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The firm’s guidance to�� startups is to assess their runway (as future financing might become challenging), reassess sales forecasts, raise return on investment for marketing spend, and assess headcount and capital spending. All business fundamentals need to be looked at once again.

The most striking statement in the post is: “In downturns, revenue and cash levels always fall faster than expenses.”

For startups dependent on venture cash to grow, belt tightening to extend the runway–provided you are not too late and raising this quarter–might make sense. In Crunchbase data, we have not yet seen funding slow down. However, funding rounds announced recently were closed in the past couple of months, with conversations and diligence stretching back to a very different funding climate.

In October 2008 Sequoia’s “RIP Good Times” described by TechCrunch’s Michael Arrington as a ” the message was dire with “cuts are a must” and “Get Real or Go Home”.

In the 2008 RIP report, Sequoia claimed the following:

New Realities

• $15 million raised at $100 million post is gone
• Series B/C will be smaller
• Customer uptake will be slower
• Cuts are a must

Need to become cash flow positive

• Increased challenges
• M&A will decrease
• Prices will decrease
• Acquiring entities will favor profitable companies
• IPOs will continue to decrease and take longer

Saying “cuts are a must” might be interpreted as sounding cruel.

In the middle of a health crisis, where people in nonessential industries are mandated to stay home, and with heavy job losses predicted for the travel, hotel and retail industries, getting a new job will be more difficult.

Some jobs are opening up, however. just announced it is hiring to up to 100,000 new full- and part-time workers in delivery and fulfillment centers to address the crisis.

Investors are aware that in the last downturn, new companies–formed in 2008 and its aftermath in 2009–have become significant technology companies. Those companies include��, , , , , and . Investors will continue seeking those opportunities, having raised unprecedented funds themselves with no shortage of money to invest. And with valuations likely to be capped, this might just be a good time to invest.

Sequoia signs off with: “Stay healthy, keep your company healthy, and put a dent in the world.”

Illustration: .

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The figure is up sharply from its last announced number, 13 million DAUs this July. Seeing Teams grow to 20 million daily actives so quickly is notable, as 54 percent daily active user growth in less than half a year is pretty darn rapid. Slack, in contrast, grew its DAU count by 37 percent in a year, according to its last data release.

Slack, a recently public company that debuted via a direct listing, announced in October. While it would be simple to declare Microsoft the runaway winner in terms of active seats of its internal chat product, Slack unsurprisingly disagrees.

When announcing its 12 million DAU figure, Slack had a few things to say that underscore its views regarding what counts as an active user. Here’s a condensed set of quotations:

DAUs get cited a lot, but what, really, is their significance? In our book, the “U” is what matters: Use! Engagement is what makes Slack work — you can’t transform a workplace if people aren’t actually using the product. […] It’s Not a Successful Collaboration Tool if People Don’t Use It […] Deep and sustained levels of engagement across companies are what keep people adopting Slack and using it above other, less connected ways of working.

Slack went on to publicly define a daily active user, saying that it counted people who have “either created or consumed content in Slack within a given 24-hour period on either a free or paid subscription plan.” That seems pretty fair.

Regardless, the Slack narrative that its DAUs are more A than Microsoft’s DAUs was a little bit stronger when their aggregate figures were closer; now that the gap has grown larger, and it appears that Teams is accreting users even more quickly than before, we really have a scrap on our hands.

What About Startups?

We focus on private companies here at Crunchbase News, but we do allow ourselves a little wiggle room when it comes to companies we covered while private go public; how can we not cover recent graduates?

But this particular story is a bit more than that. We’ve covered Slack vs. Teams since the very first days of this publication’s life, making it something we cannot quite let go of. And, finally, Slack’s falling share price after its direct listing has become a critical piece of information that may inform how private companies choose to go public in the future. Summing, Slack’s a company we’ll keep writing about for a while, and not just for the sake of nostalgia. Its performance as a public company could set the tone for future direct listings, so we must pay attention.

More when Slack inevitably responds.

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is down yet again today and shed over 9 percent of its valuation this morning. Slack isn’t alone in its struggles this morning, by our count every single 2019 IPO is down today. Even worse, the average cloud or SaaS company tracked in index is down nearly 3 percent today.

It’s an ugly way to cap off a week.

Not all companies are suffering, of course. Tech’s Big 5 (, , , , ) are worth $4.41 trillion and the Nasdaq is still over 8,000. So while there is weakness amongst some tech stocks, it’s not pervasive.

The issues with SmileDirectClub are something we’ve discussed in the past, but . I expect we’ll see lawsuits concerning this IPO before the quarter’s up.

But more importantly, SaaS’s repricing continues. This is a slow-moving story, I know, but it’s incredibly important for private companies and private investors. A good-sized portion of aggregate venture capital returns come from SaaS acquisitions and IPOs. You can tell this is the case, to pick one method, by going back through this year’s IPOs and noting the firms that meet the criteria (, , , , , , and so on).

To see SaaS take��two hits of a few points apiece in the same week is, therefore, notable. For reference, the Bessemer cloud index, a basket of public SaaS and cloud companies, is worth 1,084.15 points at the moment, off 2.94 percent on the day. The index hit an in July of 1,303.60 according to the Nasdaq.

