Enterprise Software Investing Playbook

An Encyclopedia of lessons from the best research resources, legends and personal experiences.

Welcome!

This is an investment mental model for investing in enterprise software businesses (This is not an exhaustive list, but captures enough of the best literature on the topic).

Amidst the current market dilemma since February and November 2021, this period has challenged many to reflect deeper on their investment processes. This is my attempt of accumulating the best lessons from successful investors in SaaS Enterprise Investing. B2B SaaS is predominately an area I invest into as a result of my previous work experience.

One important disclaimer, this SaaS Investing framework is where I strive towards as an Investor, but it is difficult and I always fall short of that expectation. In reality, no business is perfect and none will have all the characteristics below. However, it is important to have a framework and a mental model for analytically assessing companies and investment ideas.

In November 2020, I wrote about the Top 10 Investment criteria that I look for in a business (I laugh whenever I read it reflecting back). The good thing is that I have learned much more over the last 2-years as a result of the boom and bust in the market.    

In an interview with the Innovestor here in November 2021 (again), I discussed my process for investing in general companies. This was the framework I shared in that interview.  My article today focuses on expanding and providing details around each element.  The image below is how I distilled my entire process.

Public Software Investing Framework

Today’s version is an investment playbook focused more on software enterprise businesses in the public equities market. I will explain some of the metrics below:

High-level overview: 

Financial Execution -

1. Revenue growth (30-40%): Recurring, Acceleration, Long-term durability, and Execution (% of beat + raise). 

2. Operating Leverage or Margins (Rule 40):

   • Gross Margins (70%)

   • Operating Margins or FCF (>10%) [Context based].

3. Sales Efficiency (Sales CAC Payback period) in <12-16-months

4. Customer growth + Dollar-based net retention rate.

Product Moat & Competitive Advantage:

1. Product Moat features: Product Essentiality, Optionality, Scalability, Switching cost & stickiness, Developer focus, Product Differentiation.

2. TAM: Structural, Secular, and Sustainable. Company’s positioning amidst the market-share.

3. Mgmt/Talent/Culture/Product Velocity: Management team with a great culture that breeds high product velocity. A culture and team that attracts top talent (engineering, product, design) into the organization.

Valuation (Output): I fundamentally believe that valuation is a reflection of a company’s financial execution + Competitive Moat + Earnings quality.

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INTRO:

I like to begin this section by discussing the harsh reality that only a few companies turn out to be great investments. Ideally only the Top 5-10% of all SaaS companies today will provide hall of fame returns over the next decade. This software research by Mckinsey backs my claim. 

“In an industry that sees an extraordinary number of start-ups, very few go on to become giants. Of the nearly 3,000 companies that we studied, only 28 percent reached $100 million in annual revenues; 3 percent went on to log $1 billion in annual sales, and just 0.6 percent—17 companies in total—grew beyond $4 billion.” 

Around the late ’90s, there were (already) thousands of “wanna-be“ companies trying to be software companies but only 96 companies achieved $1-Billion by 2012, and the funnel narrows down to achieve higher levels of revenue. Building (funding) a great software business game is hard for founders, entrepreneurs, and investors since only a handful would provide that spectacular hall of fame returns. 

This difficulty is only going to get more worse as we see more and more companies flood the markets due to the declining costs of starting a business thanks to Cloud computing.

“Now there are over 4K companies with $1B+ in revenue. Within technology, we crossed the 100 company mark in 2011. 100 companies with over $1B in revenue. In 2020 there were nearly 200 companies. The less capital required to start a company means there will be more companies. More shots on goal. And the number of winners didn't stay the same” - Kyle Harrisson of Index ventures.

As a result of this challenge, every investor needs to filter for return on investment on their time, research, and effort to study each company. For me personally, a framework/mental model provides for efficiency and an easy filtering process.

Let’s discuss the key criterion. As a reminder, this is a framework for public companies rather than private companies and everyone will have a different style. 

1. Revenue growth (30% - 40%+):

Why is high Revenue growth important? - Revenue growth is the most obsessed metric used by all growth investors and rightly so. However, the reason this metric is heavily used is that in most cases revenue growth indicates that a company is doing something right - either its product or the distribution. Although there are ways companies may have temporal highs of growth like the 2020 pandemic, the companies that maintain a consistent cadence of growth at least over 30% for long stretches generally prove they have a product-market fit (depending on the maturity of the business).

