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Cash might be king, but cash is dead.
Every summer we go to Cape May, NJ for a week with my wife’s family. Despite the insufferable Philly fans, it’s a kid friendly, if not tired, nostalgic little beach town. Exit 0 feels like it was absolutely popping in the late 80’s and early 90s, and then they never bothered to freshen up the paint in the decades since.
There aren’t any chain restaurants or hotels. Everything is family owned. The corners are characterized by penny candy stores, seafood restaurants, hot dog shacks (shout out Hot Dog Tommys), and your standard gag vacation tee shirt vendors (“I’m retired, but now my wife is my boss”, or the Dunkin Donuts logo repurposed as “Drunken Adults”).
Since we’ve vacationed there, Cape May has served as the last vestige of a strictly cash society. The day before we leave, my wife and I make our annual pilgrimage to the ATM. JP Morgan may rule the banking world, but your credit card is no good here.
But something changed this year.
Seemingly overnight, everyone accepted credit cards, and more specifically, Apple Pay.
The first sign was the bike rental shed.
I’d typically drop two $20’s for the privilege of sweating my ass off on a six person pedal bike as the other five passengers stared slack jawed at the nice houses, but this year the owner changed his story:
“Credit card only. My employees aren’t smart enough to count out change.”
Boss of the year awards aside, it was like this guy had amnesia. My mans, I’ve paid you in cash since forevers.
So we went tip to tip with our phones and transacted.
He wasn’t the only one. Our favorite Italian restaurant, Tish’s, accepted credit cards this year. They even permitted me and my brother-in-law to split the bill, although they charged us a $3 fee for going Dutch, which our 40 year veteran waitress profusely apologized for.
“It’s management’s decision... not mine!!”
Even the horse drawn carriage ride was bookable online, and accepted tips via Venmo.
What happened?
Cash might be king, but cash is dead.
I remember
I remember the first time I was introduced to Apple Pay. It was October of 2016 and I was visiting my brother in Austin, Texas for our first F1 race (as spectators, not drivers).
On the way to the event we stopped at a convenience store and his roommate, Mitch, asked the cashier if they accepted Apple Pay.
They did not.
I remember thinking, what a presumptuous question. I don’t know any place that accepts Apple Pay. Also, are you a psychopath to leave the house without your wallet and just bank on your phone working?
Flash forward to today and my wife and I rarely carry more than our phones out of the house. This includes the farmer’s market in town, where I paid for my kids to get their faces painted with my iPhone last week.
Cash got chipped away at one use case at a time, whether that was a flea market vendor finally being able to take a card, a parent sending their kid an allowance digitally, splitting a dinner bill on Venmo, or tapping your phone to pay someone at a farmer’s market.
Eventually there just weren’t that many reasons left to carry the stuff.
One of my favorite books of all time is The Innovation Stack, by Jim McKelvey. He founded Square with Jack Dorsey. Their initial product was a chunky, clunky AF credit card scanner that plugged into the headphone jack on an iPhone.
Despite its initial frustrations, as it was quite ratchet, it widened the frontier for financial services. SMBs that had previously been excluded from the credit card rails could suddenly participate as merchants.
It was the first time a T Shirt hawker outside of Fenway Park, who made only $30,000 a year selling knock off gear, could accept anything other than cash.
Or, eventually, the Cape May bike rental guy in the shed.
Note: He has the updated dongle.
I was reminded
I was reminded of this just yesterday at Shake Shack, where I obviously paid with Apple Pay, as a TV droned on in the background.
In the 40 or so minutes we were there consuming inflation ridden cheeseburgers, I saw commercials for Chime, Ethos, and Klarna, all new-age B2C fintech companies.
Once you see fintech's ubiquity, you can't unsee it.
Chime went after low-to-middle-income Americans getting whacked by bank fees. In their S1 they reference consumers earning “up to $100K annually” 29 times.
Super specific customer. Super specific problem.
