As Alphabet crests the $1T mark, SaaS stocks reach all-time highs of their own

Continuing our irregular surveys of the public markets, two things happened this week that are worth our time. First, a third domestic technology company — Alphabet — passed the $1 trillion market capitalization threshold. And, second, software as a service (SaaS) stocks reached record highs on the public markets after retreating over last summer.

The two milestones, only modestly related events, indicate how temperate the public waters are for technology companies today, a fact that should extend warmth into the private market where startups, and their venture capital backers, work.

The happenings are good news for technology startups for a number of reasons, including that major tech players have never had as much wealth in hand with which to buy smaller companies, and strong SaaS valuations help both smaller startups fundraise, and their larger brethren possibly exit.

Indeed, the stridently good valuations that major tech companies and their smaller siblings enjoy today should be just the sort of market conditions under which unicorns want to debut. We’ll continue to make this point so long as the public markets continue to rise, pricing tech companies that have already floated higher like the cliche’s own tide.

But while Alphabet, Microsoft and Apple are worth $3.68 trillion as a trio, and SaaS stocks are now worth 12.3x times their revenue (using enterprise value instead of market cap, for those keeping score at home), not every private, venture-backed company will necessarily benefit from public investor largesse.

What about tech-ish startups?

How much the current public-market tech valuation expansion will help companies that are increasingly sorted into the tech-enabled bucket isn’t clear; some companies that went public in 2019 were quickly spit up by investors unwilling to support valuations that matched or rose above their final private valuations. SmileDirectClub was one such offering.

The dividing line between what counts as tech — often fuzzy — appears to be slicing along gross margin lines, and the repeatability of business. The higher margin, and more recurring a company is, the more it’s worth. This market reality is why SaaS stocks’ recent return to form is not a surprise.

For Casper and One Medical, the first two venture-backed IPO hopefuls of the year, the more tech-ish they can appear between now and pricing the better. Because technology companies today are valued so highly, perhaps even a faint dusting of tech will save their valuations as they cross the chasm between private and adult.

Cloudinary passes $60M ARR without VC money

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Today we’re continuing our exploration of companies that have reached material scale, usually viewed through the lens of annual recurring revenue (ARR). We’ve looked at companies that have reached the $100 million ARR mark and a few that haven’t quite yet, but are on the way.

Today, a special entry. We’re looking at a company that isn’t yet at the $100 million ARR mark. It’s 60% of the way there, but with a twist. The company is bootstrapped. Yep, from pre-life as a consultancy that built a product to fit its own needs, Cloudinary is cruising toward nine-figure recurring revenue and an IPO under its own steam.

Lucky coffee, unicorn stumbles and Sam Altman’s YC wager

Hello and welcome back to Equity, TechCrunch’s venture capital-focused podcast, where we unpack the numbers behind the headlines.

This week we had TechCrunch’s Alex Wilhelm and Danny Crichton on hand to dig into the news, with Chris Gates on the dials and more news than we could possibly cram into 30 minutes. So we went a bit over; sorry about that.

We kicked off by running through a few short-forms to get things going, including:

  • Alex wanted to talk about his recent story on Lily AI’s $12.5 million Series A. Canaan led the round into the e-commerce-focused recommendation engine that has a cool take on what people care about.
  • Danny talked about the acquisition of Armis Security by Insight for $1.1 billion, the VC round for self-driving forklift startup Vecna and an outside-the-Valley round for Houston-based HighRadius.

Turning to longer cuts, the team dug into the latest from SoftBank, its Vision Fund and the successes and struggles of its enormous startup bets. Leading the news cycle this week were layoffs at Zume, a robotic pizza delivery venture that is no longer pursuing robotic pizza delivery. Now it’s working on sustainable packaging. Cool, but it’s going to be hard for the company to grow into its valuation while pivoting.

Other issues have come up — more here — that paint some cracks onto the Vision Fund’s sunny exterior. Don’t be too beguiled by the bad news, Danny says; venture funds run like J-Curves, and there are still winners in that particular portfolio.

