I wrote about our portfolio company Duolingo’s English Proficiency Test back in August of last year. I have always loved the idea that a company that helps people learn a language can also help people prove their fluency in a language. It is two sides of the same coin.
But the road to success with the English Proficiency Test has been hard. The “incumbent provider” of English proficiency tests, Test Of English As A Foreign Language (aka TOEFL), has had all of the companies and universities who accept it locked up for many years. And if you are required to certify with TOEFL, well then you take TOEFL.
The Duolingo English Test is and has always been a way better product than TOEFL. But in some markets, incumbency matters more than better. One of the primary benefits of the Duolingo English Test is you take it at home on your computer versus having to go to a proctored location. It costs less ($49 vs $205). And the test takes one hour vs three hours. And yet, it has been hard to crack into this market.
And then the pandemic hit. No more in-person testing. As the international higher education publication PIE News puts it:
With the suspension of traditional English proficiency tests in countries most affected by the coronavirus, a wave of US institutions are now accepting the results of the Duolingo English Test, either as stand-alone proof or as a supplement to other measures of English-language proficiency.
Duolingo’s co-founder and CEO, Luis von Ahn, told me this in an email yesterday:
1. The number of tests we administer per day has gone up 10x!
2. 500 new university programs have begun accepting the Duolingo English Test in the last 8 weeks (we had 1,000 before this).
3. Both TOEFL and IELTS, after spending a lot of time saying that online tests were no good, now have online options.
So now the market is open to competition and the best product can win. I’m betting on Duolingo (and have been since we made our seed investment in the company in 2012).
USV TEAM POSTS:
Albert Wenger — Apr 18, 2020
A Plan for Rapidly Ramping COVID19 Testing
Bias: At-Home Film Screening Event
It’s an extremely helpful documentary around understanding unconscious bias. When Robin made the film, she concentrated on examples around gender and race, but the principles apply to all aspects of bias.
I’ve always felt the final wording on the overview captured the film well.
bias is a film that challenges us to confront our hidden biases and understand what we risk when we follow our gut. Through exposing her own biases, award-winning documentary filmmaker Robin Hauser highlights the nature of implicit bias and the grip it holds on our social and professional lives.
Throughout the film, Robin gives voice to neighbors concerned about profiling in their communities, CEOs battling bias in their businesses, and those of us hesitant to admit our own biases. After confronting her unconscious bias, Robin turns to action by engaging with innovative experiments – from corporate strategies to tech interventions and virtual reality – that are reshaping our understanding of implicit bias and attempting to mitigate it.
On Thurday, June 25th at 11am PST (2pm EST) there will be an online panel discussion around Bias. In advance of the panel discussion, you’ll get a link to watch the film online.
Along with Robin, the panelists are Kate Mitchell (Scale Venture Partners), Heather Gates (Deloitte & Touche), and Elliott Robinson (Bessemer Venture Partners).
I appreciate the sponsors – NVCA, Salesforce Ventures, Deloitte, and SVB – for hosting. I’m an enormous fan of Robin’s work (Amy and I also were Executive Producers for her documentary Code: Debugging the Gender Gap) and I learned a lot from both films.
I encourage you to sign up for the discussion and the free screening of the film online. I just did …
Check Out The Top Sessions from The New New in Venture
If you missed any of the sessions from SaaStr’s New New in Venture, they were pretty awesome. Catch up here on what’s really going on in venture and fundraising, right now, with everyone from Aileen Lee to Keith Rabois to The Forbes Midas List and more!
These sessions were our highest-rated ever for a SaaStr event so dig into them here and let us know what you think.
The post Check Out The Top Sessions from The New New in Venture appeared first on SaaStr.
We’re About To See a Lot More SaaS Debt
Debt for SaaS companies done right is a gift. Done wrong, it can weigh you down like an anchor. Few folks have more data than Nathan Latka and he offers up some insights on how to properly leverage up in SaaS. — ed.
Carlota Perez argues in her book Technological Revolutions and Financial Capital that in the early days of a “golden age”, financial capital is necessary to fuel new technology innovation.
Once that technology is better understood, production capital moves in to drive mainstream adoption of the technology.
Geoffrey Moore calls this group the Late Majority and the Laggards in his book Crossing the Chasm, a secret bible for many SaaS CEO’s.
This article looks at the history of SaaS as it relates to financial capital and production capital.
I argue that standard saas metrics make it possible for founders to scale using debt capital (production capital thats cheaper) instead of solely relying on venture capital (financial capital thats more expensive).
2004 Salesforce IPO Brought Financial Capital to SaaS Founders
With the Salesforce IPO in 2004, we saw the first sign that institutional investors were comfortable with a standard set of SaaS metrics: Churn, sales efficiency, ARPU, LTV, customer acquisition cost, and so on.
It’s hard to imagine a world where analysis didn’t understand recurring, subscription based revenue for technology products.
This CNET article captures the uncertainty well:
“Salesforce’s IPO is also seen as a test of a new business model that could shake up the software industry. The company is the poster child for subscription-based software, a model that’s gaining popularity among corporate buyers. Analysts predict that the success of Salesforce and others like it could pose a challenge to old-guard software companies, including SAP, Siebel Systems, PeopleSoft and Oracle.”
