Novice Investor #17 - The Burn Multiple Curve, Zelta, Fuego and Luck
Happy July All,
From working in Barcelona to a trip back to Dublin to show some friends around the city, I could not have asked for a better kick-off to the summer. I even turned thirty during the month and am now feeling motivated for a fresh decade!
SaaStr in Barcelona was my first conference since Covid. I found the in-person conference extremely effective for meeting great companies and investors. It felt good to be back in networking hyperdrive mode.
We had the pleasure of hosting plenty of inspiring B2B software CEOs at the Kennet Summer Founder Drinks Event yesterday evening. Alexis Prenn, Founder of Receipt Bank, gave an overview of his experience bootstrapping the company and also his more recent learnings helping companies as a board member. I am in the process of organising a golf event for August. If you are interested, please do let me know.
The Burn Multiple Curve
With capital markets punishing tech company valuations, many investors are now refocused on efficiency metrics. One metric getting the limelight is the Burn Multiple.
Sometimes you will see an inverse of the above but I prefer it this way. I like the metric, as it is super high-level and can nicely tie back into a company’s funding runway. Online wisdom will tell you all companies should now aim for a Burn Multiple of 1.0x. I would caution following oversimplified advice. With everything in life, it is never that simple.
I think you need to go into more detail and estimate your Burn Multiple Curve. For example, if you were to double your burn next quarter, would your burn multiple decrease and by how much? Depending on product-market fit, sales & marketing expertise and level of competition, a company’s Burn Multiple Curve will be totally different. Thus, the optimal Burn Multiple to maximise value creation will also be bespoke to a company.
So in this video, I created a very high-level budget to optimise value creation. Valuation creation being a function of (1) Ending ARR and (2) Ending ARR Valuation Multiple (which is driven by growth). Then given an estimated Burn Multiple Curve, I derived the optimal net burn levels for value creation. Spoiler alert, net burn producing a Burn Multiple of 1.0x was far from optimal (50% less value created).
Worth noting, the major weakness when it comes to the Burn Multiple, is that it is a cash flow metric. This means the timing of customer receipts will skew any monthly metrics beyond the accuracy levels needed to make decisions, particularly if you are a seasonal enterprise SaaS business. A better denominator would be cash EBITDA with a normalised working capital adjustment, but I fear that is too complex. I would love to hear other suggestions.
Interesting Companies
Meet Zelta. A very long-term friend of mine (friends since we were just a few months old) has taken the big plunge to leave McKinsey and start an exciting SaaS business. Zelta helps companies ensure their employees follow internal processes when using new software. For example, it could provide in-app contextualised information and prompts to sales teams when inputting deals into Salesforce to ensure accuracy. If you think this could be useful and want to explore their early product, please get in touch with Pierce Healy. I can unequivocally vouch for Pierce and have no doubt he is going to build something great!
Another great friend of mine, Finn Murphy (who starred in a Novice Investor video early this year), recently released a fun side project called Fuego. Fuego is social media app where users post videos on certain topics and then compete to own the topic by receiving the most likes, also called Fuegos. I have had a lot of fun on the app so far. Go check it out here!
Books
The Unfair Advantage - Ash Ali, Hasan Kubba
This was a blind recommendation from Amazon so I dropped in with no idea what the book entailed. I enjoyed the read, but I feel like it is more tailored for someone about to start a company. It does prompt you to assess your position in life and your skills through a fresh lens to understand your own unfair advantages. The idea is to start a company that leverages these advantages. I guess this can be extrapolated into any career i.e. focus your energy on areas that can leverage your unfair advantages.
One learning that resonated with me is about luck and opportunities. It reminded me that the more people you meet and the more events you attend, the luckier you will get in terms of opportunities. We all have the same long-term hit rate, some of us just take more swings. I am remotivated to increase my week-day evening networking. However, I am at a loss when it comes to London-based tech events. If anyone can recommend any interesting events to attend this summer, please let me know.
Kennet Partners’ Investment Target
Kennet Partners is a Growth Equity investor with over 20 years of experience partnering with European and US SaaS companies. If you know any companies which fit our criteria, please reach out.
Investment size: $8m - $30m
Maturity: Over $3m in ARR
Growth: > 30%
Type: Bootstrapped and capital-efficient B2B SaaS businesses
Geography: Europe & US
Disclaimer: None of the content in the Newsletter should be taken as financial advice.