Today’s result, if it holds, will mean that SaaS companies have given back all their gains since February. The index is still above the lows it set as 2018 came to a close, but the return-to-form is being erased by public investors.

Earlier this week we wrote the following after a raft of bad news from analysts kicked the shins of a number of SaaS companies’ shares:

The broader selloff, however — coupled to an implied revenue multiple compression — paints a stagnant picture for SaaS companies more generally. That isn’t bullish for a critical and lucrative venture category, even if sentiment among private companies is still positive towards the business model.

That’s as true today as it was before, just a little��more so as now the companies we discussed have lost another 300 basis points of value while posting a bit more growth that we’ll see in their Q4 earnings.

For now, however, the downward slide of SaaS stocks since the summer continues. Perhaps that’s why there’s only one venture-backed company on the IPO horizon, and it’s a.

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valuation declines since its direct listing are news. The firm, which traded as high as $42 after floating this Summer is worth just $23.54 today, a sharply lower figure.

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We’ve written about why Slack has seen its valuation come down from early highs, noting that Microsoft remains an active competitor, the company’s revenue growth is slowing, and more. Today, however, let’s make the opposite point. Why is Slack worth so much, compared to other SaaS companies?

Multiples

Slack is worth about 25.2 times its trailing revenue, according to . The average value of a SaaS or cloud company today, on the public markets, is . (Note that the latter figure represents a basket of SaaS and cloud companies, and is calculated using enterprise value instead of market cap. The 25.2x figure and the 10x result are therefore slightly different; however, as they are so far apart, they are sufficient for directional comparison.)

From those two results, we can see that Slack is, compared to its public peers, richly valued. Why that is the case is our next question. The good news is that we have new data that helps us better understand what is �Դǰ���������for SaaS companies.

Let’s connect some dots. Slack is worth about $25 for every dollar of revenue it brought in over the last four quarters. Other SaaS companies are worth around $10 for the same revenue dollar. Both metrics are rich valuations; some SaaS companies trade at far lower metrics as does nearly every other market segment.

To understand, then, why Slack is worth more than other public SaaS companies it would help if we had some numbers on what an “average” SaaS company looks like. With that, we could look at the gap from an average, or median result to Slack’s own, which should illustrate the company’s valuation and what supports it.

All we need is a dataset. Happily, recently dropped and we’ve been reading it. Expect more from us on the data presented, but here are some data points about a few hundred��private SaaS companies:

• Median growth (discounting M&A) of 40 percent in 2018, falling to 35 percent for companies with greater than $25 million in annual recurring revenue (ARR).
• Average ARR growth of 36.7 percent from upsells and expansions, expanding to 50 percent for companies with over $100 million in ARR. This works out to about 17.5 percent net retention, loosely.
• Median gross margins of 78.0 percent.

Now, let’s examine Slack’s :

• 58 percent year-over-year revenue growth to $145.0 million (implied ARR of $600 million, presuming little to now services revenue.)
• Net dollar retention of 136 percent.
• Non-GAAP gross margin of 87.1 percent.

Bear in mind that we’re dealing with rough-but-directional comparisons between the KeyBanc data, and Slack’s own results.

Even with that, Slack is growing���ڲ����ٱ����than the average of the collection of private SaaS companies, especially the larger cohort (private companies tend to grow more quickly than public companies on a percentage basis, as they are smaller on average). At Slack’s scale that is quite impressive.

Slack’s net retention (how much more customers tend to spend each year with the firm) is also far better than our loosely-calculated comparative metric for larger private SaaS companies. And, Slack’s gross margins are very high when compared to the already-strong SaaS median figure set by the group of private companies.

And that’s why Slack is worth so much per dollar of revenue today, even if it is worth less than it was a few months ago.

To paraphrase ourselves: Slack is valuable just not quite as valuable as some folks thought it would be.

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The troubled IPOs from and (fresh record lows set yesterday), (off over 10 percent yesterday) and (off over 40 percent from its IPO price) have the broader media world perking up and asking questions. What’s going on?

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As and written lately, it seems that some recent technology-focused and venture-backed public debuts have been mispriced for one or two of a few reasons. These include slowing growth not being fully-factored into pricing (Uber), persistent or rising unprofitability (Uber, Lyft, SmileDirectClub, Peloton), and valuations set too high either while private (Uber), or going public at companies with gross margins far lower than what software companies earn.

The final point is something we covered yesterday. Namely that statups who earn revenue which generates lower gross margins than software companies are seeing public investors value them lower than some private investors anticipated. This, , should not be a surprise.

Software companies generate revenue which has attractive gross margins and often recurs. It’s coveted by private and public investors alike, each class of moneypeople being willing to allow software companies to lose money while they accrete more top line.

High margin, recurring software revenue is a revenue gold-standard of sorts. It regularly garners high valuation multiples. That makes it a good measuring stick. For example, if a company that generates non-recurring revenue with gross margins of, say, 50 percent, is valued like a software company, we can say that it’s likely overvalued.

But what if our measuring stick is broken? Yesterday we mapped the compressing revenue multiple of Peloton in the following way:

Shares in Peloton, a recent IPO, fell over 10 percent today to $22.51 per share. Peloton’s IPO price��was $29 per share, valuing the firm at $8.1 billion. Today it’s worth $6.25 billion. At its IPO price, Peloton was trading for 8.8x trailing revenues (its fiscal year ended June 30, 2019). Today that same revenue multiple compressed to 6.8x.

