rusty coder, venture capitalist, economist by training, iterating through life
Now that summer is officially coming to an end, thought it was worth doing a post-mortem on the barrage of S1s that happened over the past month. Looks like the entire analyst community came out swinging this month, and I don’t think I have ever read this many founder/ company/ strategy/ technology histories and deep dives. A few takeaways, just reflecting on the froth!
Snowflake provides a cloud data warehouse-as-a-service. It cooperates and competes with AWS, Azure and GCP, providing its platform atop them. And in this rather complex ecosystem they have built a fantastic business. $500m+ ARR, growing at 121%, at 62% gross margin, and 158% net dollar revenue retention. The company has remarkable efficiency, with its efficiency score (revenue growth + FCF margin) at 110%.
Unlike most founder-led saas companies, Snowflake has gone through a few management changes. First was Mike Speiser, a VC from Sutter Hill Ventures. Then, post their launch from stealth, came Microsoft veteran Bob Muglia. And current CEO was Frank Slootman, joined in May 2019, who was instrumental in helping them towards the IPO. Frank was the CEO of ServiceNow from 2011 to 2017 and helped them scale the business from $100m to $1.4B revenues, including an IPO.
One of the biggest selling points for the platform is the way it helps create data network effects – Snowflake allows its customers to share and exchange data with each other, and this ability was architected in from the very beginning. According to most benchmarks, they are most often the cheapest, fastest and easiest to use platform for most of their clients.
While everyone including Warren Buffet got bullish about the company, it also helped raise the valuation astronomically high. It’s a wonder what happens when there’s a gigantic market, a top notch team, and strong growth. It handily beats enormous competition (including from the Master of the Universe Bezos) and absurd spend on S&M.
Despite all appearances, the company seems to have built an integrated system that covers infrastructure and analytics, with a core platform and various modules sitting on top. It can take in data from all sorts of sources like SAP, AWS S3 and Azure, and does the hard data engineering work of orchestration, versioning, security, search etc. This data, once ingested and cleaned, then has multiple types of analytics and visualisation that can be built atop.
So if you don’t have the talent, capability, will or time to build your own system, it can be attractive to buy an all-in-one package from Palantir. That explains both why the number of customers is low, at 125, and ACV is high, at $5.6m. Considering Palantir started way before the AI boom in 2003, it feels like a lot of the hard yards they put in is now part of industry-understood packages.
Their Gross Margin is a helpful indicator that they are not (or are no longer) a services company. At 70%+ (c80% if you exclude those pesky stock based compensation), this looks more like a software company than a consulting company. So while they do have complex and lengthy implementation process they either seemed to have changed their model. This also holds when you look at the fact that after more than a decade of “no sales people”, they now are looking to build an account-based salesforce.
The bullish case here is that large enterprises will only get benefits of big data and AI if they do a comprehensive installation. Comprehensiveness is tough to get without significant effort to build, or buy something equally giant and monstrous, like Palantir. It’s interesting to see what it takes for full enterprise transformation, at the very least, and whether this becomes true or not, the future will be interesting to see!
Considering the extraordinarily convoluted ownership structure, and the low amount of stock float, it’s gonna be interesting to watch this one play out!
The project management market is large and highly competitive. It’s not a winner-take-all market, with different customers having different requirements. To succeed in the crowded landscape, Asana has built out an exceptionally strong feature-set, verticalised it for relevant market segments like marketing, and increased international penetration to ensure utility for multi-national companies.
The company was started by the co-founder of Facebook Dustin Muskovitz, and came out of his work originally trying to collaborate within their engineering team. It retains the same sensibility as they have become a leader in the growing segment. While they have been increasing their S&M spend to reach increasingly upmarket customers, and grow internationally, their flywheel model creates demand at the individual user level, and leverages that interest to sell into the entire department and the whole company. Even as they have grown, the free-to-paid conversion rate of registered users increased from 3.6% in 2018 to 2020.
Asana has high gross margins, strong efficiency and fast growth, with a FCF margin that’s getting better. They have 75,000 customers, and bring >40% of revenues from outside the US. Considering the growth overall in the sector, and the exceptional interest in collaboration and project management tools that’s been brought about by the pandemic, this feels poised for growth.
Another direct listing is going to push it high. A simple enough product to understand, a stellar team, and a tailwind from Covid, at least for the larger enterprise customers.
Unity is the leading platform today to build interactive and real-time 3D content, and provides a comprehensive set of tools that’s mainly used to build games. It allows creators to build only once, and deeply across any platform, which significantly improves the developer experience. Unity gets the majority of its revenues through a usage-based revenue model, under a revenue-share model with its creators.
As a premier game development engine, Unity helped develop over 50% of the games built on mobile, PC and consoles. With over 2 billion monthly active users and 1.5 million creators, they are growing at 42% yoy with 2019 revenues of $541m. While Epic showed $730m of EBITDA on revenue of $4.2B, Unity still has enough room to grow in a market worth over $29 billion today.
A key risk, now highlighted though the Epic/ Apple fight, is also reflected in the S1, which is the overreliance that Unity also has towards Apple and Google, who could “limit or discontinue our or our customers’ access”.
Apart from the growth metrics, a key factor that will affect the future growth is the ability Unity has in deepening the relationship it has with its customers and get them to buy more. Their ability has been demonstrated in increasing the Dollar Revenue Retention from 124% in 2018 to 133% in 2019 and 142% in June 2020 – demonstrating a successful strategy.
They could be a major player in whatever gamification comes next, and presents a rather unique combination of revenue lines and growth opportunities. While believing they will end up creating the Metaverse, or gamify the entire world of business, might be overstated, there is still the possibility that they will push this along much further than any others. It’s great to be a leader in a space that is only going to grow!
While Jfrog filed its S1 last week, it slightly slipped under the radar with all the news around the other, better known, names. Which is unfortunate, because their metrics stand out even in a crowded field. While slightly at the lower end of the size spectrum at $146m ARR, it’s growing at 56% (similar to Elastic) but most interestingly has a positive 10% Free Cash Flow margin. This profitability, combined with its 139% Dollar Revenue Retention, has given them a 14 month payback period, and also a 101% growth persistence (the ability of a company to continue growing at the pace it has grown before).
They provide an end-to-end platform to help companies do DevOps and help release software continuously, drastically reducing the time it takes for software releases and manage the flow of from code to production. One of their biggest differentiation factors was the building of a universal package repository, called Jfrog Artifactory, which creates a single source of truth for all binaries (the outcomes of the build processes).
With most of its metrics in the top quartile, if not top decile, they are likely to perform quite well in the public markets. While they haven’t seen the same level of interest from general audiences because of the technical nature of the product and lack of name recognition, it has the potential to perform really well in the public markets once launched.
As a highly complex product with a strong, technical team, with stellar metrics, it’s inevitable that this pops high the first day of trading! Time will tell as to the lasting value, but it’s still a highly exciting one to watch.
It’s interesting to see the heterogeneity in the market, and the style and types of companies that are going public! While the market is frothy, and investors are desperate for any signs of a growth investment,