Historical data shows that trading less is one of the best things stock market investors can do to improve their returns. Although venture capital firms invest in private companies, public market investors stand to benefit by adopting their approach of investing in businesses not tickers.

Redpoint Ventures Vice President Jamin Ball has developed a framework to evaluate private software  companies that translates very well to the public markets.

He uses four buckets to analyze companies:

• The Team: he looks for management teams that work well with others, have deep technical expertise in their fields, and have big visions for their company’s future.
• The Product: he looks for customers that love a company’s products, cite expanding use-cases, and can articulate a clear return on investment (ROI)
• The Market: Jamin researches the current size of the market for the company’s products and tries to understand how large it can become. This is the category that is easiest to underestimate.
• The Financials: Jamin analyzes the strength of the company’s financials. Two metrics he focuses most on are increasing customer spend (expansion) and how long it takes the company to “payback” the cost of acquiring customers.

Timestamps

1:20 – Redpoint Ventures Overview

2:45 – Jamin’s history Investment Banker at M

3:00 – What is Venture Capital?

4:51 – Jamin’s favorite hobby &  quote

7:20 – Overview of Jamin’s framework for evaluation software businesses

16:30 – Why Redpoint Ventures passed on Datadog

17:10 – Jamin’s thoughts on cloud penetration today.

24:00 – Who are the beneficiaries of increased cloud spending?

30:00 – Earnings prediction from Q2 earnings

35:00 – Q&A from Twitter

Complete Transcript

Austin Lieberman  00:00

Hey everyone and welcome to Episode 22. We’ve got Jamin Ball here today from Redpoint Ventures and really one of the first place places I saw you or met you online Jamin was through Twitter, but through your Clouded Judgement Substack. And so that’s how I’m familiar with you. You are a Vice President at Redpoint Ventures. So I’d love for you to just spend a second introducing yourself and You know, maybe sharing a little bit about yourself. But then, you know, we talk a lot about public companies at seven investing. A lot of people are probably familiar with with venture capital and what VCs do. But if you could just provide a little bit of background on that, just just so we can start to tie together, maybe some of the similarities and differences between, you know, private venture capital and then investing in public companies.

Jamin Ball 01:21

Totally. Well, first off, thanks for having me. I’m excited excited to be joining the podcast. So I joined redpoint, about four years ago. We are a venture capital firm that invests in both consumer and enterprise b2b software businesses. We’ve been around for about 20 years now. We have two different teams here at red point. We have an early stage team. And it’s actually an early stage fund. You can think about them as typically investing in and partnering with seed and series a stage businesses and then alongside that we have an early Growth Fund, which is what, that’s the team I’m on. We have about six other individuals on that team. We’re typically investing in partnering with businesses at the Series B or later stage, right? So so anything from companies with, you know, a million dollars in revenue last all the way up to companies with you know, 10s, or even hundreds and everything in between. So I focus on mainly b2b software, businesses, anything at the infrastructure layer, any kind of DevOps business application software, SAS or cybersecurity. Those are typically the areas I focus on. We also do a bit of healthcare in consumer, but it’s not quite as much of a focus. You know, before redpoint, I was over at Morgan Stanley doing investment banking, so working more with you know, much later stage businesses or public businesses, typically, in the software and security space. And before that, I was I was over at Stanford, so pretty much been in the Bay Area working in tech. You know, my whole life and I guess to your question on on venture capital, you And kind of what we do. So at every stage of a business, you know, typically and the exception are companies that are bootstrapped, but typically businesses will look for outside capital to fund their operations that might be hiring their first few engineers to get the product off the ground, you know, down the road that might be hiring their first few go to market and sales folks to, you know, really take a business that has, you know, maybe a couple of design partners, something that’s more mainstream with an outbound sales motion. Sometimes businesses are able to fund that with cash flows that the business generates, but more often than not, you know, that isn’t the case. And you know, they’ll look for outside capital to do that. And we’ll be that partner that kind of provides the capital, but also works with the business as they continue to grow, to think strategically about their operations, right things like how to build a sales team, how to structure it, thinking about product vision, thinking about all the different types of things that you know, we get to see in every business We work with, right and you know, the way we always like to talk about it is for many of the founders that we work with, you know, it’s the first time they’re doing this right? It’s the first time they’re building a company. You know, they don’t know what they don’t know. I mean, they’re, they’re often much smarter than us. But you know, we’ve seen around corners that happen we’ve seen scaling issues that happen that you know, businesses might not be able to predict and so will will help them look around corners and and all that is they ultimately look to become a public company one day, so that’s a little bit more about me and what we do over at red point.