After that, we turned to China, in particular its venture slowdown. The bubble, in Danny’s view, has burst. The story discussed is here, if you want to read it. The short version for the lazy is that not only has China’s venture scene slowed down dramatically, but startups — even those with ample capital raised — are dying by the hundred. But one highly caffeinated Chinese startup continues to find growth in the world’s greatest tea market.

Finally we hit on the Sam Altman wager and the latest from Sisense, which is now a unicorn. All that and we had some fun.

Equity drops every Friday at 6:00 am PT, so subscribe to us on Apple PodcastsOvercastSpotify and all the casts.

How some founders are raising capital outside of the VC world

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Today, we’re exploring fundraising from outside the venture world.

Founders looking to raise capital to power their growing companies have more options than ever. Traditional bank loans are an option, of course. As is venture capital. But between the two exists a growing world of firms and funds looking to put capital to work in young companies that have growing revenues and predictable economics.

Firms like Clearbanc are rising to meet demand for capital with more risk appetite than a traditional bank looking for collateral, but less than an early-stage venture firm. Clearbanc offers growth-focused capital to ecommerce and consumer SaaS companies for a flat fee, repaid out of future revenues. Such revenue-based financing is becoming increasingly popular; you could say the category has roots in the sort of venture debt that groups like Silicon Valley Bank have lent for decades, but there’s more of it than ever and in different flavors.

While revenue-based financing, speaking generally, is attractive to SaaS and ecommerce companies, other types of startups can benefit from alt-capital sources as well. And, some firms that disburse money to growing companies without an explicit equity stake are finding a way to connect capital to them.

Today, let’s take a quick peek at three firms that have found interesting takes on providing alternative startup financing: Earnest Capital with its innovative SEAL agreement, RevUp Capital, which offers services along with non-equity capital, and Capital, which both invests and loans using its own proprietary rubric.

After all, selling equity in your company to fund sales and marketing costs might not be the most efficient way to finance growth; if you know you are going to get $3 out from $1 in spend, why sell forever shares to do so?

Your options

Before we dig in, there are many players in what we might call the alt-VC space. Lighter Capital came up again and again in emails from founders. has its own model that is pretty neat as well. In honor of starting somewhere, however, we’re kicking off with Earnest, RevUp and Capital. We’ll dive into more players in time. (As always, email me if you have something to share.)

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One Medical’s IPO will test the value of tech-enabled startups

Hello and welcome back to our regular moning look at private companies, public markets and the gray space in between.

Today we’re digging into the One Medial S-1 IPO filing. The company, popular in Silicon Valley and known for an investment from Alphabet, intends to debut this year on the Nasdaq under the ticker symbol “ONEM.” The company’s filing notes a $100 million IPO raise, a placeholder figure designed to indicate to investors the rough scale of its impending offering.

One Medical was valued at around $1.5 billion in its most recent, 2018-era fundraise according to CBNC, reporting that the company has since traded on the secondary markets for around $2 billion.

We’ll start by exploring the trusses and underpinnings of its business before turning to the question of how to value yet another tech-enabled business with lower gross margins than what tech companies tend to sport. One Medical’s valuation picture is also complicated by slow, if accelerating growth, rising unprofitability on a GAAP and adjusted basis and rising operating cash burn.

Facts and figures

Before digging into the numerical stuff we’re going to pause and quote the company’s introductory information. Normally we skip the stuff, but here are the two key sentences from the document (emphasis mine):

  • “Our mission is to transform health care for all through our human-centered, technology-powered model.”
  • “We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live and click.”

Translating a bit, those statements read like One Medical saying that it’s a technology company with recurring, subscription-style revenues. Every company wants to be a SaaS business — the industry enjoys sky-high revenue multiples — making the phrasing from One Medical unsurprising.

One Medical charges a yearly membership revenue fee to customers, providing it with eight-figure subscription revenues; the company’s membership revenue has convinced some in conversation that its SaaS-ish elements will be richly valued. While I doubt that anyone views One Medical as a SaaS business, the question remains how similar to one if might appear once we dig into its financial results. (The closer to SaaS it can appear, the more One Medical may be worth.)