According to Mckinsey’s research of 3000 software companies over 20-years, they found that consistent high revenue growth was a theme of the best companies. I quote the report: 

“In our new research, we analyzed the life cycles of about 3,000 software and online-services companies from around the globe between 1980 and 2012. High-growth companies offer a return to shareholders five times greater than medium-growth companies. Second, growth predicts long-term success.  High rates of growth are a predictor of long-term success. We analyzed the 96 companies that reached $1 billion in annual sales and found that fully 85 percent were in the top two categories of growth (super growers and growers) when the companies were smaller.”

The Mckinsey report suggests there is evidence to support the thesis that Revenue growth should be a starting metric for evaluating the success of a company before other metrics. A product that has great product-market fit demonstrates the company is solving a problem that resonates with its customer base.

ARR is the golden standard for SaaS companies. It is a slightly better metric to get a good understanding of the appetite of customers for the product. There is a difference between bookings, billings, and ARR before interpreting the core revenue growth for software businesses. One of those metrics might matter over the other depending on the business. For companies that have larger TCV (Contract value) and a large customer base - It’s better to focus more on billings, and for SMB’s/mid-sized company products that don’t have a high price tag - focus more on ARR. However, note that this varies from B2B/B2C SaaS. In this article, we will focus on Revenue. 

From all the studies I have covered, the key three things that matter for assessing Revenue growth for public companies are: i) Recurring Revenue ii) Acceleration in revenue growth or mild deceleration iii) Durability of that growth. The goal is to find companies growing over >30% - 40% consistently. The best of class growth companies usually keep growth high (from the Mckinsey study) which is why I have a minimum hurdle of 30% growth, some companies even grow over 50% - 70% for a long stretch of time spanning multiple years. E.g. Shopify has a 5-yr CAGR of almost 70% growth. The key features of growth include:"

• Recurring: The goal is to identify companies with over 80%+ Recurring Revenue. This ensures that a company has significant visibility and predictability into its future revenue. This is 90% the case for SaaS. I prefer companies that have consumption-based or variable-based pricing over subscriptions for certain business models like data infrastructure companies. 

• Acceleration + Execution (>7-10% beat + raise %): This is one of my biggest lessons in 2020/2021. This is what wall street uses to reward or discount valuations. Track how a company is accelerating revenue growth rates on a quarter-over-quarter (QoQ) basis then secondarily look at the year-over-year (YoY) growth rates. The reason is that QoQ tracks the true health and momentum of a business than the YoY gains. It is important to mention that not all companies can keep accelerating every single year or Quarter. All great companies eventually decelerate, stabilize, or re-accelerate. One thing I’ve learned is that you want to avoid any *huge* deceleration or a persistent drop, and a slowdown in revenue or customer metrics. This is usually a red flag. The market begins to discount/re-rate such companies immediately and it loses its premium valuation because in many cases, this is usually the beginning of a trend either because the business lost a significant customer eg. Fastly in 2020 or a loss in key talent/asset. Meanwhile, best of breed/premium companies have elements of high acceleration and moderate deceleration. 

  The second component to track is a company’s execution against its own guidance. Ideally, you want to track the percentage % of a company’s beat in the current, next quarters guide and historical EPS/Revenue beat to avoid being caught off guard by companies that are highly conservative with guidance. Generally, any beat rate over 7-10% is considered excellent. This signifies that a company is hitting its objectives, internal business goals and this almost always predicts a positive stock movement barring any other factor in the quarter. 

• Durability: Lastly, it is important to think hard about the durability of a company’s growth rates and assess if this is a one-time pull forward in growth. All companies will eventually face a slowdown in revenue growth over time; however, the best companies are generally able to sustain growth in the high-20s or low 30s & 40s at a large scale. Durability and ability to compound revenue growth over say a 10-year period is a function of a company’s product superiority, competitive advantage/differentiation relative to its competition (many of the factors which are discussed in-depth later). Additionally, it is important to evaluate a company’s optionality and ease at which they can develop new products to expand their TAM because this ultimately leads to growth sustainability longer-term. More discussion on this later. 