Austin Lieberman  04:35

Yeah, that’s awesome. So I’m on the Redpoint website. So also, everybody can follow Jamin on Twitter  @JaminBall and I’m on the Redpoint website. And a couple other things on here that are that are just kind of fun is your favorite hobby outside of venture is fantasy football. So that’s probably you’re probably struggling with that right now a little bit, and need. And then you’ve got a quote up here that you say it’s over quoted. But you try to apply it in so many aspects of life skate to where the puck is going, not where it has been. So, you know, it’s probably pretty obvious or you feel like, it’s probably pretty obvious to think about how, in your mind that applies to what you do investing in private companies. And then And then also, what appears to be a hobby or passion for public companies as well. But yeah, where do you apply that? Where else do you play that in your life? might get a little bit off of investing here, but still, I’d love to get to know you.

Jamin Ball 05:44

Oh, totally. I mean, I think honestly, there’s I mean, you can I’ll give kind of a joke answer first, right? But, you know, linking it back to my fantasy football interest, you know, the ways the ways to get ahead in your leagues, right. It’s by It’s not with your first second third round pick, it’s by finding that gem, you know, maybe it’s a rookie who doesn’t have much of a, you know, a track record, you don’t really know what to expect, you know, getting them in one of the later rounds. And in the idea there is right you, you know, it doesn’t matter what they’ve done in the past, you know, you want to put value in where they’re going, or what the situation will be. Right. So I applied there, think on like, a personal level. You know, I think, you know, I’m got married a few years ago, we had our first child a year ago. Number two on the way thank you. Thank you. I think there’s so many different places just in my personal relationships, right, where, you know, it helps me think more big picture. Right? You know, I want to think about you know, especially with you know, being a first time parent, you know, there’s there’s so many there’s so many challenges that arise and being able to take a step back and you know, not just worry about solving the issue at hand, but you know, things that will come up and optimizing for down the road and thinking more long term.

Austin Lieberman  07:03

Yeah for sure. That’s a that’s a great quote. And we’ve heard it a lot. But I think like you point out, it’s it’s an important one. So let’s jump in to your substack. Right. And it’s I follow it highly recommend anybody that’s interested in the types of companies that we’re talking about. subscribe as well. It’s clouded judgment.substack.com. And just from from the about section to give people a quick reference. It’s a series of weekly data driven posts that will be published on Friday mornings, where you break down latest valuation trends, operating metrics, and the metrics that are driving those trends behind the universe of cloud, SAS or software as a service public companies. And basically just talk about how, as a venture capitalist at red point, you’ve developed frameworks that are most of them are data driven to evaluate private SAS. businesses that are broadly applicable to their public counterparts. So anything you want to add upfront about clouded judgment, I love it that your posts are long and data driven, which I appreciate a lot of people are looking for like, real quick, just highlights. I love the depth that you go in. But what I really want to get into is those frameworks that you highlight, and that you’ve kind of built in, in the private world, and are now starting to apply to public companies.

Jamin Ball 08:30

Totally. And so so I guess it’s there’s kind of two questions there. And what I’ll start with is, yeah, the framework that, you know, that I like to use for evaluating private businesses, and it definitely does, it definitely does differ a bit, just because, you know, we’re allowed and we have the time to go much deeper on the analysis for every private investment we make in ways that I just personally wouldn’t have the time or the resources to do for every public investment. But you know, when we look At private company investments, there’s there’s really I’d call it five main buckets that we’re looking to evaluate, you know, the first being the team. That’s very important one for us, it’s often a needle mover. And what I mean by that is, you know, we want, we want to back teams, you know, that have big goals that have big visions, and are smart technical people, right? We want, you know, we want individuals who aren’t looking for a quick flip. We want to back founders who, you know, one, you know, we get along with, and they get along with us, but also are kind of, you know, shooting for the stars here, and finding the right team doing reference checks, looking at what they’ve done in the past that that goes a long way for us. Now, the second big category we like to evaluate is the product. Can we do that generally through a number of conversations with customers, or even conversations with customers of their competitors product, just to kind of better figure out that They’re positioning and we love to hear more than anything is customers who love the product. Customers who can articulate a clear ROI and use cases, customers who can articulate how the use cases have evolved and changed over time. And then just in general, a love for the product mean, it’s not often you hear customers who love working in a certain software, right? It’s either a means to an end, or it’s something that was mandated by them. But when you kind of hear consistent reviews of I love working in this product, it makes my day to day job. So he’s here that kind of gets us excited. You know, the third bucket we really dig in on is is the market and I guess it’s kind of two buckets. The first is being the size, you know, how big is this market? How fast is it growing? I’d say it’s, it’s generally a, it seems like it should be an easy bucket to quantify and it’s often harder than you think just given you know, the rapid the changing nature of cloud markets and SAS markets today, I’d say we oftentimes underestimate how big markets can be. And it’s a reason we don’t do deals that we should, you know, we make far more mistakes then, than right decisions. If you look at all the deals, we’ve, you know, passed on. And then you know, the second piece of the market is that competitive dynamics, we don’t have a huge bond, we have a $400 million Growth Fund, we’re probably making four investments a year or two, five investments a year, we want to back businesses that are, you know, the leaders in a category. So we want to find the market that we think is big and growing and we want to find the best company in that market. One that we think can be impactful, you know, the fourth bucket is the financial profile we want to dig in on you know, the high level metrics right the growth we’ll break out growth into look at looking at things like you know, what is the percent here How is the, you know, the net new error added reporter trending, how it’s just the new logo error per quarter. trending, you know all the different pieces of an air or waterfall, we look at the margin expansion, there are a couple key metrics that I personally really like to track. And I kind of highlighted a few of those in some of my posts. But the two metrics that I really care the most about are net expansion, and the payback period and you know, net expansion. Basically, for those who aren’t familiar with it, it will take a cohort of customers at any given point in time and say one year from now, how much is that cohort of businesses spending relative to that initial period spent? So it’s inclusive of upsells inclusive of churn or any kind of contraction and essentially, what it shows you is what that group of customers will grow to right without adding any new logos. So over time as cohorts combined, it kind of shows you what a longer term growth rate could be even assuming no new customers are added, which are no new logos are added which which is super interesting metric and I think a unique part of the SAS business model. That is is underrated. And then the payback period, that that may be a little bit more of a non standard metric. But we like to look at the cost to acquire a business, we then look at it. And when I say a business, I’m talking more about a group of businesses, right? We might look at the cost to acquire all the customers from one quarter, we look at what the gross margin contribution is, of that cohort. And then we say how long does that does it take to pay back that spend to acquire the customer on a gross margin basis, and we measure that in a period of months? You know, we like to see, they’ll call it 15 to 20 month or less payback. It’s a bit of a tricky metric to wrap your head around just talking about verbally but hopefully I somewhat explained it well.