To spoil what’s to come, it looks very little like a subscription-first business.

It’s not a SaaS business

One Medical’s membership business is sizable, but doesn’t appear to generate the majority of the company’s revenues (just $38.0 million in “membership revenue” out of $198.9 million in total top line during the first three quarters of 2019). And, One Medical’s gross margins are far below what we tend to see with software-subscription companies.

What is One Medical, then? The company is a healthcare provider with a technology and subscription twist, it appears.

The firm does have some attractive elements, however, including:

  • Accelerating revenue growth: Revenue grew from $154.6 million in the first nine months of 2018 to $198.9 million in the first nine months of 2019, representing growth of 28.6%. That’s faster than its 2018 full-year growth result of 20.3%.
  • Improving gross margins: The company’s gross margins (not including depreciation and amortization costs) rose from 35% in the first three quarters of 2018 to 40% in the first three quarters of 2019. Inclusive of excluded costs, the figures were 30% and 35%, respectively.

While those are bright spots for One Medical, each represents improvement from a lackluster base. The company’s revenue growth rate is improving, but the company still theoretically hitting its growth curve. (The company doubled its sales and marketing spend in 2019 to juice growth, mind.)

And, the firm’s margins are improving, but are not where we’d expect for a company with its implied revenue multiple.

Turning to One Medical’s issues:

  • Rising operating and net losses: The company’s operating loss grew from $25.1 million in the first nine months of 2018 to $35.2 million in the first nine months of 2019. Its net loss similarly rose from $26.9 million to $34.2 million.
  • Rising adjusted losses: One Medical’s adjusted losses (adjusted EBITDA) rose from $7.1 million in the first three quarters of 2018 to $15.6 million over the same period of 2019. That’s more than double.
  • Rising CAC: Using a crude bit of math, One Medical spent about $565 in sales and marketing costs per new member (net) in the first three quarters of 2019. That figure was about $348 in calendar 2018.
  • Low gross margins: Reporting 40% gross margins while stripping out some costs (following how the S-1 is worded) is pretty good for most industries. For venture-backed companies that raised hundreds of millions, it’s a slightly stunted figure.
  • Rising operating cash burn: One Medical’s operations consumed $11.4 million in cash during the first three quarters of 2018. That rose to $24.1 million over the same period of 2019.

How do we value the company? That’s hard. But we can use some old marks to get some numbers.

What’s it worth?

Public investors loved SaaS stocks in 2019, and startups should be thankful

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Today, something short. Continuing our loose collection of look backs of the past year, it’s worth remembering two related facts. First, that this time last year SaaS stocks were getting beat up. And, second, that in the ensuing year they’ve risen mightily.

If you are in a hurry, the gist of our point is that the recovery in value of SaaS stocks probably made a number of 2019 IPOs possible. And, given that SaaS shares have recovered well as a group, that the 2020 IPO season should be active as all heck, provided that things don’t change.

Let’s not forget how slack the public markets were a year ago for a startup category vital to venture capital returns.

Last year

We’re depending on Bessemer’s cloud index today, renamed the “BVP Nasdaq Emerging Cloud Index” when it was rebuilt in October. The Cloud Index is a collection of SaaS and cloud companies that are trackable as a unit, helping provide good data on the value of modern software and tooling concerns.

If the index rises, it’s generally good news for startups as it implies that investors are bidding up the value of SaaS companies as they grow; if the index falls, it implies that revenue multiples are contracting amongst the public comps of SaaS startups.1

Ultimately, startups want public companies that look like them (comps) to have sky-high revenue multiples (price/sales multiples, basically). That helps startups argue for a better valuation during their next round; or it helps them defend their current valuation as they grow.

Given that it’s Christmas Eve, I’m going to present you with a somewhat ugly chart. Today I can do no better. Please excuse the annotation fidelity as well:

Slack’s worth about 18x revenue, and there’s nothing wrong with that

One odd thing in 2019 has been Slack’s falling share price contrasted against the rising value of the Nasdaq composite, a tech-heavy index that many use as shorthand for the US tech market. Why one of tech’s hottest, and fastest-growing companies was losing altitude while tech stocks themselves broadly rose has been interesting to unpack.

