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Hitting your plan destroys value
The planning loop
Every management team learned the same loop: lay out a plan, execute against it relentlessly, hit it or beat it, and keep building on that. That loop is how equity value got built, and CEOs absorbed it before anything else.
The multiples
The multiples add the rest. Public SaaS companies that traded at 30 times revenue in 2021 trade around six times now. A company that has grown 4x since then and reached break-even is worth less anyway, because its multiple fell by a factor of six. The choice put to these companies a few years ago was to get to AI or be worth three times revenue.
Inverting the schedule
One friend described the CEOs this way: running a business at hundreds of millions in revenue, they worked on the core business from eight to five and tried AI in the evenings from five to eight. The schedule needed to be inverted. That is hard to do, because the training, the muscle memory, and the inertia all point toward hill climbing the plan.
Why did software multiples fall so far?
In 2021 interest rates sat near zero, which made distant future profits worth a lot in today's money. The US Federal Reserve then raised its benchmark rate from near zero in March 2022 to above 5% by mid-2023. Higher rates shrink the present value of cash expected years from now, which hits fast-growing software stocks hardest. The Fed's target range reached 5.25% to 5.5% in July 2023.
Why do well-run companies miss big shifts?
Clayton Christensen studied the disk drive industry for his 1997 book The Innovator's Dilemma. He found that leading firms listened closely to their best customers and funded the improvements those customers asked for. Newer technologies that first looked worse to those customers got little investment. The leaders kept executing well while a different kind of product grew underneath them.
Why do subscription shifts hurt revenue first?
When Adobe made Creative Cloud subscription-only in 2013, customers who once paid a large sum upfront began paying a monthly fee instead. Reported revenue dipped at first because each customer contributed less cash per quarter. Over several years, recurring subscription revenue grew past the old license totals. Microsoft made a comparable change when it launched Office 365 in 2011.
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