My younger siblings were some of Greenlight’s first cohort of customers. Greenlight went after kids (not in a weird way), giving parents a debit card with training wheels attached. Parents could manage chores, automate allowances, and control exactly where their kids spent money.
Klarna and Affirm both get shoved into the same “buy now, pay later” bucket, but they actually started in different corners as far as ACVs go. Klarna was more oriented toward smaller, higher-frequency purchases, like a pair of expensive Jordans. Affirm became known for bigger-ticket stuff like Pelotons and mountain bikes.
Wealthfront and Robinhood both went after a younger generation that thought Wall Street sucked, but they were solving very different problems.
Wealthfront zoned in on what it called “Passive Accumulators”: high-earning professionals who wanted to set and forget their wealth. Robinhood went after the person who wanted to trade but was getting nickeled and dimed every time they clicked buy or sell.
If you’ve ever seen one of those Ikigai Venn diagram thingies, they were basically finding the overlap between a specific demographic, what that person was trying to do, and whatever part of the existing financial system pissed them off.
Stack enough of those across society and suddenly there aren’t many uncovered patches of grass left.
But how much
That specificity also changes the economics.
My friend Turner Novak interviewed Figure CEO Michael Tannenbaum on his podcast The Peel (YouTube | Spotify | Apple). Michael reflected on his time at SoFi, before he was Brex’s CFO.
SoFi’s initial edge of the wedge was helping the “mass affluent” refinance their student loans. They were targeting employed professionals and intimately understood what that meant for the business.
“When you are trying to do financial services for consumers who do not have a lot of money, you are capping the amount of money you can make. If someone only has let’s say $20,000 to spend for the year, you have to capture all of that, which is impossible, to make $20,000. If someone is making $120,000 that became 6x easier. That is something people don’t always appreciate all the time.”
There’s a kernel of truth in there. You can have a great product and still pick a customer who makes the math incredibly hard to build a great business.
But once you find the right customer and solve the first problem, you can follow them.
Because you are serving such a specific customer base, you tend to know about their NEXT problem sooner and better than anyone else.
Wealthfront is a great example. Their CFO Alan Imberman told me on RTN that they watch what their customers do with their money. They noticed customers were sending billions of dollars in wires to title and escrow companies. Their average customer was getting to the age where they were having kids, leaving the city, and buying houses.
So Wealthfront launched a mortgage product.
Robinhood followed the same general progression from the other direction. It started with free stock trading. Today it has 13 different products generating more than $100 million of revenue each, including prediction markets.
Source: The Information
Which is bonkers.
The thing that looks ubiquitous from the outside was built piece by piece.
Back to Cape May
I now walk around with a wad of unspent $100 bills like Joe Pesci in Casino, figuring I’ll eventually use them for dog walker tips or paying the babysitter.
Actually, my wife pays both of them through Venmo.
So I guess I’ll keep the bills as an artifact of the past.
And somewhere on the Cape May boardwalk, a guy is selling “Drunken Adults” T Shirts and accepting Apple Pay.
There are probably a dozen other dumb little financial frictions still hiding in this vacation that somebody will eventually build a company around. Cash was just the most obvious one.
I’m excited to see what I can do from my phone next summer.
Maybe we’ll be securitizing hot dogs.
Weekly Valuation and Efficiency Metrics
Revenue Multiples
Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.
NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.
However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.
Reasons may include:
Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential
From a macro perspective, multiples trend higher in low interest environments, and vice versa.
Multiples shown are calculated by taking the Enterprise Value / NTM revenue.
Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash
Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.
Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.
Efficiency
Companies that can do more with less tend to earn higher valuations.
Three of the most common and consistently publicly available metrics to measure efficiency include:
CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?
CAC Payback Period is measured as Sales and Marketing costs divided by Revenue Additions, and adjusted by Gross Margin.
Here’s how I do it:
Sales and Marketing costs are measured on a TTM basis, but lagged by one quarter (so you skip a quarter, then sum the trailing four quarters of costs). This timeframe smooths for seasonality and recognizes the lead time required to generate pipeline.
