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Growth Equity Flashcards

(58 cards)

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1
Q

Horizontal Software

A

Advantages: All encompassing
Small share of market still results in large REV

Disad:
Winner takes all markets
Only few companies end up dominating

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2
Q

Vertical Software

A

Plus: niche segmetns
Quickly establish as market leader
Allows for a durable moat

Neg:
Risk of niche market
MIght be a reason why neglegted (lack of tech, regulatory, R&D etc)

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3
Q

Most Common SaaS multiples

A

EV/ARR
EV/Revenue
EV/EBITDA (old and established only)
EV/Monthly Subscribers

For acqui hiring
EV/ Total funding raised
EV/Total fte

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4
Q

LTV / CAC

A

Most important metric

Is the company deriving enough value from their customers to justify costs to acquire them?

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5
Q

Ideal LTV / CAC Ratio

A

> 3.0x ideal and sustainable and target for continual growth

< 1.0x unsustainable rate and implies diff to monetize new customers

> 5.0x inefficient and should spend more on CAC

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6
Q

Customer Churn?

A

Churn Rate = Total of churned customers / Total of customer a begin of period

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7
Q

Revenue Churn

A
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8
Q

What are bookings?

A

represent the value of a contract a customer has contractually committed to spend, usually agreed to on an annual or multi-year basis

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9
Q

Why are bookings a better proxy to measure growth?

A
  • forward looking indicator
  • doesnt understate true customer value of contracts
  • one main metric projected for performance
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10
Q

Why would it be a mistake to use bookings and deferred revenue interchangeably?

A

Bookings = represent the
contractual commitment of customers to use their products or services

Deferred rev = the revenue is
similarly unearned, but payment was received upfront.

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11
Q

What are billings in SaaS?

A

For example, if a company secured an annual contract of $12,000 with billings agreed to be on a quarterly basis, the total billings for the first month would
be $3,000 while the remaining bookings would be $9,000.

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12
Q

An early-stage startup has a very low churn rate. Why might this be misleading?

A

Might be early adopter that are closer to product testers

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13
Q

Reasonable churn rate

A

around 5% annually is norm

must be compared to competitors

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14
Q

Why is product revenue preferred over service-based revenue in the software industry?

A

leads to higher gross margins and better scalability

services-based revenue is less-recurring, has much lower margins, and is less scalable.

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15
Q

What does annual recurring revenue (ARR) mean in the SaaS context?

A

measure of a software business’s recurring revenue components on an annualized basis

excludes non-recurring, one-time fees
such as professional service, consulting fees, installation, and set-up fees

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16
Q

Drawbacks of ARR

A

ARR is used to estimate revenue for the upcoming year, based on the most recent MRR.

Implicit in its
assumptions is that there’ll be no customer churn, upselling, or downgrades.

And that the latest month is the
best indicator of its future performance.

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17
Q

How do you calculate net new MRR for a given period?

A

Net New MRR = New MRR+New MRR Expansion−MRR Churn

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18
Q

What are the different types of expansion MRR?

A
  • Upselling: convince existing customers to spend more on upgrades or features
  • Cross selling: Offering customers complimentary products or services
  • Add-ons: Providing opportunities to unlock more features or widgets currently not part of a customer’s plan
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19
Q

Why is the net dollar retention an important metric to measure alongside the ARR?

A

ARR cannot be looked at alone

NDR < 100%: Contraction in recurring revenue due to downgrades in user consumption and churn

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20
Q

What is CMRR, and how does it compare to MRR?

A

Committed Monthly Recurring Revenue (CMRR)

CMRR =MRR+New Bookings+Upsell Bookings−Downgrade Bookings−Churn

Unlike MRR, CMRR is a forward-looking metric with more discretion on what to include and the amount

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21
Q

In the SaaS industry, how would you measure sales efficiency?

A
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22
Q

What is the magic number?

A
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23
Q

CAC Payback Period

A

12 month is benchmark / 18months average

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24
Q

How do you calculate ARPA?