Austin Lieberman  13:51

Yeah, no, this is this is all great. And, you know, you were basically talking about the The venture side I think, right at private. Yeah, that’s the but everything you said to me applies to investing in public SaaS companies. And you hit on a couple points that I’d love to just like, here. I mean, here you talk more about, totally. You talked about it’s a factor and sometimes that’s maybe caused you to pass over companies. And then if we flip that to the public side, I think this is this is what has caused a lot of the outperformance I believe in public SaaS companies as people. And you can look, I mean, Salesforce is one of the most obvious right there. They’re kind of like the OGof SAS, the SAS category, right? They were basically the first software as a service company. Maybe technically, there was another one, whatever. They’re, they’re one of the most well known. They, I mean, and then from them on Almost every SAS company that you look at as a success today, that’s been a massive, massive winner was just serially under like underestimated their market size, their growth potential. And so it seems like just like you talked about, on the private side, public investors have had the exact same thing. They have significantly underestimated the potential market size for a lot of these companies. And so, you know, we kind of jumping ahead, but we look at valuations today and in public SaaS companies. And you know, they are getting up there for sure. And some probably aren’t deserved for the companies that have them. Some I believe are, but I guess what I’m getting at is is what are your thoughts on how much that’ll continue where, you know, are we still under estimating the potential market size of a Twilio, a Mongo database? Companies like that, or are we getting closer to We probably have a good understanding and maybe most of that growth is priced in and I’m not looking for you to make a call on on any of these stocks or anything like that. It’s just I think it’s one of the most important points that that investors in some of these companies have to think about right now is how much of this is priced in and how much is maybe underestimated still?

