Video Transcript

00:00:00 (upbeat music)

00:00:05 Aaron: I mean the really bad news is, uh, don't expect to go back to the a hundred X. Doesn't mean, you can't go back to that value. It's just, that could be five years of, of work to get back to that valuation. Just, you know, you gotta keep doubling the company at a pretty reasonable rate. So I, I think I would, I would look at historic norms and you know, whether that's 2006 to 15 or 18 or whatever you want to choose and just say. Where did SAS trade, you know, six X, eight X, 10 X, 12 X. Um, those would all, all been very good valuations. It, it all flows from how much profitability can a company have, what will people pay for that profitability? And then, and then revenue is sort of just a, maybe a, a good proxy for. For how you can generate that. And then, you know, there's a growth rate variable there. So the higher, the growth rate, obviously the, the higher, the multiple, but you have a lot of companies that have a really high growth rate where we still don't have a lot of visibility in what's the actual, underlying profitability of those customers. So, so kind of even growth rate sort of masks, some of the value creation that, that, that we, that we see in the value. So, you know, the first thing is, is possibly unfortunately, We should expect valuations to go down, um, and, uh, uh, in, in a sustainable way. Um, but, uh, but probably, you know, less for the employees and much more for the founders and people thinking about kind of building these businesses, I think focusing on just business fundamentals. And, and I would say, I would say that in the, the, the frothiest of, of times, but certainly now it's, it's much more appropriate, which. What's your customer acquisition cost. What's your profitability with the unit economics of, of customers. You have to care about your gross margin. We have a lot of companies out there that are like 40% gross margin businesses, but they trade like they are 80% gross margin businesses. That's dangerous because at some point that 40% difference means it's gonna be much harder to get to real levels of profitability. And so I think this is some of the reckoning, which is. The market is starting to figure out what things actually have software economics and what things are software enabled businesses, but they still have the economics of whatever that historic kind of industry looks like. And that's a very different model than for how you can value a company in an asset. You know, again, the problem with having something that an investment that is, you know, trading at a hundred X revenue, whether it's private or public market. That's just at some point that's gambling, that, that, like the thing is gonna be able to sustain that and it's way better and way healthier to build an environment where, you know, every day you show up, you build more value, you sell to more customers, you build a better company. And if you do that, if you do your work, the valuation will then incrementally sort of respond as a result of that. Uh, otherwise you're just paying for some company predicting what it's gonna look like in five years from. Which again is speculation, as opposed to, you know, really investing in, uh, in durable businesses.

00:02:45 Logan: What's your perspective on the, uh, like the state of web three right now in general. Um, and where, I guess the ecosystem is.

Aaron: You know, web three is, is this, one's a complicated one. It's like, there's a lot of cognitive dissonance because I actually think like I'm answering a thing, which is just a made up. Like, I don't even know, like, like if you made up a thing and then I had the answer about a made up, like, I don't know what to do, but like, but like sure. The concept of, of, of. You know, more protocols on the internet and more openness on the internet and you know, more open source and more interoperability. Those are great concepts. And those are things that people have been striving for for decades and decades. And, and, uh, and, and, you know, there's so many robust ecosystems building, amazing open source projects and new protocols that, that, that allow for more interoperability between. The, the sort of our arbitrary idea that, that somehow we have to do that on a blockchain. I just, I just like think of as, as well, somebody just said that that is the case. And then somehow we have to now talk about it. Um, like why, why, why would it have to be a blockchain? Why would I have to, why do I have to pay. Why would I have to pay a tax to replicate data a thousand times for censorship resistance when like censorship, you know, for these types of use cases are not like that, that sort of relevance. So, so I would just say like, there's some philosophies that are being talked about within web three that are totally, you know, interesting, great philosophies. And those are things that, that many people have been talking about for decades and decades. Matt Mullenweg at WordPress. I mean, Like that is like the foundational, you know, of WordPresses like, let's have more open source software that powers the internet and then we'll have some commercial elements to it that people can participate in. That's great. Um, but most of the, at least today how web three is defined as we're gonna use blockchain technology. To power, uh, you know, things, uh, outside the financial realm, um, they just don't, they just don't add up technically, uh, or user experience wise, uh, or frankly I don't even believe demand for regular consumers. So, so I just don't think there's that much to even work off of.

