring high upfront costs?

SAS companies achieve profitability by acquiring and retaining customers over a longer period of time, leading to a large existing customer base that generates recurring revenue.

Q: What are the key indicators of a sustainable SAS business?

Key indicators include low churn rates, high renewal rates, and a growing recurring revenue base, which contribute to higher profit margins over time.

Summary & Key Takeaways

• The current bubble talk surrounding SAS companies is fueled by high revenue multiples and expected future losses.

• Evaluating SAS companies based solely on revenue and EPS is flawed, as the profitability in SAS occurs over an extended period of time.

• Billings, the contracted revenue from customers, is a leading indicator of revenue growth and provides visibility into future cash flows.