We noted that Peloton is still worth more on a revenue-multiple basis than what old-school venture capitalists thought SaaS companies should be worth, also on a revenue-multiple basis.

That means that the revenue multiple gains enjoyed by SaaS companies could be expanding the window for companies with lesser-quality, allowing them to inflate their valuations; if something is worth a bit less than SaaS, say, but SaaS valuations double, what happens to the inherently less valuable company?

Provided that it can claim to be tech-ish, or tech-adjacent, or heading-towards-tech, perhaps it can get a higher multiple from private investors than it really deserves. Public investors make that decision far down the road, leading at times to unwelcome surprises.

Watching reprice on the public markets, watching private market dreams run into public market realities, and watching gross margin ambiguous companies continue to raise huge sums, I reckon that no one knows what things are worth right now. The market is too uncertain, the expansion too long, the private capital too free, and interest rates still too low. Not in a moral sense, mind, but in terms of where we are today compared to historical norms.

And so we’re seeing valuations try to sort themselves out on a relative basis but from no zero point. SaaS is a good high watermark, but if it’s inflated itself, how can we tell what anything else is worth?

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Of course, that’s wishful thinking. Like it or not, San Francisco is the de facto tech startup and unicorn capitol of the Western Hemisphere. And yes, it’s really expensive.

Venture funding data indicates things are likely to stay that way. While there are a few startups that ditch the high rents for hip and comparatively affordable places like Austin, the notion of a mass exodus of tech talent isn’t borne out by the numbers.

The numerical reality is that tech startup financing continues to flood into San Francisco, and the city’s share of total investment is in fact, rising.

I Left My Term Sheet In San Francisco

So far this year, San Francisco-based companies have raised roughly 45 percent of all seed through pre-IPO funding for California companies tracked in the Crunchbase database. That’s up from just under 40 percent in 2018. In the chart below we look at how the percentages have altered over time:

It’s a pattern that’s been accelerating for a while. In the chart below, we look at funding in dollar terms for San Francisco-based companies and those based in any other city or town in California.

The general trendline is pretty clear. San Francisco has become a venture capital vacuum cleaner, sucking up cash even faster than its growing stable of unicorns can spend it.

It’s not just a late-stage thing either. Of course the city has plenty of high-valuation startups raising supergiant funding rounds. Even a list of got rather long, topped by gargantuan rounds for logistics platform and delivery unicorn .

But early stage and seed are active as well. For 2019, San Francisco’s stage-by-stage breakdown is as follows:1

• Late stage: 115 deals, collectively valued at $10.1 billion
• Early stage: 268 deals collectively valued at $5.14 billion
• Seed: 423 deals valued at $403 million

Average round size for San Francisco’s seed deals and early stage deals are also roughly in line with the rest of the state. It’s at the unicorn stage where we see the city’s share of supergiant financings tick up. There are at least 57 private, venture-backed companies with reported valuations of $1 billion or more that are based in San Francisco. And that tally doesn’t include the sizable list of local unicorns – Uber, Lyft, Slack, Pinterest, Cloudflare, etc. – that went public this year.

The chart below looks at round counts for San Francisco as a percentage of statewide totals.

And here, we look at how total round counts compare:

Is San Francisco’s Dominance A Good Or Bad Thing?

So, is it a good thing that a city of 47 square miles surrounded on three sides by water continues to slurp up so much of California’s venture capital commitment?

We reached out to Jeff Bellisario, interim executive director for the , which studies economic issues affecting the region’s livability and business competitiveness. His view is it’s not the rise of startups and unicorns that’s the problem — it’s the region’s failure to keep pace with this growth through investments in housing, transportation, and other infrastructure.

“We see the tech industry as our advantage. It is one of the reasons why our growth has been stronger than almost everywhere else in GDP and employment,” he said. Trouble is, municipalities and developers move slower than the scale-fast-and-break-things crowd, and the region has underinvested in infrastructure for decades.

It’s a sunnier view than some others take. A popular Washington Post feature story titled declares: “You no longer leave your heart in San Francisco. The city breaks it.” Its litany of locals’ woes includes pricey real estate, income inequality, $20 salads, the homeless, adult children unable to move out, non-tech workers unable to move in, and the relentless onslaught of “hyper-gentrification.”

Wherever you stand on the pros and cons of the techification of San Francisco, data indicates it’s not stopping. The current wave of startup investment, scaling and exiting continues to build. If dollars do leave the city, Bellisario predicts it’s likely they won’t go far. He sees potential for other regional cities, Oakland in particular, to absorb some of the overflow of startup-saturated San Francisco.

We’ll have more on that trend next week. But first, it’s time for a $20 salad break.

Illustration: .

Late last week that , the pseudo-secretive intelligence unicorn that has been , is looking to raise a raft of new capital. Per the report, Palantir is looking to raise as much as $3 billion (and as little as $1 billion) at a valuation that could land “between $26 billion and $30 billion. ”

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If this all sounds familiar, it should. Late-stage Palantir has been in IPO limbo for as long as I can remember. That it needs to raise more capital, therefore, isn’t a surprise. Its targeted valuation, in contrast, feels like one.

