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OK…but why now?
In October 2022, Meta was deep in the wilderness of its metaverse bet. The company had just reported another quarter of massive losses in Reality Labs… over $3.7 billion torched on Zuckerberg's vision of the future. The stock was down 70% from its peak. Wall Street was getting impatient.
But it wasn't until the post-earnings investor calls that Meta's leadership truly understood how precarious their position had become.
Susan Li, Meta's CFO, recently shared a telling moment from that period on Patrick Collison's Cheeky Pint podcast (Patrick, come on man, it’s MY job to interview the CFOs lol).
For context, after earnings calls, it's standard practice to touch base with larger investors. It’s called doing “call backs”. They are kind of like group chats where the CEO and CFO field clarifying questions about the numbers or strategy.
October 2022 was different.
"For the first time, there were no questions.
On one of the calls, the portfolio manager said, 'We don't have any questions for you. We just want you to hear some feedback.'"
What followed was a moment of brutal clarity that would reshape how Meta thought about its relationship with investors, and its future.
The feedback was direct:
"Look, I get that you're building the future of computing and all of that. And that's great, and I'm glad someone wants to do it. I'm rooting for you."
Then came the punch line:
"But why should I invest in your stock today? Why don't I just wait for your scaled consumer product to come out and invest in you then? You're saying it's years away."
Li described how that question reframed everything:
"The way that question was framed really stuck with me. It's the way frankly me and Mark think about it now.
Great, we have a lot of these bets. These bets are technologically exciting and people can get excited about the future of the world.
But as investors, they're like, 'Cool, why don't I wait for your bets to be ready to succeed?'"
The investor had articulated something fundamental that many future-focused companies struggle with: the gap between vision and value creation.
Meta was asking shareholders to fund a multi-billion dollar R&D project with no clear timeline for returns, while their core business faced headwinds.
From an investor's perspective, it was a reasonable question: If the metaverse is years away from meaningful revenue, why not just wait on the sidelines and invest once the product-market fit becomes clear?
Li explained:
"We need people to invest with us along the way.
When we think about the financial outlook of the company, a large part of it is not just 'cool, you are building the next massive platform out here in some decades.'
It's why would you hold our shares until then? And what do we need to keep delivering in terms of consolidated results?"
The Lesson for AI Companies
This story carries particular weight today as we watch the next generation of AI companies raise massive rounds and make bold promises about transforming entire industries.
At some point, a lot of the hype will have died down, and near and medium term progress will be important.
This is a lesson that next-gen AI companies need to keep in mind. Why should I hold your stock today? What results can you still show now to derisk the story of tomorrow?
The most successful companies of the AI era won't just be those with the most compelling visions of the future; they'll be the ones that can answer two questions simultaneously:
What transformative value will you create tomorrow? (The vision question)
What tangible value are you creating today? (The investment question)
The Present Pays the Bills
To Meta's credit, they took this feedback seriously. While continuing to invest heavily in Reality Labs, they also doubled down on efficiency in their core business, implemented significant cost cuts, and showed discipline in how they communicated their timeline and expectations for emerging technologies.
(Their stock actually went up every time they cut headcount)
By 2024, Meta's stock had not only recovered but reached new highs, even as Reality Labs continued to post losses. Investors bought into the narrative because Meta demonstrated they could walk and chew gum at the same time; investing in the future while executing in the present.
You can see this maturity in how they balance their story telling for tomorrow’s AI future with the cold hard results of their advertising business of today. It helps investors underwrite the massive CAPEX budgets needed to get there.
So for any company asking investors to fund tomorrow's breakthroughs, the question isn't whether your vision is compelling. It probably is. The question is whether you can give investors a reason to believe in you today, while you build toward that vision.
As Susan Li learned in that uncomfortable October call: the future may be exciting, but the present pays the bills. Give investors the permission to invest with you along the journey.
This Week’s Benchmarks
The overall median still hovers below 5.0x, which is lower than we’ve historically seen. GTM (MarTech & SalesTech) is getting slammed in particular, with the median falling to just 3.4x forward revenues. Cloud Platforms + Infra aren’t doing much better, trading at a median of 4.0x.
The top ten median still trades above 17x, more than 3x the overall cohort.
Within the top ten, we are seeing companies become increasingly efficient in terms of revenue per employee. This metric is one to keep an eye on.
Top 10 Medians:
EV / NTM Revenue = 17.7x (UP 0.2x w/w)
CAC Payback = 24 months
Rule of 40 = 49%
Revenue per Employee = $463k
Figures for each index are measured at the Median
Median and Top 10 Median are measured across the entire data set, where n = 144
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 = 18
FinTech & Payments = 25
Vertical SaaS = 18
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 clean ass cap table,
CJ
