Q2 earnings season is now behind us. I’ll provide a more comprehensive recap later, but for now, let’s look at how the future outlook has changed after Q2 earnings. One metric I like to examine is how much companies adjust their full-year guidance. Generally, software companies follow a beat-and-raise model in their forecasts. The “raise” part reflects how much the future outlook (i.e., the guidance) changes. When we compare full-year guidance for 2024 from the Q2 call versus the Q1 call (~3 months ago), you’ll see in the graph below that, for the most part, full-year guidance didn’t change significantly. The median full-year “raise” was only 0.3%.Looking at Q2, the median “beat” (i.e., how much a company’s Q2 results exceeded consensus) was around 1.5%. So, while the median quarterly beat

When too many kings vie for the crown, you’re left with a brutal game of thrones. Can anyone truly win in a game of thrones? And will the end justify the means?I’ve been thinking about this a lot recently. Right now, there is A LOT of king-making happening in venture capital rounds in the AI space. Just this week a couple month old company raised $1b dollars. This is not a commentary on that company or it’s prospects. It could be a great investment, and they have one of the best AI teams assembled. But the round dynamics, and many other rounds like it, remind me of king making rounds.What is a king making round? We saw a lot of these pop up around the Softbank Vision fund and later in the 2021 period. The idea is that you can use capital as a weapon to anoint a winner in a category, while

Over the last 5-10 years, software markets have become increasingly crowded. Simultaneously, venture markets have expanded dramatically, contributing to this overcrowding. In a world without venture capital (or other sources of external financing for startups), each company would have to grow solely based on the merits of their product and sales. Growth would be slower, but market share would likely be more concentrated among leading companies (though one could also argue for more fragmentation among a smaller number of players). It would be harder for inferior companies to compete. On the flip side, this might lead to slower innovation cycles as “incumbents” face less pressure from a smaller number of challengers.In a world where venture markets are flush with cash, it’s common for five o

Two weeks ago I wrote about the growing number of private zombies. A common question I got after that post was “what should I do if I’m in that position?” A couple thoughts below. Most importantly - don’t wait. Don’t hope for things to improve. Hope is not a strategy. It’s a lottery ticket. I think there are 3 concrete things to do:Figure out if you’re a short / long term zombie: Turnarounds are hard, but they do happen. There may be some idiosyncratic reasons your market turned on you, but you expect it to turn back. There’s no need to panic at the “bottom,” but it’s also very important to be realistic about your chances of revivalGet closer with your existing investors. At some point you will want to raise more money. It may be a down round. Or you’re hoping to raise a flat round to “val

1: Aggregate net new ARR added (just for the companies who've reported so far, looking at that groups net new added for the last few quarters / years). Generally we don't dip down from Q1 to Q2...Image2. After a few quarters of YoY growth in net new ARR added, we dropped off dramatically in Q2Image3. 87% of companies have come in ahead of Q2 consensus, with a median beat of 1.8%. "Not getting better not getting worse"Image4. 51% of companies have guided Q3 above consensus, with the median guide coming in right at consensusImage5. We've now had 9 quarters in a row without any real guidance raises. On average, companies are "beating but not raising"Image6. Comparing full year guides from this quarter vs last quarter, the median company kept full year guidance constant

There's a lot of debate right now about the economic impact of GenAI. Some critics argue that it's deflationary—that by making it possible to do more with less, GenAI will shrink markets, particularly in software. They contend that AI agents, capable of handling infinite workloads, will ultimately reduce the need for software spend. I believe this view is (dramatically) missing the bigger picture .In reality, GenAI is poised to drive an epic shift from services spend (both internal and external services) to software spend. And that shift will dramatically expand the size of software markets (and the equity value created). I’m certainly not the first (or thousandth..) to have this view, but I wanted to flesh out why.Let’s discuss why this matters.Consider a hypothetical budget scenario. Tod

Lots of conversation / debate around GenAI, and if it'll shrink markets / create deflationary software forces (because you can do more with less). I really disagree with these takes for one main reason - GenAI will create an epic services-to-software rotation which will greatly INCREASE the size of software markets. I don't really think this is that controversial of a take My favorite quantitative example that lays out how big some of these services markets can get comes from the Mulesoft S1 back in 2017:"We estimate our current market opportunity to be $29 billion...Separately, Forrester estimates an additional $394 billion will be spent in 2017 on systems integration project work [services], which does not include the spending on custom-coded integrations by internal development teams."A

Software companies don't die easily. And neither do Zombies.Today, companies large and small are asking questions like “how should I balance growth vs profitability” or “what metrics will it take to raise my next round.” These are all important questions, but not THE question. THE question should always be “what’s my right to exist over the next 5-10 years - and how will I drive incremental enterprise value in that timeframe.” This is the existential question. I get it’s two questions not one, but they’re related :)Today, unfortunately, the private markets are flooded with companies that might not have a right to exist in 5-10 years. More and more of my conversations with other venture investors include some form of “what’s going to happen to all the zombie private companies?!” What’s a zo

The 10Y has been falling recently, and dipped below 4% for the first time since early Feb. Back then the median software NTM rev multiple was ~6x. Today it’s ~5x. Interestingly, as rates have fallen (10Y went from 4.5% at start of July to 4.0% at end of July) multiples have stayed flat. Over the last few years there has been plenty of talk about the relationship between rates and multiples, and their inverse relationship. However, rates are just one variable. Today, the market seems a lot more worried about business fundamentals / growth. There’s a number of “canaries in the coal mine” with regard to a potential slowing economy. Consumers appear to be slowing down.Wayfair CEO compared the drop in spend to home goods to the 2008 financial crisis: “Customers remain cautious in their spending