Study These Flashcards
A

Average Revenue Per Account (ARPA) =
MRR / Total Number of Accounts

25
What is the difference between total contract value (TCV) and annual contract value (ACV)?
Total Contract Value: TCV is the total value of the contract and is independent of the time frame Annual Contract Value: ACV measures the contract's value over twelve months – and is thus the better metric to use when making comparisons across the industry since it's annualized
26
How can a software company decrease its churn?
Focused Market Segmentation: identify customers with lower churn first Improved Customer Interface: Upfront Payments: annual payment plan, less likely to quit Variable Pricing Model: more flexibility
27
If a SaaS company has net negative churn, what does this mean?
Net negative churn occurs when a SaaS company's expansion revenue from existing customers exceeds the revenue lost from existing customers, from cancelations and downgrade
28
What is the difference between gross margin and contribution margin?
29
Rule of 40
states that 40% of a company's growth rate added to their profit margin should exceed 40% suggest that comps with low profits can still be valued high as long as growth counterbalances cahs burn MMR or ARR choosen
30
What does typicall growth equity deal look like
5 -49% ownership no debt usually or low not change of control might have rights to board seats and governance
31
What characteristics do you look for in a growth-stage company?
Market: Size Business Model: stong and defensible/ prone to margin pressure Management: Strong and visionary management
32
Difference between LBO and minority deal?
Proceeds go to shareholder so secondary
33
Why is debt not used in most growth investments?
Low or missing due to: 1. Unpredictable cash flows 2. Cost of capital / generate higher ROI than paying off debt
34
What are unit economics, and why are they important?
Unit economics refer to how profitable it is for the company to sell a single unit of its product or service. Understanding a company’s unit economics is a very important part of diligence for growth investors because they seek to take market and execution risk, not business model risk
35
Should growth investors care if a company is profitable as a whole?
Is there a viable path to profitability in the future? Is the company profitable in terms of unit-economics?
36
Is working capital important in growth investments?
Yes “negative working capital” dynamics can help accelerate the growth and capital efficiency of a company
37
What is the biggest risk in growth stage investing?
One of the biggest risks of growth stage investing is if a company misses their growth projections Can lead to double drag for investment returns misses its growth target, it will also have valuation multiple compression
38
Additional Risks
Limited ownership and operational control Fast decision-making to invest
39
If I told you the growth rate of a company, what else do you need to know in order to estimate returns?
you can easily estimate growth returns, if you know the company’s growth rate, by using some assumptions. Let’s say we knew revenue growth of the company was projected to be 20% per year throughout the period of the investment. If we assume that there’s no change in net debt (debt minus cash) over the period, and there’s no change in entry vs. exit revenue multiple, then IRR will equal the compound annual growth rate of revenue (in this case, 20%).
40
What are some ways that growth equity investors can protect against downside risk?
Pay lower Minority Sakes Good DD Adding preferential terms Anti-dilution provisions Low debt levels
41
What is a liquidation preference?
deal term that many growth investors request in investments to limit downside risk. This term gives investors financial protection in the event that the company has a disappointing exit valuation.
42
When looking at a potential investment for the first time, what are some general characteristics you might look for?
1. Prooven business model 2. Significant growth 3. Exit 4. Market 5. Unit economics
43
What is a term sheet?
A term sheet establishes the specific agreements of investment between an early-stage company and a venture firm. The term sheet is a non-binding agreement that serves as the basis of more enduring and legally binding documents later on. The term sheet facilitates the formation of the capitalization table, which is a numerical representation of the investor ownership specified in the term sheet. The purpose of the “cap table” is to track the equity ownership of a company in terms of number, type of shares (i.e., common vs. preferred), the investment timing in terms of the series, as well as any special terms such as liquidation preferences or protection clauses.
44
Give me an example of the drag-along provision in use?
The drag-along provision protects the interests of the majority shareholders (usually the early, lead investors) by enabling them to force major decisions such as exiting the investment.
45
Can you give me an example of when dilution would be beneficial for the founder and existing investors?
As long as the startup’s valuation has increased sufficiently (i.e., “up round”), dilution to the founder’s ownership can be beneficial.
46
How Should a SaaS Income Statement be Organized?
- Monthly granularity. - Revenue (and when possible, Gross Margin) separated into SaaS and non-SaaS if applicable. - Departmental OpEx, including people costs – but ancillary expenses can be aggregated. - Customer Success allocated in Cost of Goods Sold (see below for considerations). - Expensing all software development costs if possible and appropriate.
47
CARR
- Comitted ARR - (includes signed deals not live yet) forward looking - Rev lags behind ARR and CARR - but lagg for companies with long implementation timelines Growing ARR is backward looking
48
SaaS funding rounds
30x ARR for 1-10MM 15x ARR for 10M+ changed to 20x ARR
49
What is MAU?
Monthly active users
50
ARR Growth Rate
-ARR will result in a higher valuation - The higher your growth rate, the quicker your company will “grow into” its valuation; therefore, investors are willing to pay higher prices for a higher growth rate
51
Growth Endurance
rate at which growth is retained from one year to the next - very consistent for SaaS - decay of 30% yearly
52
CAC Payback Bucket
Using sales effectively is using captal efficiently Shorter cycles are always better 10-25mm 24 monhts 50-100MM 21 months 100+mm 30 months
53
Free Cash Flow Margin
Cash generated after COGS, OPex, Capex Determins cash avaiblable without going to capital markets So dictates profitability
54
FCF or Growth
It is a tradeoff where growth can be canibalized by cash generation
55
Efficiency Score
When looking at burn for a cloud business, we want to consider it in the context of growth. Burning $100MM a year sounds high, but what if a company burned $100MM and added $1 billion of net new ARR?
56
Efficiency Score Formula
FCF Margin of ARR + ARR YoY Growth Rate Rule of 40: comp should have efficiency score of 40% Cash conversion formula: ARR / (Total Cash raised - cash on balance)
57
Cash Conversion Score
Gives me return for each dollar invested Average is 10.0x Tends to increase as companies mature
58
Pre Post Invetor Ownersip
Share = New Investment / POst money valuation
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