00:04:41 Aaron: It's so funny. And I was just going back and forth with mark Cuban, um, on web three stuff, and market was one of our initial angel investors. And, uh, and he actually, at least back in the day, I can't speak to his current investment strategy was maybe the most conservative of all of all investors. Like we were, we were an angel investment. I think our valuation maybe was $750,000. That was our, that was our valuation.

Logan: Okay. USD.

Aaron: Yeah. In USD. Exactly. There was no other option back in 2006. So, uh, the world was, was USD based in, uh, in at least, um, uh, in, in America. And, um, and he cared about cash flow. When we were three employees. So, so like we got that stuff built into us and then eventually venture capitalists, all that we had, fortunately were probably more on the conservative side. They cared about cash flow. We didn't generate any, but they, they cared about like, what will the economics of this business look like? Um, at scale. So, so it was all kind of, I think, you know, relatively built into the foundation of the company, but we did burn a lot because, um, we were, we were definitely taking the kind of get big, fast approach.

Aaron: Um, in the early years, the reason we were high burn at the periods, we were high burn. Was we made a calculated bet that every customer we acquired would be worth, you know, 2, 3, 4, 5 times more, um, from a lifetime value standpoint versus the cost of acquiring them and in an enterprise SAS, if we can, if we can acquire, you know, uh, an annuity of a million dollars for $200,000 that might look like we're burning, you know, $200,000 in that first year or whatever, but we think it's gonna pay back a million dollars. That was why we burned so much. It was a high conviction bet on our particular market because the economic. We're sort of built into what we were doing, but that's not true of every business. And even in that case, we were still, we still spent money on things that we shouldn't have spent money on. I mean, I remember, um, you know, uh, at the sort of. Insanity of art in our particular situation, from a burn standpoint, that's like seven or eight years ago, you know, I was like, gosh, should we, should we do an enterprise software, super bowl ad? And I sent an email to a couple board members being like, would this be a good idea? Would be one of the first companies in enterprise software ever in SAS that would do a super bowl ad. And they're like, no, that's a horrible idea. And we're like, okay, shouldn't do it. And we didn't do it. So like, but like that kind of discipline getting built in is, is usually a good idea.

Aaron: As you're, as you're scaling a company, if you started the most abstract concept of all, should there be a. To store things in a, in a, in a data store that is sort of always gonna be universally accessible by you within some context that, that you can always get back to and don't require any corporation to sort of intermediate. Should that exist on the internet? I think that's actually a fine, yeah, absolutely great. That's cool. That sounds good. Does that thing have to fluctuate in pricing? Does that thing have to be 24 7 traded? Does that thing have to be, be something where you lose it because you, you, you know, you, you lose your keys on a phone and then it's gone forever. Does that like, like it it's. So, so like some of the underlying concept of, of the, the idea of a decentralized data store that lets us access, you know, and retrieve things. Is like, okay, fine. But then by the time it ends up manifesting as actual use cases, they get, it gets so derailed and there's, there's a good reason for it. It's because that thing that we just talked about would probably like on a global scale, be like a 10 billion idea. That, that would be like the Tam of that use case. Cause it would just be like, well, okay, how many things do you need to store? And what's the cost of that storage and how many people need to access that thing. And it's just not, there's not that many things that, that fit that attribute. So the only reason why it's a $2 trillion Tam or whatever we want to say, the market cap is is because people have said no, no, no, no. That thing is gonna power. The ability to have, you know, virtual Gucci product. Those things then can be traded between people and then there's gonna, and you'll get rich.

So like, so it's like, yes, like the idea of a distributed data store that nobody controls is interesting. But the manifest, the manifestation of it that has made it in the popular zeitgeist is because people are spending unbelievable amounts of money on virtual goods and things, which basically, I mean, the funny thing about even NFTs is like on a, on a technical basis, they all basically just approximate another alt coin.

They're all like, so everything is really just another alt coin, whether it has a picture associated or something else, it doesn't really matter. So. It's just like, do, does somebody gonna believe in the future that, that X new coin is worth something? And I haven't been convinced that there's a lot of use cases that would cause you to say yes.

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