Whether it was software-as-a-service’s (SaaS) modest repricing from summer highs, Microsoft’s Teams push, or Slack’s initial value just being too high, what the workplace productivity company is really worth has been an open question since it began to trade earlier this year; what became plain as the year went along, however, was that its initial trading range (above $40) and direct listing reference price ($26) were far too high, and a little too high, respectively.

But as the year comes to a close Slack has found a trading range that it likes, as we touched on a few weeks ago. This has led to the company’s revenue multiple itself stabilizing, which we should take a moment to explore. Why? Because the company’s new price/sales stability helps set a useful, upper-bound for SaaS valuations to an important degree. And because Slack’s new valuation is at once a real achievement, and, at the same time, a modest disappointment.

Leapfin raises $4.5M to help companies track revenue while keeping its own profitability in view

Leapfin, a startup selling corporate finance tooling, announced a $4.5 million round this morning. The funding event was led by Bowrey Capital, and included dollars from a number of former technology executives.

Before its newly announced investment, the company had raised just a small seed round. The small capital amounts may seem inconsequential, but they’re more strategic than anything. According to Leapfin CEO Raymond Lau, the company is running lean and keeping an eye on profitability.

After being founded in 2015 and starting commercialization of its product in 2018, the company is stepping a bit further out of the shadows this morning. Let’s talk about what it does, and why both its product and business philosophy are neat.

What it does

Leapfin helps companies track their revenue and cost of revenue expenses.

In more human terms, Leapfin helps companies track sales, and how much it costs to create and distribute its goods and services to customers. “Cost of revenue,” also known (roughly) as “cost of goods sold,” may sound like a jargony accounting term, but in reality it’s a bedrock business concept that anyone involved with startups needs to understand.

Let’s explain why. Once you deduct costs of revenue from revenue itself, you’re left with gross profit. That’s what businesses use to cover their operating costs. And, crucially, the larger a company’s gross profit is in relation to its revenue, the higher margin its revenue is; investors love high gross margin revenue.

In part, their high gross margins are why software startups are worth so much.

Back to Leapfin, its product is a shot at making business a more limpid process. In a call with TechCrunch, Leapfin’s Lau explained that many companies only have “one-in-thirty” visibility into their operations; that business owners only manage to fully collate their revenue and cost of revenue results monthly, meaning that the rest of the time they are flying at least partially blind.

The goal of Leapfin, according to Lau, is to provide a “single source of truth” for ongoing business results, using “robotic process automation” to help companies cut down on repetitive work. So Lepafin does two things: helps companies know where they stand financially, and saves them time on rote tasks that tend to come with accounting.

The company is pretty happy with its ability to sell its product so far. Lau told TechCrunch that it has found “very, very strong product market fit,” for example. Asked to describe when he felt that Leapfin had gelled with the market, Lau explained that in his view, product market fit is more “process” than a “tipping point,” but that he was confident in Leapfin’s product-market harmony when its customers began referring other companies (to a product that costs six-figures annually), and its sales cycle tightened.

Why the company is cool

Leapfin is run a bit differently from most SaaS companies that we cover. Instead of raising lots to invest in blow-out sales and marketing expenses, Leapfin is running pretty lean.

TechCrunch asked Lau why he only raised $4.5 million in the new round, which, given the product progress his company has made, felt modest. He said that the Leapfin staff “are outsiders in a way,” and that while his “peers are raising tens of millions,” his company could be profitable by the third quarter of next year. So Leapfin doesn’t need more money, and selling shares ahead of growth is an expensive way to raise capital.

Lau also said, however, that his company’s small raise “doesn’t mean that [it] won’t raise more down the road.” Another check in 2020 to ward off any downturn fears would make some sense. But Leapfin probably won’t sweat a crash too much, as the company keeps profitability and cash flow positivity “in sight,” according to its CEO.

