Jan 2, 2019 · 25m · a16z
a16z Podcast | Valuing Today's Fast-Growing Software Companies
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this Andreessen Horowitz podcast episode, Scott Kupor, Preeti Casaretti, and Jamie McGurk analyze why traditional financial metrics like EPS fail to accurately value fast-growing SaaS companies, explaining how recurring subscription economics, deferred revenue, customer retention, and multi-tenant architectures drive long-term profitability.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. How this is scored →
The host as informed peer 5.9 Guest teaching 2.3 Guest disagreement 0.1 The host pushing back 1.3
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 5:25 Dot-com metrics skepticism
In an entirely collegial episode, Scott provides the closest moment to friction by raising skepticism about off-balance-sheet billings metrics, comparing them to 1999 dot-com eyeball metrics.
Hardest push from the host ▶ 5:25 Pushback on non-GAAP metricsScott challenges the guests to justify billings metrics rather than expecting investors to take non-financial statement numbers at face value.
Biggest teaching moment ▶ 9:40 Growth acceleration cash flow paradoxPreeti educates the room on how accelerating SaaS growth counterintuitively deepens negative cash burn, reframing a major misconception held by traditional investors and board members.
The host holds their own ▶ 19:59 Legacy version support vs multi-tenancyScott demonstrates his software expertise by explaining the technical and financial overhead of supporting legacy software versions like Windows XP on ATMs versus multi-tenant SaaS.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| Perpetual License vs. SaaS Revenue Models | 6 | 2 | 0 | 1 | Scott demonstrates clear domain knowledge by laying out the exact mechanics of traditional perpetual software licenses versus SaaS recurring models. He frames the comparison using a concrete Oracle ten million dollar deal example. Preeti and Jamie politely build on his framing without friction. | |
| Understanding Billings and Deferred Revenue | 6 | 2 | 1 | 3 | Scott playfully pushes back on non-GAAP metrics, questioning if billings is an invented metric akin to dot-com bubble eyeballs. Jamie and Preeti clarify how deferred revenue on GAAP balance sheets serves as a reliable proxy for future revenue predictability. | |
| Customer Acquisition Cost and Cash Flow Dynamics | 5 | 5 | 0 | 1 | Preeti educates Scott and the audience on the paradoxical J-curve dynamics of SaaS cash flows, explaining how accelerating growth deepens negative cash burn temporarily. Scott facilitates the discussion by asking how investors should evaluate customer acquisition costs relative to long-term value. | |
| SaaS Product Stickiness and Decentralized Purchasing | 7 | 1 | 0 | 1 | Scott takes the lead by detailing why SaaS products are stickier due to decentralized departmental purchasing and widespread end-user seat adoption compared to legacy ERP software. Jamie concurs and extends Scott's point with cross-functional collaboration dynamics. | |
| Long-Term Profitability and Margin Expansion | 5 | 5 | 0 | 2 | Scott questions whether fast growth is rational if it exacerbates negative cash flow. Preeti educates the host using NetSuite historical data, showing how low renewal servicing costs (one-third of acquisition costs) drive margin expansion over ten to fifteen years. | |
| R&D Scale Leverage and Multi-Tenancy Advantages | 7 | 2 | 0 | 1 | Scott offers an extended monologue highlighting his deep industry experience, contrasting legacy software version support costs (referencing Microsoft XP on ATMs) with SaaS multi-tenancy R&D leverage. Jamie and Preeti validate his architectural points. | |
| Mindset Shifts and Telecom/Cable Analogies | 6 | 1 | 0 | 1 | Scott connects SaaS recurring revenue to established subscription industries like cable and telecom, asking why market participants struggle with the concept. Jamie explains that it represents a mindset and accounting shift rather than a brand new business concept. | |
| Summary and Conclusion | 5 | 0 | 0 | 0 | Scott delivers a clear concluding summary outlining why traditional income statements fail for SaaS companies and reiterates the proxies investors should examine before thanking his guests. |
Statements from this episode (11)
McGurk: High multiples and ongoing losses drive SaaS bubble concerns
“So I think there's two things that people look at and point to point, point to the bubble, and one is revenue multiples that a lot of these SaaS companies are trading at, and I think it's both current and future expected losses, so lack of profits of a lot of …”
Casaretti: SaaS margins are higher than perpetual license models at scale
“That profitability doesn't happen until a certain period in, in the customer's lifetime, but once they become profitable, you have this huge existing base of customers that are paying you recurring revenue over time, and your margins are actually higher than a…”
Casaretti: Billings serve as a leading indicator of SaaS revenue growth
“And that really is like a leading indicator of revenue growth, and that's why you see a lot of investors focusing on billings more so than revenue itself, because if Workday, for example, signs a severe contract with the customer, And they have that unearned r…”
McGurk: Castlight's trailing revenue did not justify its post-IPO valuation
“I think a great example of that is Castlight's recent IPO, where, you know, if you look at what the revenue was, you know, on the income statement on a trailing basis, or even on a forward projected basis, it was fairly modest, and certainly didn't justify the…”
Casaretti: Accelerating SaaS growth requires accepting deeper initial cash flow deficits
“But when they actually accelerate that growth, they'll go into an even deeper negative cash flow, and then when they come back up to reach profitability, they'll start growing faster, and that's that, like, that balance that a lot of investors and sort of boar…”
McGurk: Continuous updates make SaaS products stickier than perpetual software
“You know, you really don't know. So you have to the stickiness of your customers really dictated by in part by the product really, because in a you have constant updates. If you're a Salesforce customer, if you're a any SAS model customer, you're constantly ge…”
Kupor: Decentralized department budgets increase SaaS retention and vendor advantage
“You know, and we see this a lot in companies, which is, as purchasing decisions have moved away from kind of the CIO as the central, you know, kind of purchasing control of all these things, and now you've got department level purchases, and you see a bunch of…”
Casaretti: Retaining existing SaaS customers costs one-third of acquiring new ones
“There's stats out there that show that an existing customer costs one-third the cost of a new the cost to acquire a new customer.”
Casaretti: SaaS companies need 10 to 15 years to generate strong margins
“All these SaaS companies are six or seven years in their lifetime, and this is going to happen 1015 years down the road, and it's going to take a while. They have to kind of establish that big customer base and that large recurring customer base before, before…”
Kupor: Multi-tenant SaaS creates R&D leverage by eliminating legacy software support
“The beauty, I think, at least of multi-tenancy and SaaS generally, which I think also goes to our broader point about why these companies ought to be more profitable over time, is Every customer, or at least in most cases, most customers are running the same v…”
Kupor: SaaS subscription economics mirror traditional cable and telecom business models
“None of this stuff is actually that new, this concept that we're talking about here, right? So if you think about, you know, a company like Comcast, right, or you think about AT&T, they'got this same problem, which is, you know, it costs a lot of money to acqu…”