Attention Walmart Shoppers...Sam Walton actually started the first SaaS business
Perspectives and Quick Takes From Bigfoot and Our Community of B2B Software Operators and Investors
Thanks for joining me for another Bigfoot Bi-Weekly Roundup.
In this edition, I cover:
My recent podcast appearance with Keith Harrington of Novel Capital
A few quick takes on articles & reports I came across over the past few weeks
A sneak peek of our capital sentiment survey (full report coming this month)
If you enjoy what you read, I’d appreciate you sharing with your network!
Capital Can Be Your Strategic Advantage
Keith Harrington of Novel Capital was kind enough to invite me onto his podcast for the RBF Network to talk about lending to software companies and my experience building a company that...lends to software companies.
Here are a few note-worthy quotes that were pulled:
I find capital markets still skeptical of the software lending opportunity:
There's been a lot of development in the market, but I would have expected more supply. It’s still not obvious to many that it makes sense to lend to companies of this profile, so there remains an education hurdle to clear both for operators and capital allocators.
Aligned capital as a competitive advantage:
Give yourself the optionality as an operator and the potential to be able to bob and weave, because business is hard.
Discipline as a net positive:
Our capital should not be limiting. Yes, it may enforce some discipline, which I think is net healthy, but it should really provide optionality.
🔊 Bigfoot Quick Takes 🔊
Why SaaS is Like Walmart
This article does a good job of outlining the SaaS business model - its (potential) benefits and tradeoffs made that can deliver a lot of value if we can all understand the model for what it is and exercise some patience to realize and harvest long-term value, which is only actualized if the business model is run properly.
Comparing SaaS to Walmart and Nespresso is a different spin I found interesting. It’s basically saying both businesses made the tradeoffs SaaS companies make (investing in growth rather than optimizing for profit generation) and the public markets hated them for it.
While I enjoyed this article and encourage you to read it, for me, everything here effectively goes out the window if the growth investments a software company is making are not delivering ROI. Then you just need to run a fundamentally healthy company generating free cash flow and displaying earnings on the P&L (imagine that).
A couple takeaways:
"Capacity to Suffer" Concept - That is, trading near-term profits for long-term potential by making investments that burden the P&L (and thus reported profits) and may ding the value of the stock (in a public market context).
Basically, all growth-oriented software companies, make the trade of heavily burdening the P&L in pursuit of growth. It’s the growth > profits trade that has been the norm for the past 25 years. This article makes an argument that software companies are overly penalized in their valuations because the full investment into growth (which is S&M spend and headcount) runs through the P&L and dings earnings, rather than running through the cash flow statement as CAPEX.
P/E ratios are certainly a way public equities are priced relative to their peers, so I understand where this argument is coming from. But I only potentially agree if (and it’s a big if), these companies are actually generating significant positive free cash flow while reporting net losses on the P&L. That said, whether these growth investments are classed as OPEX (P&L hit) or CAPEX (SOCF hit) should not really matter as they’re still consuming cash and will hit free cash flow (more valuable valuation denominator imo) either way. Also, I have a hard time believing software company valuations have been “penalized”.
An aside…operators beware. Even though this article was posted only 15 months ago, we all know how things have changed since then. Over-indexing to this operating and investing mantra (which is squarely "growth at all costs" in my opinion) is certainly not en vogue for capital providers in today’s market and has obvious perils. It seems that, once again, the finance world has realized that cash is king.
Ron Gill, CFO of Netsuite, does a good job outlining the annuity concept of SaaS.
This is the core thesis behind and primary benefit of the subscription business model.
It doesn't just happen though...
Your customer acquisition must be repeatable and efficient (more so over time), and you must at least retain and hopefully expand the revenue generated from those acquired customers. If neither of these is happening, you’re not actually creating an annuity that justifies the growth spend.
H/T to Chartmogul for surfacing this article in their newsletter.
The SaaStr Guide To Bootstrapping a SaaS Biz
Jason M. Lemkin shares a few note-worthy observations on bootstrapping in a recent SaaStr article.
But … bootstrapped is “better”, all things being equal.
If you can put in the extra time to get to Initial Traction and Initial Scale, you’ll suffer far less dilution, give up less control, and be more in charge of your own destiny.
I'm hypersensitive to the perils of overfunding businesses, so my natural skew is to efficient capitalization, which includes bootstrapping.
I've long been a fan of bootstrapping and its benefits (outcome optionality, operational flexibility, and control, sanity maintenance).
That said, bootstrapping is a hard path to plow for Founders.
It's not for everyone or for every business, and it doesn't have to be the forever state for a business.
When considering bringing outside capital into a business at any given time, we should all be thinking about:
alignment with the growth and operating plan, which evolves over time.
What impacts the capital can have on the business (both positive and negative) across a variety of scenarios.
What We’re Reading?
Matt Harney, Principal SaaS Analyst at Cloud Ratings, gave our capital provider sentiment survey a shoutout this past week on Twitter.
Matt’s newsletter, SaaSletter, is a highly informative investing-oriented newsletter with a ton of valuable data and analysis. He releases a few editions every month. I recommend you check it out and subscribe.
Capital Sentiment Survey Sneak Peek
I wanted to share a sneak peek from Bigfoot Capital's Q2 capital provider sentiment survey.
Is there a recession coming in the next 12 months?
According to our survey, it's pretty equal odds with 29% thinking we're already in recession.
12 months ago, 91% of respondents said a recession was coming in 12 months.
We’ll include the full report in this newsletter later on in the month. If you’re already subscribed (thanks), you’re good. If you’re not, make sure to subscribe and stay tuned.
About Bigfoot Capital
Bigfoot Capital offers growth-oriented loans for B2B software companies with $2M- $20M in revenue. We pride ourselves on partnering with companies and their stakeholders to provide a capital partnership that comes with stability and support.
If you operate or support a B2B software business and want to learn more about alternative capital options that preserve equity, get in touch with our team today.
Thanks for the shout out and looking forward to the full Capital Provider survey.