rusty coder, venture capitalist, economist by training, iterating through life
By some estimates, investing in the IPOs of the 75 or so SaaS companies would have netted you 5x in less than 5 years. That’s the kind of math that makes even the world’s best investors drool, and considering the target for most private market investors is 3x, and that do in any liquid security, it makes this all the more interesting.
Common wisdom dictates that recurring, and predictable, revenue streams is what makes these cloud companies more interesting for investors. Another argument is that the investments are particularly downturn proof, since the sales have been done long ago.
Private vs public markets — a size differential
And yet, the sizes are still a fraction of the larger enterprise companies, compared to not just Microsoft, but SAP, Oracle or even Salesforce. In the original SaaS wave, Salesforce, ServiceNow and Workday surfed the wave to build giants in the field, and its finding and exploiting exactly those types of mega waves that’s necessary for the next generation of mega companies to emerge.
Within the world of evolutionary biology there’s a fact. When an ecosystem is less exploited, when a new niche opens up, there is a rush to fill it. And there emerges large species who take it over effectively! But when an ecosystem is crowded, when availability of niches is lower, you see high levels of competition within its constituent species, the outcome is that no individual species gets to huge anymore. And that’s as apt an analogy as exists in this new enterprise ecosystem universe we find ourselves in.
The paradox here is one of having a consistent worldview. Never has it been easier to create private unicorns, or even decacorns, because of the combined trends of capital availability and push for efficiency from every part of the corporate value chain. And conversely it’s also much tougher to build something that’s much larger. The law of small numbers applies here of course, but any time a company threatens the dominance of the true giants of the technology world, they get outcompeted or bought.
So in fact what we’re seeing is a divergence. In the private markets, these companies are even more attractive, because now there’s ample evidence that you can create a decacorn through exploiting one (or one plus a couple adjacent) niche, and that’s a large enough exit potential that it trivialises the factor. But at the same time if you are a late stage investor or a public market investor, it looks much harder, since it’s tougher to see where the 5x upside could come from if you can be bought/ copied by a large software house to bring the tech and product inhouse.
There’s a reason quasi-public investors bring multiple billions to bear in the private markets. This liquidity is more a sign of cash seeking yield and being forced to look at unfamiliar instruments, led by the fact that since you can’t wait for the IPO and invest in the best companies then, you have to invest earlier. How long this will last is another question, but the fact that private companies are being forced to mature faster creates a whole new market dynamic that enterprise companies, for one thing, are taking advantage of!
Considering the barrage of public offerings coming our way including IPOs, direct listings, SPACs and more, its worth having a look at whether the potential for public market IPO investing still holds!
All of it to say come on now that the Covid situation has been exacerbated around the western world, and the economy’s effectively shut down for close to a quarter, it’s worth looking at what some of those IPOs are likely to bring. Case in point, Zoominfo.
ZoomInfo provides go to market intelligence for sales and marketing professionals. They provide named account reps, including emails, direct phones, org charts, technology charts, location, and biographies. They’re primarily focused on the SMB segment, though they have had some traction within larger enterprises as well. The biggest competition for them is still LinkedIn, whose Sales Navigator product is of a similar size, though it only provides a smaller proportion of the overall functionality. Essentially if you work in sales or marketing, and want to get information about your prospective customers or competitors, then they’re the main place to get that.
The market is supposedly $24 billion TAM, so there’s plenty of room for growth left.!
Courtesy Nathan Latka Blog
DiscoverOrg paid around $750m for ZoomInfo, which had in turn been acquired just a year and few months ago by Great Hill Partners for $240m. The valuation multiple was 8.6x TTM revenues. The biggest competitor is of course LinkedIn Sales Navigator, which also has $350–400m in revenues and growing.
The saas metrics seem strong — 10x LTV/CAC, >90% growth seen in Q1 reaching $102m, 30 day sales cycle, 109% net revenue retention, c.10% operating margin. However a big point to note is that the growth has come from inorganic growth, with the biggest boost coming from the DiscoverOrg/ ZoomInfo acquisition. Without this the growth is much lower in the 40%-50% area, which is still good considering the scale, but not necessarily spectacular.
In 2019, ZoomInfo had $334.6m in revenue and $36 million in operating profit.
Not only did they end up pricing it at $21 a share, the range originally was $16-$18, then moved up to $18-$20, and the price ended up beating it. The shares opened north of $40, and settled at $50 now, giving it a $19B market cap. In typical valley fashion, the IPO doesn’t provide any voting rights however, and the company has $1B+ of debt load it’s sitting on. There’s also a relatively low float too it looks like, with 44.5 million shares compared to 393 million total.
Despite the woes, the IPO market for SaaS companies is pretty solid. A look at the US broader IPO market shows the growth metrics and the market interest, shown in the day one trading pop of 48%.
Courtesy Renaissance Capital
DiscoverOrg, according to an interview done a year+ ago, has 100 sales development reps. Each day they dial with Frontspin, use Outreach and Salesloft as email automation where data flows from DiscoverOrg into Salesforce and then out to these tools. Each day these 100 SDRs have 80–150 accounts they must dial, split as outbound, inbound and SWAT teams. Target is 20 completed demos per AE, and 5 AE and 5 SDR are grouped together. They also have a dedicated learning and development team who focus on training the customer, then pass on the Customer Service Managers who have a quota on upsell (115%) and prevention of churn (min 90%).
Challenges to growth
They probably will have to go into adjacencies in order to build a bigger moat and justify their market cap. How much of this can continue to happen depends on whether they can continue their profitable growth trajectory driven by smart acquisitions, and the ability to increase penetration into the $24B market. For now, it seems expensive for what it is, a solid saas company without growth driven through inorganic avenues, and without significant enough product differentiation.
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