Jamin Ball 16:19

Totally, totally. I think it’s a great question and something that’s extremely relevant to, you know, what we’re seeing in the markets now. And I guess, just highlight how this actually plays out, and then I’ll answer the question. You know, years ago, when we looked at data dog, right, we we thought that, you know, we’d call it like the series a, you know, at the time, you saw workloads moving to the cloud, right, and that entailed cloud applications, right? And you’d have to monitor with an APM solution, like an app dynamics and then infrastructure moving to the cloud, which would monitor with something like a data dog. And at the time, you look at that and you say, Okay, well how much of the market is really how much of these infrastructures currently been running in the cloud? A, it’s not that much. Okay, so how much is a tool that monitors that going to be worth? Well, it’s a fraction of a fraction. So it’s not that much. And, you know, you maybe think that monitoring the applications is more important than the infrastructure costs, because that’s when you kind of do all this analysis. Long story short, you know, we drastically underestimated that market size. And I think it’s still underestimated today by, you know, big public investors. But I guess getting back to your to your main question, and this is something that I’ve dug in quite a bit too recently. You know, you kind of you can pull any of these big CIO surveys from, you know, the sell side investment banking research groups, and, you know, I think something that you can pull out that usually ends up being a pretty consistent numbers you see about, you know, no matter how you slice and dice the data, we’re about about only 20% Cloud penetration today, whether you’re looking at applications being run in cloud environments, when you know whether You’re looking at number of data being stored in cloud warehouses versus on prem or warehouses where you know, whether you’re looking at the spend just pure spend from an IP perspective on, you know, cloud versus on prem technologies, it all ends up coming to about 20 to 25%. penetration. You know, which I think one should just demonstrate how much room we still have left to run in cloud. You combine that with the fact that, you know, you kind of hear anecdotally, right, from all the big, you know, tech leaders. Yeah, you hear from Aaron levie. All the time. You hear from Satya Nadella all the time here from the Twilio team all the time, right? digital transmitted transformations are being pulled forward. Which Yeah, I think what we still have yet to see that in the data for q2 earnings, which, you know, we’ll we’ll see a lot this week. But But what that shows to me is that we still have, you know, one a lot of room to run but to the adoption is accelerating, right? It’s not a linear trend to get to and yet we probably won’t ever You get to 100% in the near term, right. But, you know, we might get to 40 50% just in a couple years. And, you know, when I see that, and I see the public market multiples, people are factoring in high sustainable growth rates for a longer period of time than normal. And you look at someone like Salesforce is doing billions of dollars of annual revenue and still growing 30% year over year, I mean, their growth rate at that scale is phenomenal. And so you kind of have to take a step back and think, you know, the only companies that are really going to be able to sustain these growth rates are ones who a are going to be able to really take advantage of the fact that more and more, you know, workloads or data storage is being moved to the cloud. You know, you look at some of these metrics like net revenue retention. You see a company like Twilio, I can’t remember what their exact number is, but it’s north of 130% right and so you say okay, if that company can grow in 130%, net retention rate, that means As a whole, the business will grow 30% year over year without adding any new customers. You know, a number greater than 100 just means they’re expanding less than 100 means it’s contracting. So you look at just what they’re growing on their existing base of business, they can grow 30% Plus, or I think it’s even close to 40% Plus, year over year adding no customers. So then you layer on new logos, right in the growth you get from new customers, it’s, it’s really, you don’t really have to squint too hard to see a business that can grow 50% Plus you over a year real scale. And when you see these multiples, right, we see public SAS businesses in general, I think the median is trading around 13 or 14 x forward revenue. In my mind, I don’t see those multiples really being sustainable. It’s just there. It’s just quite high. Typically, we don’t see the SAS universe maintain a multiple over than 10 X for an extended period of time kind of fluctuates in between the five to 10 x band and so the company That will you know prosper are the ones that can grow into these valuations the fastest and to grow into the valuation faster you need to be able to sustain a high revenue growth rate at scale which I do believe many of these businesses will but right you know not all of them you know not not everyone benefits equally from COVID it’s it’s a tide that lifts all boats but it definitely lifts some boats disproportionally.

Austin Lieberman  21:29

I invest public public companies almost exclusively in software as a service companies I have a couple companies that own Roku and Peloton are more in either call it advertising or digital enter entertainment or something like that. But you know, mostly a lot of the enterprise software companies and one of the things I try to think about when I’m looking at him is exactly what you said. So sure, their price to sales multiples a little bit elevated right now, but it as long as they’re they’re growing 50% or 60%, they’re growing the revenue 50 or 60%, year over year, then even if their price to sales multiple is elevated right now, all that’s going to take is two or three quarters for them to kind of grow into that coding. And if the stock price doesn’t move for three quarters or a year, you know, really shouldn’t care that much, because then it’ll be undervalued. And as long as they can sustain that revenue growth and keep that customer attention. And that dollar based net expansion rate where customers are just spending more anyways, then it should work out. But the challenge is finding companies that are actually going to continue growing revenue, right. And so you talked about it a little bit in making sure that you’re invested in the companies that are kind of a piece of that. I guess you could say critical infrastructure or the critical part of companies doing business and not just something that they can, they can move away from easily You mentioned this week being kind of big for public SaaS companies. And so I’m looking at your clouded judgment, q2, SaaS earnings preview and on here you know highlighted for this week you have ringcentral today, Twilio, New Relic, Paycom tomorrow, Fastly HubSpot square on August 5th, DataDog, CloudFlare, Alteryx, Livongo on August 6th. So we love to get into those in a minute. But last week we had Shopify, a little company called Amazon, Google, and Atlassian. I would love to talk real quick, just about how you know, when we think about Microsoft, Google and Amazon, the three big public cloud platforms right? For me, I’m not invested in any of those companies, but I look at those as indicators as to kind of a health of cloud investment. And I think their results drive other companies performance like right now we’re seeing a rally and you know fastly and several other companies, probably off the back of those strong quarters that were reported. So really long winded question, but how do you use kind of the public juggernauts like Amazon, Google and Microsoft to inform what you do in the in the private world. And then also, is there a tie in, in your opinion to other companies that are in maybe industries that are kind of a play off of those? So edge computing or like application monitoring, things like that?