Let’s remind ourselves of what we know and try to work out how much more sense Palantir makes at $30 billion today than it did last year at its old, floated $41 billion IPO valuation. That IPO is .

Revenue

In October of 2018, Palantir was expected to bring in around $750 million in revenue for the year, up from “roughly $600 million” in 2017 according to . That pace of growth, 25 percent, was light for a company supposedly targeting a public valuation of over $40 billion at its then-extant revenue scale.

Later, news broke that the firm’s year was going better than expected. Indeed, in early January of this year for the company’s 2018 revenues. Growth from $600 million to $1 billion ($1,000 million) in a year works out to 66 percent. That’s a far better figure for a company looking to nail down a valuation increase. (Palantir was worth just over $20 billion during .)

Later in Q1, however, , pegging Palantir’s 2018 revenue at $880 million.

Growth

With the new, reported figure, we can calculate that Palantir grew about 47 percent last year in revenue terms. That’s not bad for a company as old as the unicorn is (Palantir was born in 2004, ). But is that rate of expansion sufficient for a firm looking to target such a large, new valuation?

Perhaps. But as we’re considering its 2019 valuation, the firm will raise off its current-year results instead of what it got done last year. So, we’ll need numbers for this year.

For the sake of argument, let’s presume that Palantir’s growth rate does not slow this year. (This will set up a bullish case, something we’ll remind ourselves of at the end.) If the firm grows as much in 2019 as it did in 2018, Palantir would wind up revenue of $1.29 billion through this December.

However, when stacked next to a $30 billion valuation — the high-end figure that the firm is targeting in its new funding round — the revenue result feels low, especially as we’re not sure what percent of the company’s revenues come from services instead of software. At a valuation of $30 billion, $1.29 billion in revenue arrives at a revenue multiple of 23.2.

(What portion of Palantir’s top line comes from services instead of software isn’t clear to anyone. The question is one that asked whether the firm is “product of services company,” somewhat humorously.)

The greater the percent of Palantir’s revenue that comes from services instead of software, the per , a Yoda-esque figure in SaaS investing. As it is that Palantir has more services revenue in its total top-line mix than the average SaaS company, we can estimate that it should trade at an anti-premium to other SaaS companies of similar scale, and growth.

Let’s continue by way of analogy. To understand if a trailing revenue multiple of over 23 is fair for Palantir, let’s compare it to a firm that we understand more clearly.

Slack

Recall that we’ve examined Slack lately in light of its repricing by the public market. Slack is an attractive company from a financial perspective, with high gross margins, recurring revenue, and well-known branding. It is growing faster than Palantir in percentage terms and has higher revenue quality (per our discussion of revenue mix).

Slack currently trades at a trailing price-sales ratio of about 26.

Recall that in our example Palantir’s end of year implied trailing revenue multiple that we came up to is close to that result (23), and is predicated on the idea that Palantir’s percent-rate-of-growth doesn’t slow this year (a heroically bullish idea). Given that we set Palantir’s revenue high in our thought experiment, we lowered its revenue multiple at the same time. That our over-optimistic revenue guess puts Palantir’s multiple near Slack’s own, then, makes a $30 billion Palantir valuation seem quite high.

Slack also has a clearer revenue mix (using its gross margins as working proxy), faster growth in percentage terms, and a known loss profile. This makes the two having similar multiples all the odder.

Which brings us back to where we started, really. I don’t know how to value Palantir intelligently as the firm is private and doesn’t share its revenue mix. But working around the edges, the prices it hopes to command do feel high.

When Big Secret raises we’ll run the numbers one more time. For now, it’s fascinating to watch a firm pull back from an IPO while working to add so many billions to its private-market valuation.

Illustration: .

After a fascinating public debut through a direct listing, share price has given up ground. It’s a topic that we explored last week, outlining a few different options regarding why Slack has drifted south as a public stock. ( from , noting that the company, lacking a lock-up period, could have a different post-IPO trading pattern than we’re accustomed to.)

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Best among our three guesses was the idea that Slack was possibly overvalued by the market at first, and that its declines from as high as $42 per share to the $26 range were merely foam coming off the latte.

I think that’s more correct than I imagined at the time (bear in mind that Griffith’s argument could hold true concurrently). I couldn’t put the idea down so I did a little research today to provide a visual look at the difference between how Slack is still valued after its declines and the relative revenue multiples of a few other SaaS companies.

My goal was to generate a striated look at the various price/sales multiples of firms that I knew so that I could better understand where Slack slotted in. Behold:

There are four groupings on this chart. The bottom two squiggles form the first. The red and orange lines represent the revenue multiples endured by and , two leading firms in the early unicorn era. As you can see, the market is not super stoked about their growth profiles; if it was, they would trade for higher multiples.

The green line is , a firm that has seen massive value accretion as a public firm, but as you can see has coupled that valuation to strong revenue growth. That Twilio’s revenue multiple is curving down in its middle-age is not surprising.

The little purple line is , a brand new IPO that priced above its raised range and opened sharply higher. Look at its lovely, trailing revenue multiple!

And then there’s Slack, up top. As you can see, it’s valued sharply higher on a price/sales basis than even Cloudflare. Despite losing quite a lot of altitude, the public market is still valuing Slack far above even the richly-priced new offering. This means that far from Slack losing its shine as a public company, it’s now merely being treated as better than its peers. That’s a change from before when, according to its historical revenue multiple, it was treated like a god.