This set of metrics that Salesforce began to standardize enabled other providers of Financial Capital to more quickly analyze new SaaS companies and invest.
As a result, you saw financial capital in the form of Venture Capital flow into software companies at record rates over the last 20 years (approaching $1 trillion dollars in total according to Statista)
2004-2010 marked the early days of SaaS where the model was still risky, and cloud providers were competing hard with their on-prem predecessors.
Because the SaaS model wasn’t entirely proven, venture capitalists took more risk, and expected a higher return.
Best in class VC firms over this period delivered IRR’s of greater than 40% to their Limited Partners.
Cheaper capital was simply not available because SaaS was still in the early adopters phase of Geoffrey Moore’s chasm model.
Things started changing in 2011.
As SaaS Metrics Become Standardized, Banks Want In On The Action
In 2011, Hootsuite raised $3m in venture debt before raising another $50m in debt from CIBC in 2018.
Digital Ocean took $40m in debt from Fortress in 2014 after doing a Series A with Andreesen Horowitz. In 2016, Digital Ocean opened a $130m credit facility with Keybanc.
This venture debt is a form of production capital. Debt providers take less risk, and expect less reward due to the predictive nature of a standard set of SaaS metrics.
Fast forward to 2020, SaaS metrics are so well established that there are ETF’s that trade almost exclusively in SaaS stocks.
The SKYY First Trust Cloud Computing ETF has grown to $3.3 billion in assets under management with large holdings in well known SaaS brands like VMWare, MongoDB, and Citrix.
This standardization of SaaS as a business model is why we’re seeing more debt deals in business headlines today.
Don’t VC’s Want This Dealflow? Why Let Banks In?
In 2004 the Salesforce CRM was the shiny object every dollar of financial capital chased.
If the move to the cloud was the next big thing, and companies didn’t have to build or buy servers but could instead subscribe and pay over and over, VC’s wanted in.
After a decade or two of financial capital saturating these new SaaS ideas, the companies started competing with each other with bigger warchests full of VC dollars.
Billions of dollars went into chasing the next big CRM after Salesforce. Google advertising spiked for the keyword “Best CRM”. Everything got more expensive.
This competition makes it much harder to build the next billion dollar SaaS company VC’s need to hit their 40% IRR targets.
It’s no longer viable for financial capital to invest in the next CRM or sales automation tool.
As a result, founders with healthy SaaS businesses are hearing “no” more often. VC’s have to turn away better and better companies.
So where does a $3m revenue SaaS founder building another sales automation tool turn if they want $500k to invest in a new engineer, account executive, or marketing test?
Venture Debt for Founders With $3m in ARR
Most VC’s have already placed their sales automation bets so they pass.
This sort of company is a perfect fit for production capital that doesn’t need massive returns.
Churn under 10% annually? Check.
110% net revenue retention? Check.
Payback period 12 months or less? Check.
Gross margin 85%? Check.
Quick ratio between 2-4? Check.
Rule of 40? Check.
Sales efficiency ratio? Check.
These metrics de-risk the business allowing founders to build wealth, while building their idea, on the back of cheap production capital in the form of debt.
VC will continue to play a role where founders are taking incredibly large risks with outsized returns.
Cheap Production Capital Will Fuel Most SaaS Founders Over Next Decade
Why haven’t more founders turned to cheaper venture debt options as they look to scale?
I think there are two reasons.
The first comes down to education. Many SaaS founders don’t understand how debt works.
With companies like MeMSQL raising $50m in debt last week, you’re going to see this understanding of debt permeate the overall SaaS market over time.
The second is speed. Right now, it’s painful to work with a bank to get debt. Banks tend to be slow, require lots of paperwork, and top it off by asking you to fax in your signatures.
Since 2016 more forms of production capital in the form of debt have become available to SaaS entrepreneurs at earlier and earlier stages of their company.
Firms like Triple Point, Hercules, CIBC, KeyBanc and others have provided billions to SaaS founders on top of (or in replacement of) capital from “more expensive” VC firms.
Is there a not too distant future where SaaS debt as an asset class tops $100 billion?
Someone needs to build a credit machine first. Underwriting currently takes too long and founders don’t have the time.
Building a Machine for SaaS Credit Scores
Why hasn’t someone built a tool that assigns SaaS Credit Scores to companies where higher scores qualify for cheaper money? Just like consumer credit scores.
The founder connects their bank, stripe, and other assets, gets a score, and in 30 seconds or less can accept or reject a debt offer.
The question now is how to do debt better, faster, and cheaper specifically for SaaS companies.
Slack just issued $750m of its own bonds at a 0.5% interest rate due in 2025. What if a $5m ARR SaaS startup could do the same?
That’s what the future looks like. The debt machine is coming.
It’s something I’m thinking about building. Want to work on it together?
Email me at nathan latka at gmail.com.
Investors2 months ago
Shifting corporate responsibility to consumer resilience
News2 months ago
New Managing Director in Michigan Branch Nina Salvaggio
Venture Capitalist Firms2 months ago
Investment2 months ago
Anne Walsh, CFA, Warns of Cumulative Credit Losses
Venture Capitalist Firms2 months ago
Venture Capitalist Firms2 months ago
Angel Investors2 months ago
Angel Investors2 months ago
Mor Assia featured at EIF’s European VC Conference