Jamin Ball 24:41

Yeah. Oh, totally. I mean, I think they’re all I think they’re all incredibly related, right? I mean, you look at you look at Amazon’s business and their, you know, their AWS business almost did want to say it was close to like 11 billion in revenue raising or growing 30% year over year and in what you look at is okay, you know, a lot of them is sure driven off storage, but it’s also a lot of compute as well. And when you think about, you know, what the derivatives are of something like AWS growing, I mean, it’s it’s really, it’s really everything right? You know, you have more, you’re spending more on cloud infrastructure. So what does that mean? Well, you’re gonna have to spend more to monitor it, right? And who’s, who’s the beneficiary of that? All right, well, that’s your data dogs. That’s your diamond phrase. That’s your elastics. Right? You know, you, you build more of these tools. You build more modern applications, oh, well, maybe you want more of a modern way to engage with the users of those applications or your customers or maybe your deal adopted Tullio. And it’s, you’re able to adopt these other cloud tools because you have other cloud applications and infrastructures behind them, you know, it’s much harder, you know, you’re not gonna it’s much harder to marry the older kind of on prem version to the modern You know, tool because usually it’s, you know, one’s a derivative of the other. And so, you know, I look at I don’t really look at the big players, when I think about what that means for the private rounds and private businesses. You know, I think while while related and while you always want to keep an eye on, you know, what’s going on in GCP or Azure, AWS. From a competitive standpoint, I think from a market standpoint, we kind of we all know where the markets going. We know cloud adoption is has a lot of room to run. We know it’s accelerating. You know, I think when I look at the public markets, the biggest question for me currently is q2, and in all the businesses that are reporting now, this is the first quarter where we’re going to see a full quarter of COVID adjusted business, if you want to call it that, you know, the ones that ended in March and April. Now the march quarters were, you know, largely unaffected by COVID. And the April quarters, you know, had a couple of weeks. So it’s hard to really read into the numbers too much, but You know, for quarters ending June for quarters ending July 100% of that quarter from start to finish was done in a COVID affected world. And so, you see people talking about digital transformations, you see people describing how that’s affecting your business. But you know, what, ultimately, you know, the proof is going to be in the numbers. In Amazon a OBS had, you know, had a phenomenal quarter, you know, I would say, Gosh, I wish I had the exact numbers, their growth did their year over year growth, it declined sequentially, a little bit more than it has in previous quarters. So we saw a little bit of decline, right. And so it’s still growing fast at a remarkable scale. You know, yet, you know, right, like a digital transformations. Right. You know, it’s, it’s accelerating cloud. You know, maybe we shouldn’t have seen so much of a deceleration, you know, and it’s, it’s hard to really drill into the specifics. You know, the causation of that. You’re, I think We are going to see buyers just be a little bit more hesitant and focus more on critical spend in kind of tier one spend versus tier two and tier three, which is why I think certain vendors will benefit more than others. So it’s an interesting, potentially leading indicator, I feel like we can, we will write the narrative once all these businesses report earnings afterwards and make it fit. It is tricky though now and especially to sense when you compare estimates or you compare the results to consensus estimates. That’s also kind of a tricky exercise, you know, and the reason I say that is, I think for the most part, estimates have been really strongly revised down. Right. And so many of the businesses I think every business so far has beaten their consensus estimates for q2 by quite a bit. It’s a little bit artificial when they’re almost beating, you know, quote unquote, fake numbers. The interesting thing has been done. See the guidance for next quarter, you know, actually come in a little bit weaker. You know, we saw that with Zendesk, we saw that with Atlassian. You know, Diamond trace, on the other hand, had quite quite a strong guidance. But it is tricky, right, like Shopify reported a phenomenal quarter and didn’t provide guidance for next quarter, you know, not because the business is doing bad, but because it’s literally growing so fast that they don’t know how to guide. So an analyst analysts are kind of flying blind in some regard. You know, they don’t know how to guide, they don’t know how to really build the right model or kind of sitting in unprecedented times here.

Yeah, I think the real the real way to analyze the data we’ll be looking at not compared to consensus estimates, but to the growth rate, you know, the year over year growth rate for the quarter we’ve seen and kind of how that’s compared to historical growth rates and see if, you know, hey, did we see a faster deceleration than normal? Did we see a normal deceleration or, you know, or With something like a Shopify Did, did we actually see an acceleration, which is usually rare for businesses of this size, right. But no, it’s all a Yeah, in a lot of ways. It’s you know, we’ll we’ll have we did this podcast A week later, we could be having a much different conversation. You know, it’s more speculation at this point.

Austin Lieberman  30:19

Yeah, for sure. So, kind of reading in and I’ll link to this in the podcast. I’ll share it out on Twitter when we share the episode but at the end of your q2, review, cloud judgment article. You. Let’s see you made a an earnings prediction. You said in the short term valuations have been stretched, we won’t see massive boost the stock prices like we did after the q1 earnings 10 of the 54 companies you track saw their share price go up by more than 10% The day after their earnings. Much of what you talked about, as far as the strength and a lot of these companies is already priced in. But for the best businesses, the secular secular growth stars, which you named a few that are that are kind of on your list at Yes, elite companies. And so maybe we can mention those, those here not for short term predictions, but just companies that you know, you like long term, you said they’ll grow into their valuation much quicker than people expect. This group does not have a bubble coming. Not to say we won’t see a 10 to 15% correction, or q2 might be lighter than expected, that’s normal, and it will happen. But in five years, if we were to zoom out and look at the trajectory of these stock prices, I think it’ll be a fantastic up into the right story with a ton of value creation to come. So I feel like what what I just read there kind of summarizes a lot of the points that you made, but also, what is a really important behavioral habit that if anybody is investing in these companies and public markets, needs, in my opinion, needs to get ahold of is the idea of dignity. During the next potential year or two years and 1015 20%, you know, drops or increases in the in the share price and focusing on are these good businesses that are going to grow for five and 10 years out and clearly, like, you’ve got that mentality because that’s what you do in the private markets, right? Anyway. So it feels like, and this is why I love talking about this people invested in these types of companies publicly, should learn as much as possible about, like venture capital, because that’s the type of mindset i think is required to be successful investor in these types of companies and public markets.

