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🚨GOAT SPOTTING🐐

I interviewed the Godfather of SaaS metrics, Alex Clayton of Meritech Capital. We went DEEP on LTV to CAC, Net Dollar Retention, and Contribution Margin. This was a benchmarking PalooZa for all the SaaS nerds.

Listen now on Spotify, Apple and YouTube

My love affair with 10K’s started in 2013. My first gig out of college was a consultant in PwC’s risk advisory group. And consultant is a generous term. I was really a lackey for the higher ups… a paper weight who also knew how to get coffee. 

My first project was to inventory 10K’s from 100 companies. 10K’s are an annual disclosure that publicly traded companies provide with their financial results to provide background on their business model, the executives working there, and the potential risks you may incur when investing.

As a member of the Risk Advisory group they wanted me to compare how many of the stated risk factors in the 10Ks were overlapping.

About a thousand cups of crappy office coffee later (Flavia, anyone?) I figured out that probably 70% of the risk factors were fluff - CYA’s that were so broad they didn’t mean much.

But there was probably 30% in there that was real signal. It was like a glimpse into what kept an executive up at night.

I figured that if I could separate the signal from the noise, I could better understand how businesses compete and what levers they could pull to go faster.

In many ways, risk factors actually identified the underlying opportunities.

More than ten years later I’ve decided to dust off my 10K boots and go digging for Risk Factors again. So I called the data gurus at Virtua Research to see which Risk Factors were most prevalent, and which were more bespoke to a particular business model or industry.

For our analysis we used a sample of 40 companies:

Sample companies

  • Unable to maintain/improve revenue growth in future:

    • 100%, 40 / 40

  • Customer attrition & inability to expand customer base:

    • 100%, 40 / 40

  • Employee attrition:

    • 100%, 40 / 40

  • Operational dependency on third parties:

    • 100%, 40 / 40

❝

OK, so up until now, a lot of CTRL + C, CTRL P by the compliance departments…

  • Failure to maintain and enhance the brand recognition:

    • 65%, 26 / 40

  • Unfavorable media coverage:

    • 63%, 25 / 40

❝

Alrite, alrite, starting to get interesting…

  • Declines in renewals or purchases of additional licenses:

    • 48%, 19 / 40

  • Long and unpredictable sales cycle:

    • 40%, 16 / 40

  • Seasonality:

    • 40%, 16 / 40

  • Actual losses may exceed our insurance reserves:

    • 28%, 11 / 40

      • Confluent

      • Digital Ocean

      • DoorDash

      • Freshworks

      • Marqeta

      • Okta

      • RobinHood

      • Tenable

      • Toast

      • UiPath

      • Zscaler

❝

I was talking to a CFO about insurance policies last week - past a certain point you are just trying to determine what level of risk you are comfortable with self underwriting as a matter of doing business. It would be too expensive to literally insure everything.

Also, if you are a security company, there really is no insurance policy big enough for you… if you get breached (like a SolarWinds) it’s kind-of-sorta a binary outcome if you go out of business or not, since the nature of your business is security.

  • Dependency on small number of customers & suppliers (for certain components):

    • 20%, 8 / 40

      • Cloudflare

      • Guidewire

      • Marqeta

      • Palantir

      • Samsara

      • Twilio

      • UiPath

      • Veeva

❝

If I recall correctly, Twilio includes a slide in every investor presentation to show top 10 customer revenue concentration.

  • Failure to meet publicly announced guidance:

    • 18%, 7 / 40

❝

Now we’re cooking!

Damn! 82% of ya’ll are feeling good about your ability to forecast in this dumpster fire of a macro environment! Good for you!

  • Misconduct by employees:

    • 10%, 4 / 40

      • Bumble

      • Okta

      • Robinhood

      • Samsara

❝

Hmmmm I guess it makes sense that a dating app company may have more internal misconduct risk than your typical tech firm…

And a password / security company could have employee conduct issues leading to breaches….

While it’s also understandable that a trading platform may have employees with access to inside trading information…

Samsara though…IoT fleet mgmt wasn’t on my bingo card here.

  • Substantial revenue from limited number of products:

    • 8%, 3 / 40

      • Autodesk

      • Freshworks

      • Peloton

❝

Autodesk is a vertical software for the construction, engineering, and design sector. They have many flavors of pretty much the same design product. This checks out.

Freshworks has a compelling customer service product, but has yet to expand to other verticals within companies.

Peloton does technically have BOTH a bike AND treadmill product, but I guess that isn’t exactly diversification.

  • Risks associated with our non-marketable securities, including partial or complete loss of invested capital:

    • 5%, 2 / 40

      • MongoDB

      • Workday

❝

I’d assume some of these riskier positions are related to investments they’ve made in smaller startups out of their corporate VC arms… Not easy assets to move over night.

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