Despite that, the company expects to hire quickly, expanding from around 20 people today to 50 by the end of next year. What we need next from Leapfin is an ARR number so we can vet just how much product market fit it really has.

Three SaaS companies we think will make it to $1B in revenue

What’s the most successful pure SaaS company of all time? The answer is Salesforce, and it’s no contest — the company closed the year on an $18 billion run rate, placing it in a category no other company born in the cloud can touch.

That Salesforce is on such an impressive run rate might suggest that reaching a billion in revenue is a fairly easy proposition for an enterprise SaaS company, but firms in this category grow or drive revenue like Salesforce. Some, in fact, find themselves growing much more slowly than anyone thought, but keep slugging it out as they inch steadily toward the $1 billion mark. This happens to public and private SaaS companies alike, which means that we can look at few public ones thanks to their regular earnings disclosures.

It’s a good time to look back at the year and analyze a few firms that should reach the mythical $1 billion in revenue at some point. Today we’re examining Zuora, a SaaS player focused on building and managing subscription-based services. GuideWire, a company transitioning to SaaS with big ambitions and Box, a well-known SaaS player caught somewhere between big and a billion.

Zuora: betting on SaaS

We’ll start with the smallest company that caught our eye, Zuora . We’ll proceed from here going up in revenue terms.

Zuora is as pure a SaaS company as you can imagine. The San Mateo-based company raised nearly a quarter billion dollars while private to build out the technology that other companies use to help build their own subscription-based businesses. To some degree, Zuora’s success can be viewed as a proxy for SaaS as a whole.

However, while SaaS has chugged along admirably, Zuora has seen its share price fall by more than half in recent quarters.

At issue is the firm’s slowing growth:

  • In the quarter detailed on March 21, 2019, Zuora’s subscription revenue growth slowed to 35% compared to the prior year period. Total revenue growth grew an even slower at 29%.
  • In the quarter announced on May 30, 2019, Zuora’s subscription revenue grew 32% while its total revenue expanded 22%.
  • Moving forward in time, the company’s quarter reported on August 28, 2019 saw subscription revenue growth of 24% and total revenue growth of 21% compared to the year-ago quarter.
  • Finally, in its most recent quarterly report earlier this month, Zuora reported marginally better 25% subscription revenue growth, but slower total revenue growth of 17%.

Why is Zuora’s growth slowing? There’s no single reason to point out. Reading through coverage of the firm’s earnings report reveals a number of issues that the company has dealt with this year, including slow sales rep ramp and some technology complaints. Add in Stripe’s meteoric rise (the unicorn added tools for subscription billing in 2018, expanding the product to Europe earlier this year) and you can see why Zuora has had a tough year.

Adding to its difficulties, the company has lost more money while its growth has slowed. Zuora’s net loss expanded from $53.6 million in the three calendar quarters of 2018. That rose to $59.9 million over the same period in 2019. But the news is not all bad.

In spite of these numbers, Zuora is still growing; the company expects around $276 to $278 million in revenue in its current fiscal year and between $206 and $207 million in subscription top-line revenue over the same period.

At the revenue growth pace set in its most recent quarter (17% in the third quarter of its fiscal 2020) the company is eight years from reaching $1 billion in revenue. However, Zuora’s rising subscription growth rate in the same period is very encouraging. And, the company’s cash burn is declining. Indeed, in the most recent quarter Zuora’s operations generated cash. That improvement led to the firm’s free cash flow improving by half in the first three calendar quarters of 2019.

It also has pedigree on its side. Founder and CEO Tien Tzuo was employee number 11 at Salesforce when the company launched in 1999. He left the company in 2007 to start Zuora after realizing that traditional accounting methods designed to account for selling a widget wouldn’t work in the subscription world.

Zuora’s subscription revenue is high-margin, but the rest of its revenue (services, mostly) is not. So, with less thirst for cash and modestly improving subscription revenue growth, Zuora is still on the path towards the next revenue threshold despite a rough past year.

Guidewire: going SaaS the hard way