Jamin Ball 32:41

Yeah, yeah, I think it’s interesting. And the last thing that I will ever try and do is pretend to be a technical trader, right? I think there are two kinds of public investors. There’s there’s traders, and there’s investors, right, right, former being shorter term. I couldn’t tell you how to read a technical chart like I know not thing about it and I don’t want to I don’t, I don’t really care to learn, you know, my philosophy is I want to, I want to invest in businesses that I think will be worth, you know, substantially more three to five years from now I want to put some money in, I want to set it and forget it, for the ones that I really believe in. Right, I’ll be looking for opportunities to put a little bit more in, you know, just pile a little bit more in every so often, you know, every time there’s a big dip, maybe put a little bit more in and you know, you’re constantly reevaluating the portfolio along the way to see which ones you know, are worth putting a little bit more in. But yeah, I want to I want to put my money in stocks. I want to set it and forget it. I don’t want to think about it. You know, I take the mindset of I you know, in three to five years, I think these businesses will be worth substantially more than they are today. In the idea behind the secular growth stars is and I kind of laid some of this out in that article. But if you look at the fact that markets are bigger than we think they are, right and they’re growing fast than we think they are, you know, you look at the unit economics of a SaaS business, things like net retention, things like their their CAC, efficiency, payback, that just lets them, you know, ultimately be fundamentally good businesses, then you marry that with the fact that, you know, I think more of a trend we’ve seen recently, usually the leaders and categories they are, they’re grabbing more shares than they used to right markets used to be more fragmented than they are today. You know, currently, I think we see more of the both the revenue and the equity value, you know, accumulate with the leader in a category. And usually what happens then is the leader in a category, they benefit disproportionately from that market growing faster than people expect. They benefit disproportionately from better unit economics, right? They kind of get that compounding effect, which is part of where the secular growth stars come from. I think that will continue, you know, I don’t think that’s going to go away anytime soon, which is why, you know, I like to not, I think investing in like, you know, ETFs that kind of cover cloud companies is a great way to start. And I think it’s a great way to get good exposure to all these macro trends. But I personally like to make bigger, concentrated bets with the few that I really believe in. Yeah, and I’m not I haven’t invested in every company I listed in the secular pro stars, you know, some of them, I just don’t understand quite as much as others. Some of them I missed. Some of them I was wrong about but that’s where I try and park all my money in ones that I think are going to benefit disproportionately in the long term from some a lot of these cloud tailwinds.

Austin Lieberman  35:47

We’ve  talked a lot about VC and Clouded Judgment. I also asked for questions on Twitter. I don’t know if you cheated and looked at these or not yet, but I’ve got some questions. We had a question from @humbledtwig. And they just said we’d love to hear jamuns take on all the recent IPOs and top three picks out of them. So don’t say I have to pick your top three picks. But are there are there any and some of the ones that have have come public, BigCommerce, Lemonade, nCino, I think aAgora and a couple of others. I personally have not invested in in any of them. And I’m just kind of staying away from the IPO scene right now, because I’ve got the companies I understand and familiar with, but would love to hear if any of those are interesting to you.