Why Is Slack Being Treated So Well?

A good question is why Slack is not only valued more richly than its peers today but more richly than they have ever traded? A few reasons.

It’s at nearly 60 percent at scale (greater than nine-figure quarterly revenue), which is impressive. Its non-GAAP gross margin (we prefer this metric for now as the company’s unadjusted gross margin is impacted by some one-time costs) is around 87 percent. That means that the firm is accreting incredibly valuable��recurring revenue.

Continuing, the firm’s “net dollar retention rate” of 136 percent is insane; the firm’s extant customers buy lots more of its product over time, generating a natural growth rate that is enviable. And Slack’s enterprise penetration (measured by looking at its number of customers with greater than $100,000 in recurring spend) is expanding more quickly than its aggregate revenue growth rate. That implies that large accounts are growing as a percent of Slack’s top line despite the Microsoft threat.

All that and the company generates cash from operations, implying it won’t need to raise money from the public markets, limiting future dilution. Investors love that sort of thing. Toss in its big brand and user love, and Slack is a super solid SaaS firm.

Therefore cry not for Slack. Cry instead for the companies slugging it out there trying to sell storage to large companies.

Illustration: .

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Most companies would kill for similar value creation. Slack, however is in a tricky spot. After setting a $26 per-share reference price for its direct listing, and trading as high as $42, its stock has rapidly lost altitude. Indeed, Slack shares have fallen under the $25 per-share mark, reducing its worth to the previously mentioned $13 billion.

Slack, once a private market darling is now enduring a more difficult run as a public company. Its most call pushed its shares down by 15 percent before they recovered to a single-digit percentage loss. Later the firm’s equity depreciated anyway, falling from a pre-earnings $31 to this week’s sub-$25 range.

A good question is why; why is Slack’s stock falling? There appear to be a few possible reasons, including , a broader SaaS repricing, and the chance that Slack’s public market valuation simply got away from it. We’ll peek at each and relate the situation back to startups as we go.

Three Whys

To summarize our three thoughts, Slack’s public market declines could be built on the fear that Microsoft will blunt its growth profile with its competing Teams product, that software-as-a-service (SaaS) companies are seeing a broader repricing of their revenue (SaaS firms are valued at multiples of revenue instead of a multiplication of profit), or, that Slack was simply overvalued by public market investors when it first began to trade.

Microsoft

Redmond is not interested in allowing Slack to burrow its way into the productivity stack of the next corporate generation. We’ve covered Microsoft’s Teams push here at Crunchbase News for years, noting that the larger company was working hard to grow its internal communication tooling after in years past.

There’s no perfect way to gauge investor sentiment in relation to a single idea. But it is hard to see how public investors could be overly worried about Teams and Microsoft today, given recent Slack performance figures.

After reporting 58 percent revenue growth in its most recent quarter, Slack’s CFO reported the following concerning large accounts (the very market category we’d presume that Microsoft’s Teams product would do best amongst):

We remain focused on expansion within existing customers and growing our large enterprise customer base, and ended the quarter with 720 Paid Customers greater than $100,000 in annual recurring revenue, which is up 75% year-over-year.

That’s nice and healthy. Whatever impact Microsoft is having on Slack, and it must have at least some, regardless of what people keep telling me on Twitter, it doesn’t appear to be existential to growth in the short term.

For startups, the above indicates that even when an incumbent technology behemoth enters your market aggressively, there’s still space for you provided that your brand is strong. Slack is a verb; Teams is a competitor.

SaaS Repricing

Software-as-a-service companies have been repriced by the market in recent weeks, but not much. We’ve covered the slight decline in the value of SaaS revenue, noting that from a high of 11x enterprise value/revenue the market has .

But the multiple data from the cloud index just makes plain what we can see in the markets. The same index has been mostly flat over the past few quarters while the companies that make up the index have grown. That puts natural downward pressure on revenue multiples. But all the same, the slow change in the value of SaaS revenue is insufficient to explain Slack’s value changes.

For startups, the takeaway from the above is that public markets still value SaaS companies highly, at least when compared to historical norms. That’s welcome news for quickly-growing private companies that sell code instead of widgets.

Overpriced?

Let’s see if Slack is valued more richly now than before on a revenue basis, and how that may stack up to peers.

As we often do with SaaS companies we’ll use its quarterly revenue tally as the foundation of our ARR calculations. This blends some non-recurring revenue into the figure, but it’s the best that we can do in the case of Slack. What follows are the company’s revenue results for the past four quarters, and its implied ARR:

• Slack Q3 2018 revenue: $105.6 million ($422.4 million ARR)
• Slack Q4 2018 revenue: $122.0 million ($488 million ARR)
• Slack Q1 2019 revenue: $134.8 million ($539.2 million ARR)
• Slack Q2 2019 revenue: $145.0 million ($600 million ARR)

As we can see, Slack has rapidly grown its GAAP revenue, and its implied ARR.

Recall that Slack was worth about $7.1 billion in Q3 2018, and is worth about $13.2 billion today. Using the firm’s Q3 2018 and Q2 2019 ARR numbers, which valuation (loosely) provides the more attractive (lower) multiple?