2. Margins/Unit Economics:

• Gross Margins are different. I lean towards companies with 70% gross margins and ideally over 80% LT Gross margin potential. Also, prefer companies that have a clear roadmap of achieving that metric within 3-5 years. Generally, Gross margins multiples are a better measure of a business’s future profitability and it shows the business has leverage in the sense that there are fewer humans involved in the process. Some context on Gross margins for SaaS. Many SaaS companies pay the major cloud providers to allow them to run their software like Snowflake (close to 68% margins), or cybersecurity companies that require high amounts of computing resources. Meanwhile, there are platforms like Asana and Monday (Gross Margins of over 90%) that have their own abstraction layer which doesn’t require a full expense to the cloud providers. The higher the gross margins, the higher the likelihood will be able to generate profits for shareholders. Every business is unique. 

• Operating Margins:  Find companies that are GAAP Profitable or have NGAAP Operating margins of at least >10-20%. This is very difficult in today’s market where businesses are funded by VC’s and capital markets to grow at all costs. Generally, I am comfortable owning a company with at least negative -20-30% margins -- depending on the context of the product, improving operating leverage, and if the competitive moat significantly shows that the business unit economics can be profitable in the near future. For example, Salesforce has never really been GAAP profitable but its product moat in CRM is undisputed or MongoDB has high LTV to CAC within the database market, but decide to focus more on acquiring more customers now.

  Within the operating and EBITDA Margins, other key metrics to track here are S&M Efficiency and R&D Per Revenue Dollar. The average SaaS company spends heavily on S&M and it generally makes up their largest expense bucket. They want to acquire enough customers to capture as much of their TAM as quickly as possible. Secondly, due to the fight for talent, profitability for many of these SaaS companies is elusive due to high stock-based compensation.  The most important thing is to track the unit economics of the underlying business to understand if the business can truly be profitable (or generate significant cash-flows) long-term if they decide to turn off the taps on Op-ex and Cap-ex.

3. Sales Efficiency - S&M CAC to LTV ARR:

Sales efficiency is an often-overlooked metric in a world that prioritizes growth. There are two ways I approach tracking this methodology. First, the easy one is tracking companies that have Sales & Marketing (S&M) cost growing faster than revenue growth consistently over many quarters, or don’t have a high difference between S&M growth to revenue growth is a red flag. It means a company is burning cash in S&M but is inefficient in its process of sales. The greater the difference in S&M to revenue growth, the better leverage. For example, Datadog in their Q3 2021 Qtr grew revenue over 80% and yet their S&M expense only increased 40% which shows high leverage. This S&M to Revenue section should be within the context of the size of the company/product type. If revenue growth cannot keep up ahead of S&M growth, this is a sign that the company needs to fix its sales teams/account executives/reward incentive and go-to-market strategy. 

• Gross Margin Adjusted CAC Payback: This is the second metric used. CAC payback pretty much tries to detect how long it takes for a company to generate gross profits from customers based on its S&M CAC expenses. It signals how efficient a company can be with its sales employees. + CAC can be calculated as (Last Quarter’s S&M) / (Net New ARR x Gross Margin) x 12. Some companies have longer payback periods depending on their gross margins or the company’s sales cycle. The LTV/CAC calculation can be derived by using: (Change in Subscription Gross Profit Dollars / Incremental S&M expenses) x (1 / Churn x Discount Rate) x (New Customers / Total Customers). In general, the key evaluation here is “How much did the S&M units (inclusive of all programs and personnel) spend compared to how much New Sales ARR or Net New ARR from new customers was generated in the quarter or year.” The ARR or TCV generated should be higher than they spend. David Sacks at Craft Ventures has a metric called the Magic number, “Magic Number: Magic Number is the Net New ARR in a period divided by S&M expense from the prior period. Ideally, the ratio is greater than one.”

4. Customer growth + Dollar-based Net Retention (DBNRR):

Steady customer growth is almost the food that sustains a business. Customers provide lifeline. The baseline is to see a healthy 30-40% customer growth. The younger the business, the higher the growth is expected in this early stage to avoid high customer concentration/business risks. 