Jamin Ball 37:35

The IPO scene has been interesting, I’d say just the general mania around, you know, software and even technology, you know, more broadly, as I think forced a little bit of of kind of irrational behavior of the recent IPOs. And it’s compounded by the fact that when these companies go public, most of the shares are locked up, meaning existing shareholders prior to the IPO can’t sell Their shares until it’s generally six months after. What that means is there’s a limited percentage of shares as a percentage of the total that actually trade and then we have a small supply of tradable shares, you know, a couple, you know, swings in demand can cause big changes in price. So you look at a company like you know, like eliminate, right, which is trading like a SaaS company, you know, which is their valuation on a multiples perspective is just totally different than what insurance companies trade at and should it deserve a premium to classic insurance? Yeah, yeah, I absolutely think it should. Should a trade like a sass company like no, no way. You know, like, that’s my personal opinion. You know, you even like Encino who I love I like that business quite a bit. I think they’ve built a super super interesting product. You know, I think the reality is is financial services as a vertical you know, it’s it’s been trickier because there are you know, it’s something like Call it a limited market, right? There’s only so many banks that matter, you know, the sales cycles are usually much longer. It’s not as much as the high velocity. Business implementation takes a while there’s usually professional services involved right and so margins are impacted. Generally those businesses trade a little bit of a discount to overall SAS in nCino for a time was trading like a top 10 pure SAS software business. Do I think it should this should sustain that? Probably not, you know, but I still think that business has quite a quite a bit of room to grow, right financial services in particular part industry that you know, that hasn’t moved to the cloud quickly, right. There’s still a lot of room there’s still a lot of on prem stuff in banks and so they they’re benefiting from that. You know, I look at some of my favorites. Um, you know, I do really like abora I think they have a lot of tailwind you know, current Taylor right. They have the classic COVID talons if you want to call that people are looking for four ways to engage with others in a real time manner. And they offer an amazing API product to do that, right? Similar to how Twilio is more of like the jack of all trades around communication, you can text, you can video chat, you can voice call, and you add that via programmable API. You know, gore is more focused on that real time video real time communication. I think they’ve built a phenomenal business. Zoom info is an interesting one. I generally haven’t been the biggest fan of data businesses. I think it’s harder to build moats. I think, zoom info has just gotten to the size and scale where they’re remote is they just have better data. It was just typically a harder mode to build. I think that’s that’s definitely an interesting one. Big commerce definitely worries me a bit. You know, going back to my like, investing, philosophy, investing thesis, I like backing, you know, big markets, great products, but then that third key bullet was like the leaders in the market, right and so it’s hard to get it’s hard For me personally, to get excited about a big commerce and Shopify is in the market. There might be a better value play there. But you know, again, I like backing big multiple long term winners as opposed to like the value bets, right? It’s why I own quite a bit more data dog writes in like an elastic, both phenomenal businesses, but it’s just slightly different philosophy. Jamf was the Apple device management one. That one also worries me a bit because Apple just bought a company, I believe it was called Fleet Smith. That was that’s a company more in my realm, venture funded ones and so you know, when Apple is buying Apple device management product it It worries you a bit. But I think that one, had a nice trading debut. I haven’t really followed it as closely. Yeah, yeah. Yeah, I would say Maybe Agora and Zoom Info would be my favorites of the bunch with Agora probably being the favorite.

Austin Lieberman  42:10

So we have @quadsparky who asked just about how total addressable markets for SaaS companies have expanded or shrunk over time and which companies or markets you expect to be larger. I think we pretty much answered that when we were when we were talking about TAMs earlier. So we’ll jump to the next question is a great question. But we kind of already hit on the the TAM topic. This is a this is an interesting one from @Phil_Sylvester. Where do you get a company’s customer acquisition costs in net retention rate, aside from them just telling you? How much do you trust these metrics and if they’re calculated by the businesses themselves, and not audited by a third party, so maybe there’s two parts of that it’s the private side, but also the the public side as well.

Jamin Ball 42:52

On the private side, we’ll calculate it we generally Oh, this is the benefit of a much longer due diligence process. We’ll we’ll engage with the company over weeks, you know, we’ll look at financials from them, not just like the income statement, balance sheet cash flow, but customer files all that. So on the private side, we’ll calculate net retention. And we’ll do that specifically with the cohorts. You know, we’ll we will look at all the customers acquired in every quarter and see how their spend changes and every subsequent quarter. So that’s a number we’ll, we’ll track and we’ll calculate, kind of similar thing with payback we can just get a little bit more granular. When we look at public metrics. Those the payback is a metric I calculate purely based on the other financials. NET retention is not a number I calculate. There’s just you don’t have close to enough data to calculate it yourself. For a lot of businesses, they report it. I would say you do have to get a little bit in the weeds to make sure it’s apples to apples between every company most businesses will look at the net revenue retention in that way. Describe or they’ll call it dollar based net expansion. Sometimes they’re calculated differently. For the most part, if you look at their 10, KS and 10 Q’s, they’ll they’ll define it. And they’ll, they’ll say things like this is inclusive of customer contraction or loss logos. Sometimes they don’t include contraction, or churn. And what that means is, you know, let’s say you had 10 customers a year ago, who were paying you $100,000 currently you have, you know, nine customers who are paying you just make it simple $100,000. If it’s not inclusive of churn, you would have no just 100% net expansion, which is basically like no change. Some businesses will say, Hey, we’re going to strip out all the customers who left from the beginning cohort and just look at how the business has changed who were there from start to finish. Usually they don’t do that. The numbers they give you I would trust being on the banking side, every number that’s One of these documents is heavily scrutinized by a team of lawyers. Right? And so I would, I would trust it, the payback stuff, that’s all calculated, and it’s usually a bit more of a swag. It’s not going to be an exact number. But when we calculate the metric the same across the universe of businesses, you can at least benchmark one company versus the other. Right, so that I think zoom had like a phenomenal payback last quarter, because their revenues skyrocketed. They’re not actually paying back that customer acquisition cost and exactly three or four months or whatever it is, I use it more to like to benchmark the relative performances of each businesses rather than looking at the absolute value.

