Korva is a scroll of the internet’s best ideas.
The annuity assumption
At 120% net dollar retention, existing customers spend 20% more each year, so the base case was 20% growth year after year. Artificially low interest rates inflated the prices further and created a speculative asset bubble in software.
How AI changes it
AI has changed that picture. Churn is elevated, revenue can change fast, and these companies now trade at much greater discounts.
Why multiples compress
Revenue multiples are a rough heuristic, used almost exclusively in Silicon Valley, and they work best when a company grows more than 50%. They compress very quickly once growth slows. Airtable sold for about two times revenue, yet on a look-through basis that works out to something like 30 times free cash flow.
Slow growth also feeds on itself: company morale drops, and customer turnover begins to spike.
Why do low interest rates inflate software prices?
A company's value depends on the profits it will earn in the future, discounted back to today. When interest rates are low, the discount is small, so far-off profits count for much more. Growth companies, whose profits lie furthest in the future, gain the most from that effect. In 2020 the US 10-year Treasury yield fell below 1 percent, according to US Treasury data.
How can net dollar retention exceed 100 percent?
The measure tracks revenue today from the customers a company had a year ago. It adds upgrades, extra seats, and added usage, and subtracts cancellations and downgrades. Above 100 percent, expansion from existing customers outweighs the revenue lost, so revenue grows even with no new customers. Investors in subscription software watch it closely for that reason.
Why do revenue multiples compress when growth slows?
A multiple is a price for expected future growth, so a lower growth outlook lowers the multiple directly. Investors often apply the Rule of 40, a guideline popularized by venture investor Brad Feld, which says a software company's growth rate plus its profit margin should reach 40 percent. A slow-growing company has to make up the difference with profit. A business valued as a growth story can therefore lose much of its price when it becomes a profit story.
More from All-In with Chamath, Jason, Sacks & Friedberg
