Weekly Financial Resources and Capital Markets Roundup: 4/17/2020
Outlined below is a collection of key financial and capital market resources from the week ending 4/17.
What is the GDP of Mongolia, in USD? The distance from earth to nearest star (excluding sun), in light years?
In a blog this week, Dr. Peter Attia wrote about the 95% Confidence Interval—the range of values that we can be 95% confident contains the exact value answer for a specific question.
Now think through the “Fermi-esque questions” we opened with—could you give a range, with 95% confidence, for 20 questions like this (at 95% confidence, you’d have to answer all but one correctly)? Turns out, this is really hard. The exercise reinforces that any model is only as good as your confidence in the inputs to it.
Gartner projects that the worldwide software market growth will fall to negative 7.0% from the 1Q20 forecast estimate of 10%. While it is possible that we already found bottom in terms of demand for software, it is more likely that software purchasing will be very different in each product / customer market, or that the “bottom” hasn’t come yet because software buyers take a long time to get new purchasing policies created and executed. As we noted last week, all companies should be tracking things like cash collections, signed contract activity, and A/R aging on a weekly basis.
Why? Take the “confidence interval” exercise and apply it to your financial model. More specifically, use it to evaluate the each input to the model – conversion rates, deals, retention, collections, etc. In financial modeling our ranges are narrow, and outputs (i.e. new ARR) are highly sensitive. Our level of confidence shouldn’t change though—we should still be 95% confident that our range of inputs will drive the output.
Now consider the COVID and recession scenario planning you’ve done within the last month and the granular inputs to any new forecast. For example, “what is the expected conversion rate of a paid lead in this new environment.” Even with all the historical data, it is just as hard to put a range around the GDP of Mongolia with 95% confidence as it is to put one to the inputs in your business model (like conversion rate) in this rapidly changing world. And, despite Gartner forecasts, we don’t really know what the impact will be. Weekly tracking of these key data will give you an idea of what you might need to revisit—if your range for any input is too wide, narrow, or just plain wrong— so you can be confident that you’re always operating under the right scenario and tracking towards the expected result.
Planning framework from OpenView
This week OpenView Partner Blake Bartlett shared his recession planning framework. To quote Blake, “this framework is meant to help you develop the map, so you can then focus on navigation.”
The CARES Act: PPP update
On Thursday morning, the Small Business Administration posted a message on their website, noting that “the SBA is currently unable to accept new applications for the Paycheck Protection Program based on available appropriations funding.” $349B in the CARES Act for PPP loans has been completely allocated. There has been little progress in Congress towards appropriating new funds, but it is no longer a hypothetical—the funds have run out and businesses are in need (some interesting data and commentary here).
If you are still interested in this program to maintain payroll and haven’t already applied, we recommend that you assume the funds will be replenished. Review all eligibility criteria (affiliation, necessity, etc.) with counsel and submit an application ASAP so as to be at the top of the queue if / when new capital is appropriated. It is a light lift for 8 weeks of additional runway.
Capital market resources
Public market update
“An investor who bought Salesforce at the end of 2008 would have boosted their compounded annual return to 27% vs. 17% since IPO and 14% for the NASDAQ” (Morgan Stanley). Software has been and will remain a sector with strong structural growth / tailwinds—demand will only accelerate in the long term. More broadly, investors are certainly positioning for a speedy “v-shaped” recovery. The precipitous market rise since early April seems to be catalyzed by “fear of missing alpha” with Fed stimulus, positive news around treatment, and economies reopening boosting confidence.
This week, all key indices finished up on the back of the largest one-week percentage gain in 45 years (SaaS Index +6.81%, Dow +2.40%, NASDAQ +7.36%, and S&P 500 +2.95%). All indices are still down from their February levels, but have cut losses in half over the last two weeks.
Shapes of recovery & economic data
A phrase folks have been using when discussing restarting the economy is “the shape of the recovery.” Per Wikipedia, “the shapes take their names from the approximate shape economic data make in graphs during recessions.” San Francisco’s Fed Chief noted this week: “I don’t expect a sharp V-shaped recovery, I expect something more like negative quarters of growth throughout 2020, and then a gradual return to positive growth in 2021…”
Part of the rationale for that recommendation is new economic data this week (declines in retail spending, home builder confidence, and factory output). The U.S. economy will shrink 5.9% this year, a pace more than twice as severe as the 2.5% decline in 2009 according to the Wall Street Journal. The global economy is almost certainly already in recession. We’ll get more data from March soon, but next month we’ll see the real impact from a full month of shutdown (April data).
Other financial & capital markets reads
Data on M&A in this COVID Technology M&A Report from AGC. SaaS valuation multiples trended up +1.5x, from 6.8x to 8.3x 2020E revenues at the median to open the week. “v2” of Hubspot’s COVID Sales & Marketing Benchmarks. Unicorn layoffs piling up (and note, OV’s talent team is open to connecting with anyone in the B2B SaaS industry new to the job market during these unprecedented times).
“The path of least resistance is the path of the loser,” according to author H.G. Wells. Yet time and time again we see that humans are all guilty of opting for the easier path.
Pick a mood, index, direction and percentage and you might have a future as an editor for any major newspaper—this is the “Mad Libs” like template the last few months of news has followed.