Novice Investor #23 - Virtual SaaS Pricing Game, Apple Magic Mouse Pro, Founder Stories
Happy September All,
Since the start of 2022, we have seen a massive shift in the valuations of tech companies. A lot of people bought tulips in 2020/2021 so there is definitely more focus on entry prices today. However, so far this year, M&A volumes have collapsed, IPOs have been scarce and funding rounds are few and far between. Public market pricing has changed but there are not enough private market deals getting done. As an investor, how do we know what to pay? Are private markets still paying 10x+ ARR or are we down to 5x? With so few deals out there it’s hard to calibrate. Fear not, I have a solution in the form of a virtual game, called “What Would You Pay?”
On a lighter note, it does seem like an awful lot of processes are kicking off this month. Hopefully, the number of deals funded will take a big increase in Q4/Q1.
Also, I will be in Paris next week for the IPEM Conference and in Munich for Bits & Pretzels the week after. If anyone is around and fancies a chat, please do let me know.
Virtual SaaS Pricing Game - What Would You Pay?
My obsession with SaaS valuation continues. I have shared quite a few methods for valuing beloved SaaS companies this year. But how does one benchmark these methods with so few deals getting done? Meet my new virtual SaaS pricing game, “What Would You Pay”. Below are three fictional software companies. The rules of the game are simple. You choose the hypothetical price you would pay to invest in these companies. I’ll reciprocate by sharing the market-tested results in the next issue of this newsletter. Easy. Plus it’s anonymous so you won’t be revealing any secrets.
Side note for the founders - If you want to test the valuation of your company with this method, we could always anonymise the name. I think it would be cool to test real company data. Let me know.
Hagrid Software
A European B2B SaaS company with a differentiated Dev Ops product. Hagrid sells into a large market with a TAM of over €3 Billion. Hagrid is founded and led by a second-time entrepreneur who hopes to make this start-up a greater success.
Hagrid finished last month with ARR of €5m, reflecting 60% YoY growth. Hagrid generates gross margins of 80%, EBITDA margins of negative 20% and net revenue retention of 110%.
Hagrid just launched a Series B funding round and is seeking to raise €10,000,000.
Ace Software
A US B2B SaaS company with the leading ERP & Supply Chain product. Ace sells into a very large market with a TAM of €10 Billion. Ace is founded and led by a serial entrepreneur with two prior successful start-ups.
Ace finished last month with ARR of €15m, reflecting 100% YoY growth. Ace generates gross margins of 85%, EBITDA margins of 10% and net revenue retention of 130%.
Ace just launched a Series C funding round and is seeking to raise €30,000,000.
Dyno Software
A European B2B SaaS company with a differentiated Sales & Marketing product. Dyno sells into a sizeable market with a TAM of €1 Billion. Dyno is founded and led by a first-time entrepreneur with strong domain experience.
Dyno finished last month with ARR of €3m, reflecting 100% YoY growth. Dyno generates gross margins of 70%, EBITDA margins of negative 100% and net revenue retention of 120%.
Dyno just launched a Series A funding round and is seeking to raise €7,000,000.
Human-to-Computer Write Speed
An interesting topic I stumbled upon while listening to an Invest Like the Best podcast. A lot of human technological development hinges on a data storage and transfer problem. At first, knowledge was stored in our minds and transferred via word of mouth. Then, painting on walls, creating art, paper and pen, the printing press and digital information all significantly increased our data storage and data transfer capabilities, greatly progressing humanity. Now that data transfer and storage speeds within computers have become faster than anyone can really process, the data transfer and storage bottleneck is squarely situated between our own ability to read and to write to computers.
Our human-to-computer read speed has pretty much plateaued with a screen and sight modality. Given its effectiveness, this will likely stay the same for some time. On the human-to-computer write speed side of the equation, there have been a few more recent developments. Originally all we had was the keyboard to write code and instruct computers what to do. Following the release of the beloved computer mouse in Apple Lisa in 1983, the masses had a new way to interact with computers. This gave rise to the graphical user interfaces we all interact with on computers today. Steve Jobs released another human-to-computer write modality with the release of the multi-touch screen on the iPhone replacing the humble mechanical button. You can argue voice is another modality progression but you can also argue it’s inferior to the keyboard and mouse for most applications. While convenient, you could never operate a fighter jet with your voice!
All of the examples of change in data transfer/data storage modalities above undoubtedly pushed significant advances in human technological development. Have we stumbled upon a new one?
The Apple Vision Pro made plenty of headlines for being an incredibly highly-priced AR headset. Stepping away from the VR/AR use case, the technology released as part of the headset seems like it could be a game-changer. The eye tracking and hand gesture technology arguably removes the need for a computer mouse. Think about your interaction with a computer. It displays information. You use your eyes to locate the area you want to click. Then you use your dexterity to physically move the mouse to where your eyes have already located. Then you click. Apple’s new technology could remove the physical part of the process of moving your hand and clicking.
This might not sound like much, but there is undoubtedly a solid efficiency gain here. There is a reason investment bankers all around the world learn every possible Excel shortcut to ditch the mouse. It’s considerably faster (and cooler if you are a complete Excel nerd).
If I was the Apple CEO, I would release a slimmed-down version of the Apple Vision Pro. No screens, no battery, no AR/VR use case. Just the eye-tracking and gesture technologies that work with any physical screen to replace the humble computer mouse and supercharge willing buyers’ human-to-computer write speed. Call it the Magic Mouse Pro. Please forward this to Tim Cook if you know him.
Founder Review - James Cameron
I have been experimenting with some efficiency gains in content consumption. I love reading but lately, my ability to digest non-fiction has become a bit of a ture. I have a nagging and inconvenient hypothesis that once you have read 10 non-fiction, self-help books, you have read them all. Irrespective of this, there’s undoubtedly massive value in learning from the greats in the form of biographies. I came across a great podcast called Founders which deep dives into the lives of great founders in one-hour episodes. Here’s what I learned about James Cameron.
James Cameron taught himself cinematography while working as a truck driver. Through blind belief in himself and some bold leadership moves, he managed to rise up and direct "The Terminator" in 1984, which was his first major success. Following this he directed Titanic, which won 11 Academy Awards and Avatar, the highest-grossing film of all time. He even took 8 years out of his career to become an explorer and solo dived to the deepest parts of the ocean, the Mariana Trench.
What are the traits that got him there:
Vision - James was a big dreamer. He had ideas and held onto them for decades before bringing them to life. The idea for Avatar came in a dream when he was 16. Maybe there’s value in journalling and writing down your thoughts.
Tenacity - James hated writing, but realised this was key for his career. To complete the script for Terminator 2 he bought the most uncomfortable chair possible to write in so it motivated him to write faster. Even when important work is hard and tedious, it still has to get done. Sit down, focus and get it done.
Focus on the Challenging - James gravitated towards the impossible. To shoot Abyss, Titanic and Avatar he had to film underwater which most felt was too technically challenging. He created new technology and literally waited decades to make the perfect movies. This focus on doing challenging movies made him unique, reduced competition and clearly worked in his favour.
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.