Hope everyone enjoyed a relaxing holiday filled with eggnog, family zoom calls and the soft patter of keyboard strokes hitting refresh on your bitcoin account. Although there wasn’t much activity in the private markets to close the year, the public markets capped off a historic run in OSS names that saw the index outperform both the broader market as well as their emerging cloud peers. In reviewing OSS performance over the last year, I’ll spend time on two key metrics: growth and sales efficiency. As we look ahead to 2021, several of these companies are poised to drive even more value as enterprises continue to rapidly shift toward cloud, opensource and digital infrastructure. However, expectations may be tempered by unprecedented multiple expansion over the last year.
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Private Markets
Discord, a San Francisco-based social media company with a gaming heavy community, raised $100 million. Greenoaks Capital led the round valuing the business at about $7 billion, per a source. [Discord empowers the OSS community through their communications tools - see more here]
Starburst Data, a three-year old company which sells software to help companies search and analyze their data, is raising $118 million at a valuation of up to $1.6 billion, which would value the Company at ~130 times their annualized recurring revenue of $12 million More info. [The combo of momentum, multiples, market and FOMO is unstoppable!]
Public Markets
To track the performance of OSS companies, I created an equal-weighted index comprised of public names including: MongoDB, Datadog (new addition!), Elastic, Talend, Cloudera, Rapid7, Fastly and Jfrog.
Over the last year, the OSS Index significantly outperformed the benchmarks:
OSS Index +138%
NASDAQ +44%
S&P 500 +16%
Over the last three years, the OSS Index continues to outperform:
OSS Index +372%
NASDAQ +84%
S&P 500 +38%
While all software companies have outperformed the post-pandemic March selloff, OSS multiples have grown even faster. As we end the year, the OSS index is trading at 20.5x NTM revenue, almost six turns higher than the BVP emerging cloud index which last traded at 14.6x and sixteen turns higher [!] than the benchmark NASDAQ Composite which closed at 4.5x. The elevated level of performance reflects a growing appetite for digital infrastructure tech across both cloud and open source, but it’s important to measure this window within a broader historical context and I’ve included a longer lookback period below. I believe a reversion to the mean will happen, but when and will the mean have changed remain open questions.
OSS Index: Current Multiple 20.5x | Five-Year Mean: 7.7x
Emerging Cloud Index: Current Multiple 14.6x | Five-Year Mean: 8.5x
NASDAQ Composite: Current Multiple 4.5x | Five-Year Mean: 3.0x
Given the importance of revenue in enterprise software valuations, I wanted to look even closer at the individual performance of the companies in this index. As a barometer for performance, I’ve used the median and top quartile metrics from Jamin Ball’s excellent newsletter Clouded Judgement which evaluates a larger universe of public SaaS companies. As depicted below, five-ish of the eight OSS companies in the index trade at or above the top quartile of LTM revenue growth performance across all public SaaS companies which helps drive the narrative around why the OSS index trades at a premium. But is this growth coming at a reasonable cost?
In assessing the cost of growth or sales efficiency, I looked at Gross Margin Adjusted CAC Payback which notes how many months it takes for a customer to pay back the cost to acquire them. This metric is helpful in evaluating the relative strength of sales and marketing as well as the company’s pricing power. However, given an abundant supply of cheap capital to fuel growth at any cost, it may not be helpful in understanding current valuation trends. Nonetheless, as depicted below, only three-ish of the OSS companies have top quartile metrics while the other five fall below the median of all public SaaS companies.
Taken together, the powerful combination of revenue growth and sales efficiency should drive sustainable long-term value. The new generation of OSS companies (the five companies that went public after mid-2017: MDB, ESTC, FSLY, DDOG, FROG) have optimized on the former which has driven valuations, but only a couple (DDOG, FSLY and FROG) have proven the sales efficiency to match.
Extra
Hot cheetos and the American dream.
Amazon defies diminishing growth at scale (e.g. third-party GMV grew 48% in 2020 following 25% in 2019 on a $200bn base[!])
Did someone say Miami … in 2010?! Moishe did.
TE12 was the patent GOAT.
Finally…
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