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

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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.