Weekly Update: Don't Fight the Fed
A few highlights from the week of 10/31
Cloud stocks had a brutal week. The WCLD cloud index fell 13% to 23.55.
Friday was particularly gruesome. Atlassian (TEAM) and Twilio (TWLO) plunged 29% and 35%, respectively, after reducing their growth outlooks in their earnings calls.
Many other growth SaaS stocks sunk 10% or more on the day: Gitlab (GTLB) was down 12%; SentinelOne (S) was down 12%; BigCommerce (BIGC) was down 30%. Most growth SaaS stocks are now down in the neighborhood of 75% from their highs of late last year.
What’s going on?
The proximate cause is the Fed. This week, not surprisingly, the Fed raised its short-term rate target to 3.75-4%. This means that very-low-risk, short-term credit instruments will deliver 4% yields. A guaranteed 4% return looks pretty darn good compared to riskier assets like public equities. Even worse for cloud stocks, the Fed’s hikes seem likely to induce a recession, which which reduce growth and earnings
Meanwhile, early stage venture capital’s reaction to the last few months’ market carnage continue to be “hold my beer.” Deal activity, particularly at the seed stage, remains strong.
It’s hard to reconcile huge gap in sentiment between seed stage and public market tech investors. In defense of the seed stage perspective, it’s good to remember that there are plenty of cloud stocks that continue to perform. For example, Snowflake (SNOW) & Crowdstrike (CRWD) are growing rapidly with strong cash flows. Datadog is another - the company announced a monster quarter this week (yet was down 13%!)
Datadog is now down 57% on the year, but it still has a market cap of $22b - meaning its early stage investors hit a massive home run. Crowdstrike is down 36%, yet still has a $30b market cap. Snowflake is down 60% on the year, yet its market cap is still $42b.
For a seed stage VC, the upside case in great SaaS companies continues to be enormous. Even if the broader market conditions stay negative for some time, I won’t be surprised if many seed stage VCs continue to invest with exuberance.
Podcast Recommendation of the Week:
The BUILD podcast had a great interview with Chris Degnan, CRO of Snowflake, on a timely topic: sales strategies for a recession.
One major takeaway is the value of connecting your product to a customer’s revenue. With a recession looming, SaaS companies should expect extra budget scrutiny from customers and be prepared to defend their ROI. For some products, showing a direct line of causation to revenue is a challenge. But if it’s at all possible, it’s a strategy worth embracing.
I was also quite impressed by the culture of extreme accountability demonstrated by Degnan. He described himself as on a continuous string of “90 day temporary contracts” - every quarter, he emphasized, he needs to deliver results and earn his place. Coming from one of the most successful CRO’s in software history, that’s a remarkable display of humility.1
Reading Recommendation of the Week:
Another sign of just how much the tech landscape has changed: Stripe, one of the most celebrated startups of recent years, announced they would layoff 1,120 workers, 14% of their workforce. (link)
Ironically, this is a bullish signal for early stage startups in one key respect - the hiring market has improved dramatically in the past few quarters. For startups that have capital and a durable business model, there’s far more talent available today than even 6 months ago. Building a talent edge is never easy, but it has become much more attainable.