Cloud Giants Update:AWS ( $Amazon.com(AMZN)$ ): $105B run rate growing 19% YoY (last Q grew 17%)Azure ( $Microsoft(MSFT)$ ): ~$81B run rate (estimate) growing 30% YoY (last Q grew 31%) $Alphabet(GOOG)$ $Alphabet(GOOGL)$ Cloud (includes GSuite): $41B run rate growing 29% YoY (last Q grew 28%, neither are cc)ImageAWS at a $105B run rate growing 19% Quarterly YoY growth trends below.ImageQuarterly absolute change in revenue YoY. So the most recent data point shows Q2 '24 AWS rev - Q2 '23 AWS revImageQuarterly net new ARR addedImagehttps://x.com/jaminball/status/1819112894380027977

$Microsoft(MSFT)$ over and over again on the earnings call: DEMAND FOR AZURE AI FAR OUTSTRIPPED SUPPLYmust have been said 10+ times. Theme of the call "we're capacity constrained"On CapEx - will continue build out as long as demand signals persist, which as of now are very strongSome data / stats on AI related products at Microsoft. Real revenue!Azure AI Services- $5b run rate up 900% YoY- 60k customers up 60% YoY- Responsible for ~8% of overall Azure growth this QDeveloper Tools- GitHub at $2b run rate (It was ~$1b in Sept '22)- GitHub CoPilot: ~$300m ARR. They accounted for 40% of overall GitHub growth this year and is "larger than GitHub when Microsoft acquired it"- 77k orgs using CoPilot up 180% YoY- 480k orgs using AI powered capabilities in

This week had a number of important AI announcements. $Meta Platforms, Inc.(META)$ released Llama 3.1. OpenAI announced SearchGPT, their $Alphabet(GOOG)$ $Alphabet(GOOGL)$ / Perplexity competitor. Mistral announced Mistral Large 2, their newest flagship model. The rate of innovation in the AI markets is staggering, and a reminder that it’s really hard for anyone (big companies especially) to “fully commit” to an AI strategy or vendor. They know they need something, but hard to make anything super concrete. The foundational tectonic plates are still shifting so rapidly that fully committing to anything would be premature. So instead, companies are looking to avo

What we're seeing out of the foundation model companies is really getting me excited about the future of Voice / Video AI apps. Won't be long before we have truly human like (real time) experiences with voice / video AI apps. Let me explain - below is what $Meta Platforms, Inc.(META)$ and OpenAI said about their latest models (3.1 and 4o)Llama 3.1:"We integrated image, video, and speech capabilities into Llama 3 using a compositional approach, enabling models to recognize images and videos and support interaction via speech. They are under development and not yet ready for release."GPT-4o"Prior to GPT-4o, you could use Voice Mode to talk to ChatGPT with latencies of 2.8 seconds (GPT-3.5) and 5.4 seconds (GPT-4) on average. To achieve this, Voice M

For the last 18 months Big Tech has been on a tear. So much so that the market created a separate name for them - The Magnificent 7. This group includes $Apple(AAPL)$ $Microsoft(MSFT)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Amazon.com(AMZN)$ $NVIDIA Corp(NVDA)$ $Tesla Motors(TSLA)$ $Meta Platforms, Inc.(META)$, and has been responsible for a significant percentage of the overall gains of the $NASDAQ(.IXIC)$ . T

We're entering the Fourth Industrial Revolution: The Intelligence RevolutionThe First Industrial Revolution (circa 1760-1840): Known for the rise of mechanized manufacturing, and the rise of new technologies like the steam engine and power loomThe Second Industrial Revolution (circa 1870-1914): The Technological Revolution. This period was characterized by the advent of electricity and mass production processes. Railways and the invention of the telegraph and telephone were key developmentsThe Third Industrial Revolution (circa 1960-early 2000's): The Digital Revolution. This period introduced the shift from analog and mechanical technologies to digital electronics. Computers, the internet and proliferation of digital communication were key developmentsThe Fourth Industrial Revolution (~20

Recently $Onestream Inc(OS)$ their initial S1 statement. A S-1 is a document companies file with the SEC in preparation for listing their shares on an exchange like the NYSE or NASDAQ. The document contains a plethora of information on the company including a general overview, up to date financials, risk factors to the business, cap table highlights and much more. The purpose of the detailed information is to help investors (both institutional and retail) make informed investment decisions. There’s a lot of info to digest, so in the sections below I’ll try and pull out the relevant financial information and benchmark it against current cloud businesses. As far as an expected timeline - yesterday the company filed an amended S-1 with a $17 - $19 pric

I strongly believe in two competing truths with respect to AI and its impact - the size of the prize will be bigger than we imagine now, BUT we’ll overestimate it in the short term. I believe this sums up a lot of the debates around “too much capex too little revenue.” It’s just too early draw any long term conclusions. I also think looking at AI “software” revenue over the course of time will drastically understate its impact. AI will lead to new drug development, new autonomous vehicle /robotics technologies, better ad targeting (yawn, but real impact!), and other things we can’t even imagine now. And maybe most importantly, it will lead to dramatic cost reduction in certain industries. Take customer support - is the right way to look at AI’s impact as the spend on AI contact center solu

Everyone knows that growth as declined across the board over the last couple years. But by how much? I wanted to share a couple charts. The chart below shows the median NTM growth rate of the software basket I track. I add companies to this basket as they go public, and remove them as they get acquired. Outside of the obvious macro conditions, another reason for the median declining is that we haven’t had many new higher growth IPOs. As you can from the chart below, the median growth rate has fallen by ~50% in the last 2 years from ~25% to ~12%The below scatter plots show the multiple vs growth rate scatter from 1 year ago (top) to today (bottom). One year ago there were 8 companies with NTM growth >30%. Today there are zeroTop 10 EV / NTM Revenue Multiples