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. 
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) :
- 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. 
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. 
Time will tell. Gosh, life was simpler (if less interesting) when companies went public at $30M.
# # #
 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.
 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?
 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.
 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.)