DBNRR can be described as the revenue a cohort of customers provides to a business in each period relative to their original subscription. It almost measures engagement and usage. This metric takes into consideration customer churn. Many public companies don’t disclose churn. Ideally, a phenomenal SaaS business has a strong suite of products that they can upsell/cross-sell, land & expand and have strong pricing power. For example, Twilio (140%), Crowdstrike (>120%), and Datadog (>130%) have maintained high retention rates consistently for multiple years in a row. Generally, these businesses are able to deliver a minimum of 20% growth every year without adding a single new customer. Generally, you want to find businesses that have optionality and those that invest in specific post-sales constructs to increase upsell and retention amongst customers. Dollar Retention of less than 100% won’t usually be disclosed by a company. A DBNRR metric hovering around 100% is a sign that a product is not sticky and the business is experiencing churn. However, strong customer growth and high net retention are drivers of durable revenue at scale.  As a rule of thumb - generally, the higher the DBNRR, the higher the LTV of the customer base. They prove there is an efficient GTM land & expand strategy and that customer churn/health is healthy.

In summary, financial execution is a combination of long-term revenue and steady state margins which include an efficient sales strategy complimented by customer growth.

The Top 7 Competitive Moats And Product Advantages:

Moats are core attributes associated with a business. A company's sustainable competitive advantage over competitors. An economic moat can fend off competition and enable a company earn high returns on capital for multiple years.

The best businesses have sustainable and durable competitive advantages. There will always be competition, but these companies have a distinguishable edge that drive long-term margins. 

Essentially, the greatest businesses have generally exhibited at least one or two of the following characteristics predominately. They have either an element of high-switching costs, an intangible asset/brand, network effect, or cost advantage that leads to economies of scale. In software and B2B SaaS, the following moats include software defensibility, counter positioning, data network effect/network economies, cornered resources (unique talent/valuable resource over competitors), and process power. Readers interested in software moats can read this piece. I will discuss the core lessons that have shaped my process:

1. The durability of Product Moat/Differentiation:

The goal to evaluate the key differentiators of the company’s product and determine if those differentiators are enough to help counter position or undercut their competitors to capture a good section of their TAM. Differentiation might appear in the form of a unique brand, popularity amongst a loyal customer like Open source software that appeals to developers, or a unique process/IP that a company has developed that is different than competitors. In many cases, it is hard to build something ‘extremely unique’ in SaaS, so a company’s advantage might be their first-mover advantage, distribution, and/or differentiated product development process/speed.

Importantly, it is important to assess the durability, longevity, and barriers to entry to a company’s product moat. For example, Zoom’s product had a perceived moat in 2020 at the height of the pandemic but over time, the durability of that moat started to dissipate because the barrier to entry for video communication was relatively low and distribution channels were weak hence they could not find ways to distribute their product across enterprises as easily as Google and Microsoft did as the pandemic dissipated. A product moat may come in the form of accumulation of data, a significant amount of capital/knowledge/time to build infrastructure to build the business like Z-Scaler's unique cloud network in ZIA/ZIP built across the globe, or it may be the way a company delivers its products and counter position its peers like offering a superior product relative to competitors for a cheaper price e.g. Salesforce did to Siebel when it changed its pricing strategy from paying per-user to a flexible strategy of pay-as-you-go. I highly recommend using platforms like Teagus, Gartner/Forrester reports, G2 Product ratings/Gartner Voice of the customer to assess real product strengths. In general, you want companies that have a differentiated edge with high barrier to entries.

2. Essential/Mission Critical:

The product is highly essential to the underlying business. It is critical whereby if the company did not have the product - it could affect their bottom-lines either by minimizing revenue opportunities or driving cost high. e.g. Think about the impact of not having cybersecurity protection (cost savings) or think of a CRM system for tracking leads (revenue driver). These types of software products are extremely difficult to rip off, and it serves as almost an oxygen layer for the business. Whereby products that are more like features, point solutions or have lots of substitute products are very vulnerable to cycles or changing customer preferences which affect the underlying revenue and margin profile. 

