E23 | Question of the Week, Rev.io, and Stellar Software
Introduction: Welcome to Five & Thrive: a weekly podcast highlighting the Southeast’s most interesting news, entrepreneurs, and information of the week, all under 5 minutes.
My name is Jon Birdsong and I’m with Atlanta Ventures.
Question of the Week: This past week I received a question from a friend who’s company had raised a very large round at a significant valuation late last year. Back then, she was excited at the prospect of the company being worth that large number reported in TechCrunch. Having a validated and credible financial partner produced confidence in the direction of the business. Fast forward to today, rumblings around the office of upcoming layoffs in the weeks and months ahead persist around the water cooler. She has vested ¾ of her options but now wants to know what she should do. Should she stick around to help the company achieve the latest goals set to fulfill that exorbitant valuation? She is in sales and knows that growing into the valuation will take at least three years of strenuous work. Would it be better for her to stay there or move on to a new opportunity?
This is a timely and touchy topic. There is no question several companies who raised large rounds in 2021 at very high valuations are currently in a predicament. Most likely raised with the plan to grow at all costs, hire quickly, and achieve the 12-18 month plans to develop into that valuation. A few things have changed: first the macro-economy has shifted. Growing interest rates have made money much more expensive than this time last year. Secondly, valuation multiples on revenue have dropped precipitously from 12 months ago. We love to look at the Bessemer Cloud Index at the Atlanta Ventures office which gives a high-level barometer of current multiples among public cloud computing companies. As of this recording, the average multiple on revenue for publicly traded cloud companies is 7.4x with an average revenue growth rate of 35%.
Knowing this context, now let’s apply it to my friend’s company. First, every employee should know the strike price of their options. This way they can back into the value of those options once they would be exercised. Secondly, and we’ve talked about it before, but understanding the Rule of 40 (a concept we’ve discussed before) for your company is important to gain a perspective so you’ll know how much your company is stepping on the gas to generate revenue. Lastly, finding out the valuation of the latest financing round will give you all the numbers needed for your equation to help make a decision. I won’t go into specific numbers but if your company is way below the Rule of 40 and is burning a lot of cash each month to scale revenue, now you have an idea of ballpark revenue multiples on valuations – and pretty soon it becomes clear if and how long you should stay around. It could take years to get back to the last valuation of the company and then another 3-5 years to make any significant progress on those options. Would it be better for her to go work at another company and start fresh? Maybe. Asking leadership when is the next time we’re planning on raising is a good indication of how they plan to build moving forward. Remember, each new investor most likely has preferences over all other investors and common stock shareholders, which is also another factor. Regardless, if you work for a company that has raised a significant round at a seemingly high valuation, asking some probing questions around Rule of 40, growth rate, and revenue multiples is not a bad idea.
Quiet Giant of the Week: This week’s Quiet Giant is Rev.io. With over 120 employees, they are used by thousands of companies for customized billing software to help your business grow. If you’re looking to launch new product lines and quickly tailor your billing and subscription needs, Rev.io has you covered. Led by Brent Maropis, Rev.io continues to grow with health and swiftness. Keep an eye on them as they scale.
Acquisitions in the Air:
First reported in Atlanta Inno this past week, Atlanta Tech Village Startup, Stellar Software was acquired by Austin based Storable. Stellar Software makes boat rental simple and easy through their software. If you own or rent a power or house boat, or a fleet of them, having software schedule, order, and process payments is now a must have in the market. Congratulations to Brent and team as they move on their next adventure.
Annnnd, that’s 5 minutes.
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Resources discussed in this episode:
Acquisitions in the Air: