I said in yesterday’s post, entitled Too Much Money Makes You Stupid, that while I don’t have much of a beef with Domo, that I did want to observe in today’s fund-to-excess environment that any idea — including making a series of Alec Baldwin would-be viral videos — can sound like a good one.
While I credited Domo with creating a huge hype bubble through secrecy and mystery, big events, and raising tremendous amounts of money (yet again today) at unicorn valuations — I also questioned how much (as Gertrude Stein said of Oakland) “there there” Domo has when it comes to the company and its products.
Specifically, I began to wonder how to quantify the hype around a company. Let’s say that, as organisms, SaaS companies convert venture capital into two things: annual recurring revenue (ARR) and hype. ARR has direct value as every year it turns into GAAP revenue. Hype has value to the extent it creates halo effects that drive interest in the company that ultimately increase ARR. [1]
Hype Factor = Capital Raised / Annual Recurring Revenue
Now, unlike some bloggers, I don’t have any freshly minted MBAs doing my legwork, so I’m going to need to do some very back of the envelop analysis here.
- Looking at some recent JMP research, I can see that the average SaaS company goes public at around $25M/quarter in revenue, a $100M annual run-rate, and which also suggests an ARR base of around $100M.
- Looking at this post by Tomasz Tunguz, I can see that the average SaaS company has raised about $100M if you include everyone or $68M if you exclude companies that I don’t really consider enterprise software.
So, back of the envelope, this suggests that 1.5 (=100/68) is a typical capital-to-ARR ratio on the eve of an IPO. Let’s look at some specific companies for more (all figures are approx as I’m eye-balling off charts in some cases and looking at S-1s in others) [2]:
- NetSuite: raised $125M, run-rate at IPO $92M –> 1.3
- Cornerstone: raised $41M, run-rate $44M –> 1.0
- Box: raised $430M, run-rate $228M –> 1.8
- Xactly: raised $83M, run-rate $50M –> 1.7
- Workday: raised $200M, run-rate $168M –> 1.2
There are numerous limitations to this analysis.
- I do not make any effort to take into account either how much VC was left over on the eve of the IPO or how much debt the company had raised.
- Capital consumption per category may vary as a function of the category as a CFO friend of mine reminded me today.
- Some companies don’t break out subscription and services revenue and the ARR run-rate calculations should only apply to subscription.
Since private companies raise capital and burn it down until an IPO, you should expect that the above values represent minima from a lifecycle perspective. (In theory, you’d arrive on IPO day broke, having raised no more cash than you needed to get there.)
So I’m going to rather subjectively assign some buckets based on this data and my own estimates about earlier stages.
- A hype factor of 1-2 is target
- A hype factor of 2-3 is good, particularly well before an IPO
- A hype factor of 3-5 is not good, too much hype and too little ARR
- A hype factor of 5+ suggests there is very little “there there” at all.
I know of at least one analytics company where I suspect the hype factor is around 10. If I had to take a swag at Domo’s hype factor based on the comments in this interview:
- Quote from the article: “contracted revenue is $100M.” Hopefully this means ARR and not TCV.
- Capital raised: $613M per Crunchbase, including today’s round.
This suggests Domo’s hype factor is 6.1 including today’s capital and 4.8 excluding it. So if you’ve heard of Domo, think they are cool, are wowed by the speakers and rappers at Domopalooza, you should be. As I like to say: behind every marketing genius, there is usually a massive budget. [3]
Domo’s spending heavily, that’s for sure. How efficient they are at converting that spending to ARR remains to be seen. My instinct, and this rough math, says they are more efficient at generating hype than revenue. [4]
Time will tell. Gosh, life was simpler (if less interesting) when companies went public at $30M.
# # #
Notes
[1] In a sense, I’m arguing that hype takes two forms: good hype that drives ARR and wasted hype that simply makes the company, like the Kardashians, famous for being famous.
[2] And having some trouble making the different data sources foot. For example, the SFSF S-1 indicates $45M in convertible preferred stock, but the Tunguz post suggests $70M. Where’s my freshly minted MBA to help?
[3] You can argue that the first step in marketing genius is committing to spend large amounts of money and I won’t debate you. But I do think many people completely overlook the massive spend behind many marketing geniuses and, from a hype factor perspective, forget that the purpose of all that genius is not to impress TechCrunch and turn B2B brands into household words, but to win customers and drive ARR.
