I’m just gonna be straight with you… there’s a TON of bad business advice flying around right now…
“Companies are only hiring AI engineers”…
“You need VC money to scale”…
“This economy is bad for starting a business”…
If you’ve fallen for any of these oft-repeated assumptions, you need to read Mercury’s data report, The New Economics of Starting Up. Mercury surveyed 1,500 leaders of early-stage companies across topics ranging from funding, AI adoption, hiring, and more, to set the record straight.
What they discovered is equal parts surprising and encouraging:
79% of companies surveyed, who have adopted AI, said they’re hiring more because of it.
Self-funding is the number one avenue for accessing capital — even for tech companies, with half likely to bootstrap.
87% of founders are more optimistic about their financial future than they were last year, despite prevailing uncertainties.
To uncover everything they learned in the report, click the link below.
*Mercury is a financial technology company, not a bank. Banking services provided through Choice Financial Group, Column N.A., and Evolve Bank & Trust; Members FDIC.
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There's usually a separation of church and state when it comes to playing the venture capital game. The operators are presumed to be the best at running companies. And the investors are presumed to be the best at picking the right ones to invest in.
But there's a weird cross-over that happens every once in a while when startups use the money they’ve raised to invest in other startups.
Now, companies investing in other companies has gone on for decades. There are venture arms at stodgy corporates such as BP oil and Colgate, trying to reluctantly diversify out of fossil fuels, or discover the next teeth whitening strip. They are, important to note, slower growing and using their own free cash flows to make investments.
The private tech ecosystem also dabbles in investing. Companies like Stripe, OpenAI, and Databricks all have investment arms to build relationships with younger customers in similar fields. A rising tide lifts all ships if you can do something to support the ecosystem you work in, getting a customer, ally, or acquisition in the process.
However, you do have to wonder when the "right" time to start playing investor is… $100 million in revenue? $1 billion in revenue? $10 billion in revenue?
IDK.
Enter Vercel Ventures
The Information reported that Vercel joined the startup-turned-VC realm, with the launch of Vercel Ventures. The startup will invest from its balance sheet, which just got fatter after raising $300 million last month.
"Sometimes it's about taking bets on earlier-stage technology that is more speculative. We can act as an earlier-stage partner placing a bet on the technology—and give them hints of what that technology [looks like] at the scale of Vercel."
CFO Marten Abrahamsen says Vercel Ventures has no "specific mandate" as to the types of companies it will back, but expects to focus on startups that help developers create products. Investing in these companies hopefully increases the adoption of Vercel's software.
"We also get to know the next-generation infrastructure talent and offer an attractive exit path if of interest to the founder."
Vercel is rumored to be doing around $200M in revenue, a figure they reached in about a year. That's a remarkable growth trajectory. But to be clear, in today's terms, that's still very much sub-scale.
So to call a spade a spade, a cash-burning company doing $200M in revenue per year is using some of the money it's raised to invest in other cash-burning companies.
Is this peak bubble behavior? Or shrewd business development?
What’s the Scuttlebutt?
I spoke to a number of friends this week, spanning both the VC side of the table as well as the corporate development side at late-stage privates. I received mixed reviews.
A former finance leader turned VC told me they started investing from their company's balance sheet around their Series B (this was in the 2020/2021 timeframe). The checks usually weren’t that big, maybe $500K to $2M, but they added up.
Looking back, none of the companies they invested in hit escape velocity. But one did become a small “team and talent” tuck in acquisition.
A growth stage investor I spoke to said:
“I hate the optics of this. It’s distraction for the team and it’s not like the ecosystem needs it. There is infinite capital available…
Only do it if you feel like if you don’t do it nobody else will, which is def not the issue today.”
And a senior biz dev leader at a pre IPO company added:
“I have a pretty strong view here that most of the time it’s a very bad idea and a sign of a bubble.
However, there are clear exceptions.
The only time it makes sense to have startups investing in other early stage startups is if the product relies on network effects, and you want to build an app ecosystem that then drives further folks or developers.”
How Big is Big Enough?
The question may be less "is this a good idea" and more "at what scale does it go from being a bad idea to a good idea?"… Because there are some success stories.
To get more specific, Stripe invested in Ramp in both 2021 and 2022. The company also invested in the likes of Monzo (challenger bank), Step (bank account for teenagers), and Pilot (accounting software and services). All of those have become successful companies in their own right, and additive to Stripe’s ecosystem. These wound up being companies that would eventually process billions through their platform.
But here's the key: Stripe was already at meaningful scale when they made these moves, with revenues in the single-digit billions.
On the other end of the spectrum, Slack was actually pretty small when it started investing. It contributed to the balance sheets of Lattice (HR performance management software..good one!), Hopin (virtual events…bad one!), and Loom (video recording…great one!) when it was smaller than Vercel. According to a blog on the Slack Fund: when the fund launched, Slack’s revenue had “crossed the $100 million recurring mark last year”.
So What's the Answer for Vercel?
It's genuinely uncertain. At $200M in revenue with explosive growth, every dollar and every hour of management attention matters. The opportunity cost is real.
Vercel is certainly winning, but they haven’t “won” yet.
However… there’s an attractive counterargument: in AI infrastructure, maybe you have to play this game. If Anthropic, OpenAI, and every other platform player is investing in the next wave of developer tools, sitting on the sidelines means ceding those relationships to competitors.
The checks aren't huge. The upside could be real. And with $300M in fresh capital, Vercel has the dough to experiment. The questions may be if it has the bandwidth, and if management is uniquely qualified to make worthwhile investments.
Either Vercel Ventures becomes a case study in smart ecosystem building, or it's exhibit A for 'what startups do when they raise too much money.'
Let's check back in 2030 (or in December, if this bubble pops).
TL;DR: Multiples are DOWN week over week.
Top 10 Medians:
EV / NTM Revenue = 20.6x (DOWN 1.1x w/w)
CAC Payback = 24 months
Rule of 40 = 49%
Revenue per Employee = $475k
Figures for each index are measured at the Median
Median and Top 10 Median are measured across the entire data set, where n = 147
Recent changes
Added: Bullish, Figure, Gemini, Stubhub, Klarna
Removed: Olo, Couchbase
Population Sizes:
Security & Identity = 17
Data Infrastructure & Dev Tools = 13
Cloud Platforms & Infra = 15
Horizontal SaaS & Back office = 19
GTM (MarTech & SalesTech) = 19
Marketplaces & Consumer Platforms = 19
FinTech & Payments = 28
Vertical SaaS = 17
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.
Please check out our data partner, Koyfin. It’s dope.
Wishing you a forecast you can beat, and raise,
CJ