• Slack Q3 2018 implied ARR multiple: 16.9x
• Slack Q2 2019 implied ARR multiple: 22x

As you can see, Slack’s ARR multiple today is higher than it was. And both its Q3 2018 and Q2 2019 ARR multiples are far above what the Bessemer index sports. (Note: we can’t directly compare the results as we are doing ARR calculations using market cap on one side, and enterprise value/revenue on the other. But the gap is large enough to show Slack as an outlier.)

Now recall that Slack was worth far more a few months ago. That means that its ARR multiple was even��higher before. Slack’s declines, therefore, feel much more like the firm inching closer to market norms than it being repudiated by public investors. You simply cannot say that Slack is being dissed by public investors when it is still richly valued compared to its comps.

The lessons for startups in the above is that top-tier SaaS companies can command strong revenue multiples, but that they are not unlimited. No matter who you are.

Wrapping Up

Yesterday, , a managing partner at shared a chart with Crunchbase News () that detailed the premium that faster-growing SaaS companies enjoy over their more slowly-growing peers. In this context, we can add a final wrinkle to Slack’s revenue multiple declines.

It’s perfectly reasonable to say that Slack’s falling net retention rate (from 138 percent in the quarter ending April 2019 to 136 percent in the quarter ending July 2019) implies a slower future growth rate. And that is causing investors to reprice Slack downward, akin to what Richards’ chart would lead us to understand.

But Slack is still a richly-valued SaaS company putting up quick growth from a position of wealth; the company has more cash than the ferrous financial institution. So while Slack’s falling share price makes for good headlines, upon closer look the situation appears to be more return-to-senses than dramatic diss.

Illustration: .

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�ұ��é: Welcome James Currier founder, angel investor turned into a fund manager with the founding of NFX fund in 2015. Why NFX?

James: We said let’s try to build a venture firm with network effects. We believe that the most interesting, most impactful things have big network effects. Originally we started with an accelerator. We dropped that two years ago. We were doing 15 companies per class. We either need to scale up to 80 per class, to get the random effect, to make that model work. Or we needed to scale down and increase the percentage ownership. In the end we decided to scale down and increase the percentage ownership and be a straight fund.

�ұ��é: Why the name NFX?

James: It stands for network effects. What we realized in about 2010, is that all the companies we had invested in as angels, that we were really excited about, all had network effects. They were growing. They were defensible. Mostly about defensibility.

�ұ��é: Given that we’re in the Internet era and everything’s connected, does almost every company have a network effect?

James: About 20 percent of the business plans have network effects in them, and 80 percent don’t. So if you’re a medical device, a synthetic biology company, SaaS software, enterprise software, or direct to consumer products, these things do not have network effects. These things have scale effects. They could have embedding effects, or they could have brand effects as their defensibility. But in the digital age, there are very few defensibilities left.

�ұ��é: And why don’t they have network effects?

James: So the basic definition of a network effect is that every new user or new customer makes the product more valuable for every other customer. The first time we saw network effects was with telephones.

�ұ��é: Which companies have stood out with a huge network effect?

James: Just look at the most valuable companies in the world. Microsoft is still one of the top market cap companies in the world, and they’ve been working on that two sided platform network effect since 1976. And then you’ve got Facebook, you’ve got Google, and you’ve got PayPal.

There’s like five or six of us who just spend so much time looking at this, at Harvard Business School, from Intuit, and a few others. There’s actually some interesting what we call “social network effects,” but not social network. One of them is naming. So “let’s grab an Uber” is a real problem for Lyft right. “Google that” is a real problem for Bing, Once Google became a verb, that’s an incredible social lock. It’s just awkward for me to use Bing if you tell me to Google something. That’s right on the edge of brand. Brand is different or the bandwagon effect.

�ұ��é: What other companies have a network effect?

James: Think of the big valuable companies, Uber, Lyft, and Slack. The more people in your company that use Slack the more valuable Slack becomes for you. Dropbox. Once my designer said, “Hey, I’m going to be sending you the mocks of the website on Dropbox”, and suddenly 76 people signed up in the next 48 hours because we had to get his mocks, all the engineers did and all product managers. Airbnb, the more properties, the more buyers. The more buyers the more properties. eBay,�� Amazon Marketplace. More than 50 percent of all transactions on Amazon are now going to the marketplace. They’ve basically taken over what eBay was 15 years ago. It’s a two sided marketplace network effect. IOS. If you look at Apple’s market cap. It was $42 billion. And then they added iMusic for sharing music. And then they added iOS. Those were their first two network effect products. And then their market cap went up by 10 or 15 times. Before that they were selling hardware and software.

Since 1994, since the Internet connected everything, we looked at the 336 companies which have become worth over a billion. We looked at each of their business models and said, “Did they have a network effect at the core?” And if they did we looked at the market cap. 70 percent of the market cap came from companies with network effects, 30 percent did not. Yet only 20 percent of the businesses had network effects in the business plans, and 80 percent did not. So that seemed like a huge imbalance. So that’s why we decided to do NFX in 2010 but we didn’t get around to it because I was still running .

�ұ��é: What else are you trying to fix in venture?

James: We’re trying to help seed stage founders figure out how to navigate to their best investor. And that’s why we built to find the best investor for you. We don’t take salaries. We use the management fee to hire engineers and staff to support the company. We are building a platform to help the ecosystem.

