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It can also be about funding growth. (Getting more money to invest in your awesome business) Let's say you can get to $100mm in recurring revenue, and your co

It can also be about funding growth. (Getting more money to invest in your awesome business) Let's say you can get to $100mm in recurring revenue, and your company has $95mm in costs. Let's say that you know that every $1 in cash that you invest in Sales will generate $1 in new business every year from here on out. (This is a good business after all!) If you don't take any VC money, your business will grow as follows: 100M -> 105M (100+100-95) -> 115M (105+115-95) -> 135 (115+115-95) Now let's say you take $20mm from a VC, or the public markets. You now are investing $25mm in the base year, from which to grow. Your revenue stream would be 100M -> 125M (100+ 120 - 95) -> 145 (125 + 125 - 95) -> 185 (145 + 145 - 95) So you have a 185mm revenue company rather than a 135mm company on the back of the investment. If your company trades at a $5x revenue multiple (similar to what Qlik traded at today) you have increased the value by $250mm for the $20mm initial investment. The math is a little fuzzy, but the general idea is as long as you can use the money smartly to increase your rate of growth faster than the VC (or public market's) required return on capital, it's worthwhile for all parties.

msdos 10y ago
> The math is a little fuzzy The math is off, mathattack. Growing by $5m a year on $100M (5%) doesn't mean you'll grow by $25m a year on $120M (20.8%). You make the good point though that raising the growth rate from 5% to 6% would make a difference.
- mathattack 10y ago
  Very off. I didn't want to create a spreadsheet. :-) But the idea is that $95M of the costs are fixed, so whatever you add goes to growth. So on 100M of revenue you have 5M to invest in growth, which will get you a 5M revenue stream the next year. On 120M you have 25M to invest. This sounds far-fetched for traditional businesses, but isn't so off for SaaS companies. Once you get through sales, general and administration and fixed R&D costs, the margins on great SaaS companies is very high. It can be 80 or 90%. This is why GAAP metrics can look bad on them for a while (have to get over the fixed cost hurdle, and sales costs can be very high) but once you're profitable, it's a huge cash cow. This is one reason why Salesforce and Bloomberg do so well. They make tons of cash, and any competitor will need to lose money for several years to catch them.
beambot 10y ago
The VC model isn't the only game in town. If the revenue was predictable and stable, you could just as easily obtain a line of credit (debt financing) without giving up any equity a la VCs.
- mathattack 10y ago
  Reasonable point. There are lower cost sources of capital. My impression is that many banks are still nervous about lending to SaaS startups if the GAAP metrics don't look great. This may be why PE companies are getting into the game lately.
icedchai 10y ago
This is a bit fuzzy, indeed. You mention "revenue", yet you are subtracting a $95mm in expenses. Did you mean profit? If so, how can the $95mm costs possibly stay fixed? Your $25mm is going towards sales and marketing expenses. It's not staying in the bank, so that should be accounted for somewhere.
- mathattack 10y ago
  I'm making the oversimplifying assumption that costs are fixed. In SaaS business, a disproportionate amount of the costs tend to be. Look at the SG&A line of Qlik, in the news for their recent sale. [0] SG&A at mature companies can be 20-30% of revenue. At Qlik it's almost all of the revenue. This is ok, because they get the revenue over time. It's possible to create a more realistic model, but the core idea is "If you have a great company, it still can be ok to get VC money to grow it even faster." [0] https://www.google.com/finance?q=NASDAQ%3AQLIK&fstype=ii&ei=zHZRV7iiJuGqiQKLrblg https://www.google.com/finance?q=NASDAQ%3AQLIK&fstype=ii&ei=...

msdos 10y ago

> The math is a little fuzzy The math is off, mathattack. Growing by $5m a year on $100M (5%) doesn't mean you'll grow by $25m a year on $120M (20.8%). You make the good point though that raising the growth rate from 5% to 6% would make a difference.

mathattack 10y ago
Very off. I didn't want to create a spreadsheet. :-) But the idea is that $95M of the costs are fixed, so whatever you add goes to growth. So on 100M of revenue you have 5M to invest in growth, which will get you a 5M revenue stream the next year. On 120M you have 25M to invest. This sounds far-fetched for traditional businesses, but isn't so off for SaaS companies. Once you get through sales, general and administration and fixed R&D costs, the margins on great SaaS companies is very high. It can be 80 or 90%. This is why GAAP metrics can look bad on them for a while (have to get over the fixed cost hurdle, and sales costs can be very high) but once you're profitable, it's a huge cash cow. This is one reason why Salesforce and Bloomberg do so well. They make tons of cash, and any competitor will need to lose money for several years to catch them.

beambot 10y ago

The VC model isn't the only game in town. If the revenue was predictable and stable, you could just as easily obtain a line of credit (debt financing) without giving up any equity a la VCs.

mathattack 10y ago
Reasonable point. There are lower cost sources of capital. My impression is that many banks are still nervous about lending to SaaS startups if the GAAP metrics don't look great. This may be why PE companies are getting into the game lately.

icedchai 10y ago

This is a bit fuzzy, indeed. You mention "revenue", yet you are subtracting a $95mm in expenses. Did you mean profit? If so, how can the $95mm costs possibly stay fixed? Your $25mm is going towards sales and marketing expenses. It's not staying in the bank, so that should be accounted for somewhere.

mathattack 10y ago
I'm making the oversimplifying assumption that costs are fixed. In SaaS business, a disproportionate amount of the costs tend to be. Look at the SG&A line of Qlik, in the news for their recent sale. [0] SG&A at mature companies can be 20-30% of revenue. At Qlik it's almost all of the revenue. This is ok, because they get the revenue over time. It's possible to create a more realistic model, but the core idea is "If you have a great company, it still can be ok to get VC money to grow it even faster." [0] https://www.google.com/finance?q=NASDAQ%3AQLIK&fstype=ii&ei=zHZRV7iiJuGqiQKLrblg https://www.google.com/finance?q=NASDAQ%3AQLIK&fstype=ii&ei=...