3. High Switching Costs:

This is a highly important business characteristic that has defined many of the great software businesses. For example, one of the key moats that are common amongst oracle, salesforce, and ServiceNow in that order is the high level of switching costs associated with the ripping off their software. I’m attracted to companies that have significant friction to the removal or displacing of their products. This friction boils down to the difficulty of the time, energy, resources, and information required to displace the product once it has been installed. The best SaaS companies develop a good process that balances relative ease of adoption/minimized sales cycle to a product that once it has been installed, it becomes difficult to uninstall e.g. MongoDB makes it easy to adopt, but once you have most of the data built on their database, the costs of removal mostly outweigh the benefits the longer one uses it. The benefit of this moat is that if a company has great product-market fit and customer experience, the company can create a high pricing power on its customer base. The product doesn’t easily get replaced, so you build a loyal customer base and if the company can add incremental features, re-invest into new products, they can easily get the customer to pay more and this can lead to tremendous success/durable revenue growth over time. The best example is how Atlassian built a strong product-led growth and spent most of its operating expenses on R&D to develop new products and annually, they have raised prices by double digits without experiencing churn. Another great case study is Datadog that protects a company’s infrastructure services which makes it highly sticky and hard to replace.

4. Platform Ecosystem/Network Effect:

As Bill Gates line defines platform effects “A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.” Marketplaces with their network effects are some of the best examples. In this SaaS example, a platform criterion in my definition measures if a company’s platform can serve as an infrastructure for the building of other applications or systems on top of it. Once things can be built on that platform, can it facilitate sales, transitions, and the exchange of knowledge? 

This builds upon my point about mission-critical and switching costs criteria for analyzing businesses. Platform ecosystems allow for significant value creation, for example, open-source applications have large communities of product users, developers, and evangelists - who love a product, are committed to improving it, and build applications on those products. An anecdotal evidence from a newsletter, I highly recommend Nandu Substack, “This First Round 2019 survey showed that “nearly 80% of founders reported building a community of users as important to their business, with 28% describing it as their moat and critical to their success.”   There is significant organic marketing that happens here. For example: Confluent is an example based on its open-source product Kafka. Similarly, Cloudflare has built an edge platform and their CDN network/distributed servers globally that makes it easy for developers to build products using Cloudflare as their core infrastructure. The natural inherent benefit of building a platform ecosystem is the network effects that emanate from it and the eventual switching cost it creates once you’ve built applications and systems on it eg. Jira for Atlassian marketplace + ecosystem for developers, Salesforce marketplace + user ecosystem. Enterprise network effects are created if the experience and value for your customers get better as more customers join in. Businesses with app stores or marketplaces have exhibited this characteristic. Good examples include companies like Salesforce transforming their platform from a core CRM to allowing developers to build upon it. Finally, a  great platform ecosystem naturally breeds optionality for a business to expand or cross-sell into newer areas. 

5. Scalability:

Products that have the capability of scaling across thousands of customers within an organization with a single installation. There are no incremental costs of providing extra elements of the product across an organization or for more customers. One example is the cloud providers like Microsoft Azure that can deliver cloud across thousands of clients at a profitable scale i.e. they have a core infrastructure that has almost no extra marginal cost to scale. On a relative level, enterprise B2B SaaS companies have this leverage over customer/DTC businesses.  On a relative level, enterprise B2B SaaS companies have this leverage over customer/DTC businesses. Technologies such as infrastructure or database products benefit from this scalability effects across wide levels of customers due to the leverage of the cloud. Although, Netflix is B2C business, but think about how Netflix has over 222 million subscribers and spreads the cost of an original content across all of that customer base using varying subscription levels

 

6. The Go-To-Market Strategy (GTM):

Distribution is everything in today’s digital economy. It is extremely important to assess the go-to-market motion. Distribution is ultimately key for selling a great product and generating sales.  