We build our own CRM, and data analysis. And we’ve got an internal group which helps with pitch development, which helps with PR, culture building, hiring. Within a few weeks we’ll just answer so many questions, so that the founders can get back to product and iterating.

�ұ��é: Your most recent fund is $275 million, a pretty large seed fund, which you raised in April 2019?

James: We are a seed and pre-seed fund. Instead of investing over two years we’re going to invest over three years. We’re still going to be investing one to three million and lead seeds. In this fund we will make 35 investments. Four of them will be at a valuation which we would all consider to be a Series A, which is over $20 million. But we’ve also done probably 10 pre-seeds where we put in $250K, and help the company figure out what they want to do.

�ұ��é: What are the valuations for pre-seed and seed rounds?

James: Valuations for pre-seeds are typically one million dollars pre-money. For a seed round I guess the average would be about eight or nine million dollars pre-money. Our sweet spot for seed is investing is about $1.5 million in a round.

�ұ��é: How many companies do you meet in a year as a team?

James: We evaluate 3,000 companies a year, and then we’ll probably meet with 400. And invest in 15 companies in year.

�ұ��é: You invest in the Bay Area and Israel. How do you help startups build a network effect?

James: We’ve published this about the 13 different network effects. Starting with�� the physical, which is the telephone or Comcast in the middle. And then you go into weaker and weaker network effects as you go out.

Once you understand each of these, you can start to imagine how to add these network effects to the various businesses. Whoever adds a network effect first wins. Because it adds more value without you doing anything. Someone signs up and pays you money, and suddenly your product is more valuable for everyone else. We’ve written long articles about and their defensibility. They’re not going anywhere.

�ұ��é: Facebook from what I understand worked hard to get each user 10 to 20 friends. Once you have that network you were never going to leave.

James: 10 for Facebook, 16 for Twitter, and 6 for Path. We call that network density

�ұ��é: Path however was not successful?

James: They weren’t because they were too late and the other platforms were largely serving the needs of people. Facebook messenger is a personal utility, which is actually stronger than Facebook. I can make payments, my wife wants me to pick the kids up at school. I can’t leave. Whereas Facebook, I can turn off.

Interestingly enough, the reason I exited the companies that I have is because they didn’t have network effects…Because if you really want to make�� an impact in the world, the best way to do it is to run a network effects business like Nextdoor, or LinkedIn, or Tencent.

Stan, who’s a minor partner at an NFX, is now running Facebook Messenger. He and I have been talking about building the global currency since 2004 when I bought Blue.com with the intention of either building a spiritual group, or building a global currency.

I never got to do it, but he’s doing it as a part of Facebook. So once you get in a platform like that you have the opportunity to actually do these important things for the planet. Had I had a network effect business, I would not be a VC, I would be running that.

�ұ��é: Given that you’re investing in such an early stage, how do you perceive growth focus in our industry.

James: So let me be clear. Network effects is about defensibility and retention. Viral effects are about growth. Network effects are not about growth. It is about retention. It is about keeping people in. Network effects reduce churn.

We also want companies to grow very quickly, because fast growing companies attract the best people. Fast growing companies have more opportunities to do more creative stuff. Fast growing companies means that they’ve hit on something important to somebody. That is different from the sugar-coated viral growth of 2004, that people think of as growth hacking. We were very good at that, at that time. We did a bunch of that between 1999 and 2007. We invented a lot of A/B testing methodologies, and a lot of the viral loops. But since Facebook shut down Facebook Platform, virality has gone to near zero across the digital world.

�ұ��é: What is virality?

James: Virality is when a user of yours gets you another user for free.That was a 1998 to 2012 thing. It had a good 14 year period, and then it was over. But a very interesting period, with a lot of math, a lot of iteration.The culture of Silicon Valley, that we think of as Silicon Valley came from that age of rapid iteration, and changing all the time, and never sleeping. It was very exciting. It’s like running a 24 hour news program because things were changing so fast.

�ұ��é: Viral still seems to be here for users recommending brands?

James: Yes, there are still incentivised as viral programs. If you get someone to try Lyft, I’ll give you 20 bucks. Those are very popular. But that’s not for free. And in fact, for most of those companies their cost of user acquisition to the channel is higher than just buying ads on Facebook. But they don’t want to stop it, because it makes so much sense. And it gets the users to attach their own brand to the brand of the company.

So what we talk about is more fundamental growth. And that has to do with the name of the company, what is this thing for people, how valuable is it compared to the alternative, how do you lower the barriers to friction for people to use it. These are fundamental growth issues as opposed to growth hacking.

�ұ��é: So would you throw growth hacking out?

James: We do throw out growth hacking, except for the iterative culture that growth hacking bequeathed us. Because there was no A/B testing until about 1999. You can’t A/B test a shoe, or a computer, or a car. You put it out there. It works or it doesn’t. The mentality of A/B testing, the mentality of iteration, and letting go of what doesn’t work and trying something until it does, that we want to keep.

But the idea of creating very slick viral flows across the Facebook platform. Those days are gone. Even Upworthy, which was viral with their positive psychology stuff, which I loved, that’s dead now. is dead.