Revenue is measured as the year-on-year change in the most recent quarter’s sales (so for Q2 of 2024 you’d subtract out Q2 of 2023’s revenue to get the increase), and then multiplied by four to arrive at an annualized revenue increase (e.g., ARR Additions).
Gross margin is taken as a % from the most recent quarter (e.g., 82%) to represent the current cost to serve a customer
Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.
Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)
Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and EBITDA Margin. Netting the two should get you above 40 to pass the test.
Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %
A few other notes on efficiency metrics:
Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.
OPEX
Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.
The most common buckets companies put their operating costs into are:
Cost of Goods Sold: Customer Support employees, infrastructure to host your business in the cloud, API tolls, and banking fees if you are a FinTech.
Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools.
Research & Development: Product and Engineering employees, development expenses, tools.
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead.”
All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.
Companies Included
1. Security & Identity (16 companies) Endpoint, network, IAM, security operations. The CISO budget.
CrowdStrike, Palo Alto Networks, Fortinet, Cloudflare, Zscaler, Okta, SentinelOne, SailPoint, Check Point, Qualys, Tenable, Rapid7, Varonis, Rubrik, Mitek, OneSpan
2. Data & AI Infrastructure (13 companies) Modern data stack, AI/ML platforms, vector and analytics infra, GPU compute. Software-native by design.
Snowflake, Arista Networks, Equinix, CoreWeave, MongoDB, DigitalOcean, Nebius, Elastic, Akamai, Fastly, Teradata, C3.ai, Cerebras
3. Dev Tools & Observability (10 companies) Anything bought out of the engineering budget.
Datadog, Atlassian, Figma, Dynatrace, Nutanix, GitLab, UiPath, JFrog, AvePoint, PagerDuty
4. Horizontal SaaS & Back Office (18 companies) Software sold across industries to ops, HR, finance, and collaboration teams. Not vertical-specific.
Oracle, ServiceNow, Workday, ADP, Paychex, Paycom, Paylocity, Zoom, DocuSign, Navan, monday.com, Asana, Workiva, BlackLine, RingCentral, 8x8, Box, Dropbox
5. GTM (MarTech & SalesTech) (16 companies) Anything bought out of the revenue org. Marketing automation, sales engagement, CRM, ad tech, customer experience.
Salesforce, Adobe, HubSpot, The Trade Desk, Twilio, Klaviyo, Braze, ZoomInfo, Freshworks, Amplitude, Five9, Zeta Global, Wix, Sprout Social, Yext, Criteo
6. Vertical SaaS (15 companies) Software built for a specific industry without take-rate or transaction economics.
Palantir, Autodesk, Veeva, Samsara, ServiceTitan, Guidewire, Tyler Technologies, Doximity, Procore, AppFolio, CCC Intelligent Solutions, Blackbaud, nCino, CareCloud, CS Disco
7. Take-Rate Platforms (18 companies) Marketplaces and commerce platforms that earn money on transaction volume.
Uber, Airbnb, Shopify, MercadoLibre, DoorDash, eBay, Zillow, CarGurus, Instacart, Etsy, Toast, Lyft, Opendoor, StubHub, Upwork, Coursera, Ethos, Fiverr
8. Payments & Money Movement (10 companies) The rails. Payment processors, payment infrastructure, B2B payments, treasury. Volume game, utility margins.
Intuit, Fiserv, Adyen, PayPal, Block, Shift4, BILL, Flywire, Marqeta, Lightspeed
9. Consumer Fintech, Lending & Crypto (15 companies) The front-end. Consumer-facing financial apps, BNPL, lending platforms, crypto exchanges. CAC-driven, marketing-heavy, totally different unit economics from #8.
Coinbase, Robinhood, SoFi, Chime, Affirm, Upstart, Circle, Bullish, Figure, Klarna, Sezzle, Gemini, Blend, Remitly, LendingClub
Please check out our data partner, Koyfin. It’s dope.
Wishing you trade at a high revenue and EBITDA multiple,
CJ
