Weekly Update: Desperately Seeking Stability in SaaS
Highlights from SaaS & VC from the week of 1/16
This week, the WCLD cloud index ticked up 1.5% to $26.44. It was a positive week for markets as the Fed appears poised to slow down their rate hikes amidst continued hope of a soft landing for the economy.
While the public markets have taken a baby step towards “risk on” in the new year, public SaaS valuations still reflect caution. The median valuation is 5.5x forward revenue - a remarkable drop from late 2021’s peak of 20x.
The third highest multiple belongs to Paycom, an Oklahoma City-based payroll software vendor founded in 1998. Its 30% revenue growth & 18% free cash flow margin are attractive, although not the typical SaaS stats of a valuation high-flyer.
What’s driving Paycom’s high valuation? It embodies a key quality that current public SaaS investors covet: stability.
Consider these four numbers: 30%, 31%, 30%, 29%.
These are the annual revenue growth figures of Paycom in the past four quarters. That’s the extreme consistency that Mr. Market desires. While the WCLD index is down 37% in the past year, Paycom stock is up 1%. In this market, that’s a win!
If there’s one area of tech growth where investors are still wearing their party hats, it’s AI. The biggest M&A deal for a tech startup this past week is a lovely illustration:
With Microsoft in the news for its savvy backing of OpenAI, it’s easy to overlook the brilliance of Google’s acquisition of Deepmind back in 2014. BioNtech’s move here to buy InstaDeep and its AI platform seems to be following a similar playbook.
Given the pharma industry’s historical fondness for copying, there’s a chance that this sparks an industry-wide run on AI assets. Given the pharma industry’s historical aversion to valuing modern software, I don’t think this is likely. But we can hope.
Podcast Recommendation of the Week:
I highly recommend Lenny’s Podcast with Naomi Ionita, Partner at Menlo Ventures. Naomi has many great insights on PLG from her experiences as an operator at companies like EverNote as well as her PLG-focused investing experience.
As an early user of EverNote, I was intrigued by her take on why it failed to scale (for those who don’t remember, it was one of the first startup unicorns back when it raised $70m at a $1b valuation in 2012). She points to its inability to take its product from single-player to multi-player, which led to churn problems. The strategic path of single-player to multi-player might be obvious today, but wasn’t 10 years ago. I wonder, what are examples today of common strategic mistakes that will be considered obvious things to avoid in a few years?
I couldn’t find a good link to the podcast, so here’s the YouTube:
Reading Recommendation of the Week:
Speaking of Deepmind, I enjoyed this interview with its founder Demis Hassabis. This was a surprising anecdote from the interview:
Hassabis turned down a bigger offer from Facebook. One reason, he says, was that, unlike Facebook, Google was “very happy to accept” DeepMind’s ethical red lines “as part of the acquisition.”
Yikes - it sounds like Facebook flubbed trying to buy DeepMind.
The timing on this is extremely interesting: Google announced its acquisition of DeepMind in Jan 2014. Just two months later, in Mar 2014, Facebook announced its (disastrous) acquisition of Oculus.
This leads to a fascinating counterfactual: if Facebook hadn’t blown the DeepMind deal, would they still have gone on to buy Oculus? At the time, Zuck was on the hunt for a next-gen tech platform. It appears that DeepMind’s AI platform might have been his first choice. It’s hard to imagine how much better Facebook would be positioned today if it had bought DeepMind in early 2014 instead of Oculus.
Of course, in that same period in early 2014, Facebook closed the very successful acquisition of WhatsApp. So I shouldn’t grade their 2014 M&A strategy too harshly. But, wow, what might have been!
(Time’s interview with Demis Hassabis is here)