There are fundamental growth principles that are very deep. Which means you gotta get the founders to change the name of the company. The old name, no-one can remember it. No-one can spell it. Every ad you put out there, you’re going to lose 40 percent of value, because no-one can remember the name.

We need a stronger voice in this community about the creative product culture that brought us here, originally, as the waves of money culture flow over us. And figuring out how to create a protected area for entrepreneurs and founders who care more about the product and customer than they do about money. It is just a switch. Money can be second. You need fuel to grow, to attract talent to build the product. But that’s not the goal. And if it’s money first and creative to get the money, that’s really different. It’s really sour.

�ұ��é: Do you think Silicon Valley has gone that way?

James: If you’re writing a blog post and or tweet and you want someone to pay attention to it, you gotta put the numbers in. For instance, a lot of journalists say unless you have a financing they can’t really write about you. I think it’s because it’s the path of least resistance to aggregate confidence in something.

�ұ��é: This whole ecosystem is becoming global. Do you think that’s a protection against this money first culture, or do you think that just travels from Silicon Valley.

James: I think it travels, because people perceive Silicon Valley through the eyes of the bloggers and journalists. And the people tweeting out. And what they are�� blogging about is the money, and who made what. Because that’s what people click on and read. So people outside understand if I go to Silicon Valley, I can make money. Silicon Valley is a product. People are incepting that I get money if I go there.

�ұ��é: So how do you change that?

James: I don’t think we can stop that. But I think we can create a pocket of people, and language, and writing, and events like the lobby. And the stronger the community who wants to keep it about creativity, and about product; and the more of Silicon Valley we influence; the more the products will be influenced; the more of the rest of the world we influence to really go after the creative future, rather than ‘I made a lot more money than you and therefore I have more worth.’

�ұ��é: What wave of technology are you riding?

James: We are riding synthetic biology. We are finding two-sided platform network effect businesses in the synthetic biology area where there’s three technologies which are all three on Moore’s Law sort of curves.

What is synthetic biology?

James: It’s essentially applying computation to the measurement and design of biology. You can do a lot more now, than you could because you have robotics, which are getting much cheaper, and are able to do 600,000 tests in an hour, versus six tests in five years. Machine learning, machine vision, and AI is getting better and better at processing and speed. Then the actual editing, the sequencing cost is coming down. Which is opening up vast new capabilities people haven’t even thought of. We are now waiting for the founders. There’s this gap between what the tech can do today, and what the founders are even thinking of doing, which is exactly where you want to invest.

�ұ��é: This is for disease prevention?

James: For disease, agriculture, oil and gas, replacing palm oil, and impossible foods. It touches almost every industry. It is incredible.

The other thing we see happening right now is that there has been enough fintech infrastructures built on top of the old rails, so that it’s becoming easier and easier to build faster and faster fintech related companies, or fintech enabled marketplaces, fintech enabled brokerages. The ease of developing in the fintech area, through regulation is much easier than it was three or four years ago.

�ұ��é: Is this due to platform players in the fintech?

Companies like that make it easier to get an API, or . So that’s another technology wave that we’re going with.

I feel as if the waves of tech change are slowing down compared to where they were in 1994 to 2012, because of TCP/IP and then because of mobile devices, opened up a huge Pandora’s box of potential. We haven’t had one of those big tectonic shifts since 2008. These are micro changes but the markets are so much bigger. Then the access is so much bigger. So the cost of acquisition is so much lower than it was in 1994 to 1998, because so many more people are on these networks and are easily addressable. So I think that’s making up for the fact that it’s not necessarily a tech wave. It’s a scale wave.

�ұ��é: What are the two companies that you are excited by and why?

James: based in New York is doing financial products in the real estate sector. They allow people to buy residential houses for cash. It’s a product that the agent can give to their buyer and then get the other agent to use the other side. So the network effect to new agents using Ribbon lowers the cost of house acquisition, and increases the amount of cash transactions.

So I go from saying I offer you $100k for your home and I’ll get a mortgage to saying I’m going to give you cash but I’ll give you $95k right now. And you say deal, done. And so Ribbon takes 2 percent. I as the buyer save 3 percent. You get the cash you want. The agent gets the transaction done. They each make their commission. Ribbon gives the cash for two to eight weeks for the transition to take place. And then the home buyer gets a mortgage. It really helps when you want to buy a home before you sell your other one. I can’t afford to buy a new home, until I sell my old home.

Another one would be , which is the largest repository of CRISPR IP in the world, which is gene editing. , a co-founder is a discoverer of CRISPR. They’ve created a platform play, and then they’re working with pharma and agricultural companies to develop diagnostics and therapies to edit change in a responsible way. The more people use the platform, the fewer experiments everyone needs to do because things have already been checked off. And there’s just more data available.

�ұ��é: Anything we did not cover?

James: We as founders have built 10 companies prior to starting NFX. Despite the money culture, we have exited for $10 billion. No other group has done that. It is about 2x any other new venture firm. As a venture firm of founders we’ve really been in the trenches for a while. I’ve made so many mistakes and have so much scar tissue. Let’s build a venture firm which is about building companies from the operators perspective who have been in their shoes. And that brings ethos, and respect, and authenticity to the conversation. That’s one thing that I think is important to us. We don’t dislike VCs who haven’t been operators. There are a lot of great VCs. But if I’m a founder, I want a founder.

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