$5 Million is a Nightmare

September has a funny way of turning "we'll figure that out during budgeting" into "can you have this modeled by tomorrow?"

Suddenly Sales has a new hiring plan. Marketing found three tools they absolutely need. Someone changed the revenue target. And the budget you started with is already on version 6.

Budget season is always going to mean changing assumptions. Abacum just makes those changes a lot less painful. Update the driver once, see the impact everywhere, and keep everyone working from the same numbers.

The hard part of budgeting should be deciding where to invest. Budget season is here. Your legacy planning process doesn't have to come with it.

In NYC? Join Abacum on Sept 28 for Hackcelerate, a one-day hackathon for finance leaders turning real forecasting problems into working AI workflows.

Real quick before we begin!

I’m making a rare trip across the pond. Next month I’m hosting a happy hour for our London readers. If you want to have a cheeky pint with ya boy, RSVP below.

It’s on Thursday October 15th

$5 Million is a Nightmare

Of all the Succession scenes I share (there are plenty) this is the one I return to most often:

For those of you reading this at your child’s soccer practice or an Arby’s restroom and don’t want to blare the clip like a boomer, here’s what goes down…

Basically, Cousin Greg explains that even though he’s being cut out of his rich grandfather’s will for siding with Uncle Logan, his mom thinks he’ll still squirrel away $5M for him. Much lower than the theoretical amount he thought would be in his trust, but hey! That’s still a lot of Doritos!

Cousin Connor and BFF Tom quickly cut him down to size:

That’s what being a private SaaS company growing ~20% is like. Growing 20% is a nightmare.

More specifically, being a pre-AI SaaS company growing ~20% while not exceedingly profitable, is a nightmare.

Yea, you’re growing, and you have clear product market fit with something people like and maybe you’ve achieved some good scale. But even if you’re $500M in revenue and plugging along at a 15% or 20% or even 25% clip, with everyone all roided up on AI, you’re the weakest strong man at the circus.

When you fall to those growth rates, you just don’t trade like you used to. In fact, you don’t even trade off the same metrics as you used to…

At high growth, the future revenue base can swamp today’s cost structure (in a good way).

But as Gokul points out, once you drop below 30% growth, you lose the right to trade at a revenue multiple because you’re not growing topline fast enough to outrun your current cost structure. It’s much harder to make people forget that you aren’t profitable. Which means the profits, or lack of profits, you produce today are closer to your terminal valuation velocity than your revenues.

People assume that when growth slows, your revenue multiple compresses…. Maybe instead of trading at 12x revenue you trade at 6x…. But that’s not true; it gets replaced.

And 10% to 20% growth with mehhh FCF makes you too rich for PE investors, too poor for growth investors, and not big enough to IPO.

You’re the poorest rich person in SaaS.

On Thursday, news dropped that Bending Spoons struck again, acquiring Miro for $1.355B.

Miro is a company I’ve always liked, despite making jokes about how they auto upgrade everyone and their grandmother to a paid plan within your org if you so much as breathe on a slide that was shared. It is a useful and beloved company.

They raised at something like $17 billion back in the halcyon days.

This exit shakes out to around 3x current ARR given the +$400M in cash they had on the balance sheet.

And yet… none of those facts guarantee a “good” revenue multiple anymore.

$600M of ARR sounds huge, but if you’re only growing 15–20%, the market is no longer underwriting some radically larger company three years from now. The math doesn’t math.

(Note: I don’t actually know what Miro was growing at. But I’m assuming it was closer to 20% than 50% y/y)

Miro’s old valuation was based on the old days.

A $17B valuation assumes a very different growth path, market environment, and cost of capital. Miro admittedly can’t control all of those, btw, which is why timing your exit window is so important. More on that in a sec.

The acquisition price is based on what a buyer thinks the whole company is worth now, not what a minority investor thought a small slice could someday become.

That’s why 3x ARR can simultaneously look insulting to anyone anchored to 2021 SaaS multiples and perfectly rational to a buyer underwriting Miro as a mature software asset.

At this point my wife and kids are probably sick of me haranguing over this point at the kitchen table, piece of rotisserie chicken falling out the side of my mouth:

But here I go again!

When you raise you typically sell between 10% and 20% of your company. The VCs have a “what can go right” attitude. When you sell, you are selling 100% of it. The buyer has a “what can go wrong” attitude. They have to, you know, run the thing. So they sit on different ends of the risk spectrum. And if the former goes bad, hey you got some cheap capital.

So yes, Miro did technically raise at $17B and Airtable did technically raise at $11B and the list goes on. It doesn’t really matter, unless you’re an employee who was granted stock at that highwater mark. Then it really matters and I feel your pain.

So whenever I hear about a company selling “early” I never pile on the “what if” train.

Good for them. Sell the farm. Secure da bag.

I remember when Metronome sold for a reported $1B to Stripe last year. My goodness, get yours and hit the sell button.

Bc you never know when your window may close and you aren’t the belle of the ball anymore. I’ve come to appreciate a founder’s sixth sense for capitalizing on their window.

Plus, if you have a few hundred million in the bank, you can build SaaS companies until the cows come home.

A wise man once told me… You can sell early and still be really really fucking right.

You can’t sell late and be all that right.

Miro will join Airtable in the Bending Spoons bargain bin. I wrote about Airtable’s saga a few weeks back (read the article below for 10 lessons I learned).

Bending Spoons has honed in on a very specific aisle of the software dollar store: big, well-known products, with hundreds of millions in revenue, lots of users, and growth rates that no longer support the valuations they grew up with.

These companies aren’t broken, but fundamentally mispriced, mistimed, and stuck in no man’s land.

so which door will the grim reaper knock on next?

I don’t want to spread any bad ju-ju, but here’s what some ppl dropped in my comments:

once again, I want to point out that none of these are “bad companies”, just companies caught in the wrong window. Born in the wrong time under the wrong moon. Or rather, exiting in the wrong time, under the wrong moon.

And finally, this stuff hurts like a B, but it’s healthy. There are about to be a lot of smart people released back into the tech ecosystem, across all departments, not just engineering, who will contribute to cool new projects.

Sometimes the rainforest needs to burn down a bit so the plants growing underneath can get some light or whatever.

Sometimes you gotta crack a few Gregs to make an omelette.

Wishing you trade at a high revenue and EBITDA multiple,

CJ