[4] Note that Domo says they have $200M in the bank unspent which, if true, both skews this analysis and prompts the question: why raise more money at a flat valuation in smaller quantity when you don’t need it? While my formula deliberately does not take cash or debt into account (because it’s hard enough to just triangulate on ARR at private companies), if you want to factor that claim into the math, I think you’d end up with a hype factor of 3-4. (You can’t exclude all the cash because every startup keeps cash on hand to fund them through to their next round.)
I think Josh James made a mistake with Domo by taking his successful marketing software business model and trying to apply it to the analytics software world. His model was successful with Omniture because the marketing world is full of hot air and you can wow a lot of people with bad software. But the analytics world looks under the hood of your product a lot more and the people in that world are obsessed with hard facts. That’s the nature of analytics.
Another mistake was to attack Excel in their ad campaigns. They basically just alienated at least half of the analytics world.
Then of course there is the Power BI buzz saw that they are running into. It will be interesting to see how the top down marketing approach of Domo does against the grassroots marketing of Power BI.
Bottom line, you just quantified what everyone in the analytics world knows to be true. Domo will ultimately be unveiled as vaporware. But whether that will happen before or after their IPO remains to be seen.
Thanks for your comment. /Dave
Great post Dave. Couldn’t agree more. Hype-r-drive factor 10.
Had a question from a reader via email — “what about Zenefits?” Answer appears to be about the same: $583M in capital raised and around $100M in ARR (see http://www.insurancejournal.com/news/national/2016/02/22/399409.htm).
Though they’ve done it at 2x Domo’s valuation. So they are probably the hype king. And valuation-to-ARR is probably another good hype factor metric.
Had an email comment from a reader — “Domo’s $100M is [cumulative] bookings, not ARR” per this source: http://techcrunch.com/2016/03/22/domo-takes-on-slack-with-130m-at-2-billion-valuation/
I don’t have any MBAs doing my legwork so I’m not going to re-do a lot of math, but if the $100M is cumulative bookings and not ARR, then that would put Domo into the stratospheric 10+ hype factor range.
I keep getting emails and texts about Domo — the post seems to have a struck a chord with many readers. Among other tidbits people are telling me are (none of which I’m asserting are verified in any way): [1] revenue guestimates as low as $50 in 2015 which would double their Hype Factor, [2] a high churn rate suggesting the dashboarding vision is not sticky enough, and [3] that churn driving the company to move into collaboration and targeting slack. Domo’s not the first company to have the all BI in one box (data integration, reporting, dashboards, visualization) and that vision has failed before. The fact is BI is rich with best-of-breed components that are simply not that hard to tie together. Ergo, the suite/integration argument is not de facto highly compelling.
Really makes you wonder what type of due diligence (if any) these late stage investors are doing… Definitely like the Hype Factor metric!
A lot of “momentum” investors and FOMO (fear of missing out) happening out there — or it was happening out there.
Love the idea of creating a calculation like this Dave. Whether it’s “hype”, “buzz” or whatever you want to call it, having “it” is usually a key reason that top talents joins a startup or emerging saas company. Important to understand what creating the “hype” factor has really cost a company over the long-term.
It looks like there is now more clarity to what Domo is doing:
http://www.forbes.com/sites/alexkonrad/2016/03/22/domo-raises-130-million-makes-its-product-free-and-launches-fund-to-invest-in-its-own-ecosystem/
It seems VERY similar to Power BI to me, except at first glance Power BI seems to have the advantage because of:
1. The Hybrid / On Prem data sources in addition to the Cloud data sources
2. The data modeling engine developed by the seasoned SSAS team which can do advanced modeling and measure calculations
3. The existing Office 365 user community
4. The open source visualization engine that enables advanced visualizations like Sand Dance:
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwiv6IXU-uPLAhVQymMKHU8WBlkQtwIILzAB&url=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DbqiBS-Ow2Ow&usg=AFQjCNHxpMF6uYcxLOsLnVsNjm_BSvfo1w&sig2=dvwO6Byvh2Jwl22pkruAqw&bvm=bv.117868183,d.cGc
More Domo Hype Factor substantiation:
http://diginomica.com/2016/03/23/time-for-adult-supervision-at-domo
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Looks like Domo completed another D round extension of $100m at $2.3B post money. From what I’ve read this is only 1/2 of what they tried to raise. Delaying the IPO and raising more — into $700m! Hype factor continuing to soar. Is this a house of cards?
If it walks like a duck and quacks like a duck …
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