There are two broad categories of GTM. First, they can be top-down, enterprise-wide products such as Z-Scaler that require CTO/executive final decisions to decide the final sale decision. In this case, investors want to assess the companies partner ecosystem - does the company have partnerships with the largest players that control the industry or have the right channel ecosystem partners/system integrators that have key selling access to 70% of your ideal customer base?. The second type of GTM is a bottom-up - developer/user-led growth strategy and somewhat product-led organic growth. In this strategy, Investors want to assess if the company already has a strong community of loyal users that love/advocate the product, assess if there is evidence of product-led growth - e.g. does the company easy sign-up/freemium/trial process that involves a less number of sales reps?. The reason is that the decision-makers are more driven by developers or employees or referrals /WOM who have easy access to the product. Companies like Shopify developed huge success with users or Cloudflare that started from bottoms-up to now a hybrid product-led sales motion that combines tactics for driving user decisions and they have account executives who focus on large-scale enterprise sales at the top. Ideally, users/developers like the product and recommend it to their managers/executives.  If the product is something that could be easily purchased from the website without having to involve a sales rep/account executive, the better e.g. Atlassian generated most of its success, over 90% of all sales happen online. 

At this stage, track how the company lands new customers and expands with them over time. Some companies provide cohort analysis. The goal is to assess the GTM motion for the right stage of the company and align it to 1) Customer growth/DBNRR metrics and 2) CAC/S&M to Revenue metrics to assess if the GTM strategy is working.

7. Management/Talent/Culture:

Culture/specific talents are equal to or more important than management. As a hypergrowth company scales and grows fast, the more important talent becomes than the product. The people define everything.  However, the first criteria are to evaluate the management team. What is management’s competitive advantage with regard to talent, skills, past track record, or experience? Do they have almost a chip on their shoulder? What is their skin in the game & % of ownership?

Visit the company’s blog/Glassdoor and tech talent review sites to get a good sense of the culture. The key component of culture is to evaluate a company’s product cadence and innovation. The most successful SaaS companies build and execute products because every the incremental cost per unit for technology declines and competition always increases. The toleration for risk, a trial-and-error mindset is key to a company that can generate revenue and cash-flow at scale. Evaluate how quickly the company launches new products because this is ultimately key to driving most of the revenue growth discussions above. It is also important to track management’s ability to be consistent and to deliver what they promise either in their messaging on the earnings call, investor conferences, and interviews. Lastly, for SaaS companies, it is important to know where talent is flowing. Does the company consistently lose key talent? and/ are they attracting the best of talents? This is hard to track, but anecdotal evidence suggests the following shouldn’t be taken lightly because the inflow of top talent leads to great tech companies. 

8. Structural Total Addressable Market (How durable is the trend?):

Underlying everything has to be a broader addressable economic market that is big and growing. Assessing if there is a structural change happening whether across an industry, enterprise, or in the delivery/adoption of software. One-time tailwinds such as the rise in video calling in a pandemic can arguably be defined as pull-forward or temporal tailwinds but they cannot be compared to the type of structural tailwind that happens when companies discover new ways of storing information on the cloud rather than on-premises. The TAM should be growing in double digits. Generally, great SaaS companies are able to first create a niche or increase market share within a SAM (Sector Addressable Market) then go broad. Assessing the company’s market share/positioning within an industry is pivotal because certain companies have large TAM’s but don’t have the right business model or talent to profit from the market. 

Valuation (Output):

Valuation reflects the profits a business can generate into the future. In my opinion, valuation is an output derived from the inputs above, a combination of financial execution, earnings quality, and business moat.

The biggest question is to evaluate the exit multiple you are willing to pay to own that business in 3-5 years’ time if all the growth assumptions discussed above were to happen. SaaS Valuation can be difficult since many companies are unprofitable and trade at a premium to the market. The goal is to determine the IRR/minimum hurdle rate you’re willing to accept and evaluate it against the assumptions priced into the stock. An important caveat when calculating share price return profile is to incorporate the level of stock-based compensation dilution relative to the exit multiple/long-term growth profile.

It is important to remember that the best-in-class SaaS companies always trade a premium valuation because of their expected future growth profile, higher margin profile around CAC relative to LTV and a healthy customer growth + dollar-based net retention.

Conclusion:

Final questions might include - if you as an investor have an edge in the business? What are the key drivers and KPI’s to watch? What are your exit/sell criteria - perform a pre-mortem analysis and if you’ve developed a balanced bull and bear case analysis. Lastly, make sure you’ve developed full conviction for times of volatility will prove the depth of your due diligence.

