Weekly Financial Resources and Capital Markets Roundup: 4/10/2020
April 10, 2020
Outlined below is a collection of key financial and capital market resources from the week ending 4/10.
Debt capital markets were all the rage this week. Debt is nothing new but it has been slower to come to Silicon Valley as a mainstream form of financing. That is changing and Slack, Wayfair and Airbnb all executed debt transactions—albeit on very different terms—this week. On one end of the spectrum Slack and Wayfair were price makers, and on the other, Airbnb a price taker. Slack will pay just 0.50% interest on notes due (at a premium to current stock price) in 2025. Airbnb on the other hand will pay $100M (10%) in annual interest and issued warrants at a nearly 50% discount to its last valuation.
As we process through this new environment, the Airbnb deal in particular is a great reminder that the metrics we’re accustomed to evaluating in SaaS—revenue growth, gross margin, CAC payback, retention—might not look as good as they once did and that will scare a lot of investors off.
But metrics aren’t the be all end all of an investment decision. Defensible competitive advantage, management team quality, market size and penetration, and more are all equally as important yet harder to benchmark. As OpenView’s Tom Holahan pointed out in an all-firm email this week, “we need to shift our focus from evaluating just the traditional KPIs or measures of success we’ve become accustomed to so that we can make better determinations on what companies could look like in 12, 24, 36+ months.”
The Airbnb deal will be a great outcome for Sixth Street, Silver Lake and Airbnb. Yes, the company is struggling along with the broader hospitality industry due to COVID and the absence of demand. But the underlying assets haven’t gone anywhere and short term metrics shouldn’t matter. Performance will return with vigor when the economy restarts.
There are opportunities to play both offense and defense in this type of environment. Slack played offense, essentially having investors hand it free money in exchange for a bit of potential dilution down the road (if you’re really curious, Slack hedged their bond issuance with capped calls to avoid further dilution). Airbnb played both—the headline terms of the deal today aren’t great and they needed a cash cushion (defense) but they joined forces with prolific investment firms who will be ready and able to support the company in the public markets (offense).
Playbook for tough times
This Harvard Business Review article from 2009 is your one-stop shop “playbook” for tough times. Written post-Great Financial Crisis, all of the recommendations are just as relevant today. One seemingly simple thing we’d add to this playbook is the recommendation that each and every company begins tracking key metrics like A/R and cash collections weekly. It only seems like overkill until you realize that over the next few quarters things will change very fast (churn, revenue target misses, and cash burn). If you’re being surprised at the end of each week, imagine how painful the end of month could be.
The CARES Act: Beyond paycheck protection loans
As a refresh, the CARES Act was the third piece of law to be passed in response to the current crisis, as summarized in this piece. We’ve written extensively about the PPP loan program in the CARES Act, but that isn’t the only piece of legislation that will be relevant to companies. A fourth legislative initiative to address COVID-19 is now under discussion. We expect key benefits (like payroll tax credits for SMBs) to be reconsidered and potentially expanded and we’ll continue to update as information is released.
Capital market resources
Public market update
We feel like Michael Burry in “The Big Short” having to convince his investors that he was right—a market crisis is looming around the corner.
Okay, maybe we’re not that prescient.
But we continue to believe there is a bid / ask spread—between the government stimulus (the bid) and the economic hole (the ask) being created the longer the world is shut down—that the markets are underestimating. Stimulus to date is really a “bridge loan” vs. stimulus, which can only come when the economy restarts.
Nevertheless, the markets had a strong week on the back of promising trends infections in certain U.S. geographies like New York. All key indices finished up, with intra-week double digit moves we’re now accustomed to seeing (SaaS Index +11.47%, Dow +13.25, NASDAQ +10.05%, and S&P 500 +12.93%).
Proprietary data on economic impact
Speaking of the CARES Act as merely a short term “bridge loan,” Womply and Hubspot each compiled reports on the state of the economy through “their eyes” (proprietary data). Womply compiled financial data from 50+ partners to visualize the significant impact on business categories across the U.S. Hubspot has unique insight into their customers’ sales and marketing performance and benchmarked the trends they’re seeing while simultaneously offering tips to help navigate through the changing sales landscape.
Other financial and capital markets reads
SaaS valuation multiples trended down from 7.7x to 6.8x 2020E revenues to open the week. This blog from Gavin Baker. McKinsey’s Valuation: Measuring and Managing the Value of Companies (because there is no time like the present to refresh on the nuts and bolts of valuation—we prefer the third Edition—but all are great). Investing, the Last Liberal Art, a book shared by OV’s Mackey Craven last year.