Austin Lieberman  45:43

Another thing and like you said, there’s little Asterisk basically at the bottom of the 10-Ks or 10-Qs that outline how these different terms are calculated. Yeah, I own shares of Twilio. And I like the company. I owned shares a couple years. ago and actually sold them after the Sendgrid acquisition because I didn’t like how Twilio was claiming they had 75% revenue growth, when really they only had 75% revenue growth, because of the Sendgrid acquisition and really, the organic revenue growth rate had actually dipped down to like 30 to 35%. Yeah, a couple months ago, I bought shares again, I’ve had some for the whole time in a like a rollover IRA that I didn’t even touch but in the account that I guess you can say manage more actively, I bought shares again, because it feels like the business is more relevant than ever because of COVID. And finally, I think Twilio Flex the programmable call center platform is actually going to start to grow which is sort of why I was invested in the first place. I was a consultant and working at one of our customers, which was one of the largest cable companies in America. And just seeing all their call center and contact center stuff. I was like, wow, this is a major need, but then flex never really took off. So I think that’s gonna happen.

Jamin Ball 47:12

One of the most impressive things when you look at the company is is there the amount of customers they have and the growth of customers. But then when you dig down, they count anybody that spends more than $5 a month with them as a customer. Right, though they’re also counted in the dollar based net expansion rate, anybody that spends $5 or more a month. So I guess it just goes to show like, you’ve got to look at those details of how they’re calculating that dollar based net expense. Right. And I guess at the end of the day, if it’s 145% it’s still 145% because that captures the small customers and big customers too.

Yeah, sometimes people strip it out though. I mean, you really do kind of have to read the fine print. Just to make sure it’s apples to apples. I think Zoom Info.They have a bunch of really small businesses who use their data feed. They, they report it to numbers, they reported an overall number, which I think was like 100 and 809%, or something like that. And then they reported another number, which I think was more of a tagline number, which was something in the 120s. That was, you know, this is the dollar based net expansion or net revenue retention for every customer paying us. I don’t remember what the number was, you know, like more than 10 K a year or something like that, right. And so, you know, you kind of have to just figure out which one you care more about, right? Because it really isn’t 130% net expansion business, it’s really more 109. And they kind of give me these two metrics. So it is important to, just to read Yeah, just to read the fine print to see what what the number really is and what it’s representing.

Austin Lieberman  48:48

One of the last questions I have for you, Jamin, and thanks, thanks for your time is I one of the metrics I looked at and you haven’t mentioned it yet is sales and marketing spent as a percentage of quarterly or annual revenue. And the reason I look at that is because for software companies, I’m willing to accept them spending more on sales and marketing when they’re early, if they prove mardik product market fit, you know, ideally, they should have to spend less and less on sales and marketing over time, and they can put that into research and development or whatever. Just wondering if that’s a metric. Do you think about that metric at all? Or is that captured in the other stuff you look at?

Jamin Ball 49:23

You know, so it would it would I think it part of the reason I love the payback metric so much is that it I think it factors that in and encapsulates ultimately how effective is your sales and marketing spend, you know, because the high level way of before you get into the months, right, the inverse of it is the magic number, which will basically shall tell you you know, for every dollar of sales and marketing spend, how much you know, revenue or I guess in my case, how much gross profit Are you generating for every dollar mark sales and marketing spend? So I think I think the payback metric is it’s a great way to factor in efficiency, you know, it kind of takes into account the burn, takes into account the sales and marketing as a percent of revenue. I think in at least in my view, this is just my view, it kind of factors in all the things you care about from like a broader efficiency standpoint. And then it’s just one less metric to try, right. You know, like the fewer metrics you have to track the better mental benchmarks you can build. I think it definitely matters and you want to absolutely be looking at sales and marketing spend, you know, whether your personal preferred metric is as a percent of revenue or something like payback or maybe even something like a net burn. You know, everyone kind of has their own secret sauce Mine, mine just happens to be the payback metric.

Austin Lieberman  50:50

And final question. Not necessarily looking for a book recommendation, but just resources if, if you have a favorite resource or two, maybe it is a book for anybody. that’s interested in learning about venture or these public types of software as a service technology companies to just learn more about them and maybe get started. My colleague Tomasz Tunguz  has a phenomenal blog that breaks down this is more from like the operator’s perspective as opposed to people looking to invest in these businesses, but he does a phenomenal job breaking down in defining the metrics that matter, as well as just looking at you know, certain things operators would care about, you know, if you’re in his or her more of like the quick punchy couple minute posts, as opposed to like the longer deep dive things are going to take you 10 or 15 minutes to read. I mean, he’s got so much gold in his pod in his blog over the years.

Jamin Ball 51:59

Thanks so much for your time. I had a lot of fun. Hope you enjoyed it as well and hope the listeners had a good time too.

Austin Lieberman  52:20

Yeah, thanks for having me. There’s a lot of fun. All right, see Jim. Take it easy. Bye.