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Additional frameworks for Investing in Software:

I want to also provide a variety general frameworks that goes beyond my research/experiences to open the topic further.

First, this is a framework by Goldman Sachs research. This breaks down investing into tangible and intangible factors. The key metrics, secular themes (market size), competitive moat, and unit economics of the business. Overlaying everything with the long-term outlook probability and stock catalyst for the future. (h/t: @ExitMultiple for the chart and together with @SaaScalSiakam for providing additional thoughts).

Mckinsey Research:

This is a summary of Mckinsey’s study of hundreds of SaaS companies. The key metrics highlighted here show that ARR, CAC Payback period, dollar-based net retention rate, and FCF are good predictors of a stock’s future success. The full research notes can be found here (a) and here (b).

Lenny Rachitsky shared North Star Metrics for Companies. 

Lenny, ex PM at Airbnb breaks down six categories of key metrics depending on the business model. Read the full article here.

This is a metric by Battery Ventures that shows the key metrics that enterprise software companies should focus on as public companies. They include ARR, No. of customer growth, dollar-based net retention rate, subscription contract length, billing frequency, and Margin profile. Read more here.

Core Software Investing Twitter Accounts (Newsletters to follow):

• @hhhypergrowth

• @StackInvesting

• @jaminball

• @stratechery/ @benthompson

• @GavinSBaker

• @StockNovice

• @investing_city

• @richard_chu97

• @BigBullCap

• @convequity

• @Beth_Kindig

• @itunpredictable

• @BucknSF

• @InvestLikeBest/ @joincolossus

• VC:@a16z, @benchmark, @BatteryVentures, @Altimeter, @Insights Partners, @BessemerVP.

Encyclopedia on Software Investing Reading Resources:

(Many of the following are great newsletters to subscribe too for free)

Mckinsey Research:

• Which metrics really drive total returns to shareholders: https://www.mckinsey.com/Business-Functions/Strategy-and-Corporate-Finance/Our-Insights/Which-metrics-really-drive-total-returns-to-shareholders 

• SaaS Metrics That matter: https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/saas-and-the-rule-of-40-keys-to-the-critical-value-creation-metric 

• Mckinsey’s results from 2000+ SaaS Companies: https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/grow-fast-or-die-slow?s=03 

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1. Dictionary of tech investing frameworks: https://roamresearch.com/#/app/Investing-101-2dot0/page/fmSpr-LWR

2. Key SaaS Business Metrics to track by WebSummit (Video)

3. SaaS Businesses that Matter by Craft Ventures (Most Popular).

4. Competitive Moats & Business Strategy:

   1. 7-Powers of Business Moats: https://florentcrivello.com/index.php/2018/07/29/mind-the-moat-a-7-powers-review/ 

   2. Morning Star on Moats: VanEck Morning Star’s Five Sources of Moat.

   3. Scalability and differentiation: https://breadcrumb.vc/marketplaces-scalability-lessons-from-uber-and-airbnb-d461aded18a2  

5. Clouded Judgement, Jamin Ball on key software metrics.

6. Young Hamilton analysis on Salesforce business model and success.

7. 10th Man Investment Checklist: https://www.the10thmanbb.com/investment-ideas/investment-checklist 

8. Interviews of Tech CEO - Newsletter here.

9. Nandu on the 7 Software Moats (Substack Analysis).

10. Step-By-Step SaaS GTM Strategy Analysis — Linked here

11. Software Stack Investing process - Characteristics of winning software investment by a CTO

12. Hhhypergrowth criteria for Software Companies: https://hhhypergrowth.com/what-is-hypergrowth/ 

13. Introducing a New and Improved SaaS Metric by Nnamdi: Weighted ACV - https://whoisnnamdi.com/weighted-acv/ 

14. Technically software company analysis on by Justin Analysis 

15. Tidemark Capital on Vertical SaaS: Link here.

16. End of Horizontal SaaS: https://every.to/napkin-math/the-end-of-software-again

17. “How to be a Value Investor in software.” (in-depth analysis of SaaS business models). The reading link can be found here.

I hope this framework and compilation of resources was helpful. If you have any feedback/additional resources, please provide them in the comments/email me.

Thank you for reading. I welcome any feedback and thoughts!

Francis.