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Once upon a time Fastly had the 7th highest revenue multiple and traded at a 36.5x NTM revenue multiple. Fastly was the shining star that would power the internet (or something like that). Unfortunately reality eventually kicked in…

And actually…this could be a story about several of the top 10 companies from October 2020. Several of these companies have fallen quickly out of favor and the reasons seem obvious now.

Fastly released earnings this week and its stock puked on the results/guidance…dropping 21% in a single day. And that is after the stock has already fallen by 90%+ from its high back in 2020.

What happened to Fastly?

Fastly plummeted from the 7th highest revenue multiple to the the 9th worst revenue multiple amongst the ~85 public cloud companies I am tracking.

Here are some lessons on what happened…

Broken Unit Economics

The unit economics at Fastly have always seemed a bit broken, but investors were sold on the growth story which was supposed to fix all of those problems. And if strong revenue growth continued then maybe that would have been right to some degree, but Fastly was never going to be a super high profitable business like other SaaS companies.

Gross Margins

Fastly never had true SaaS gross margins. They have always been < 60%, which is in the bottom decile of public cloud companies that I track. Last week I discussed how Amplitude’s financials were bad and their gross margins (highlighted in yellow below) are nearly 20 percentage points higher than Fastly!

If all other expenses are the same then a company like Fastly will NEVER have the profit potential as other SaaS companies given their much lower gross margins. Gross margins represent a ceiling on profitability.

Gross margins are stubbornly sticky after a certain stage so I wouldn’t expect any big changes anytime soon.

Rule of 40 Score

Fastly commands the 4th worst Rule of 40 Score at just 3%! The Rule of 40 Score is comprised of 1) revenue growth + 2) profitability

#1 Revenue Growth

In Q4 2024 Fastly only saw 2% YoY revenue growth….Fastly is going no where fast!

Fastly is bottom decile of public cloud companies when it comes to revenue growth. And this is particularly bad relative to their profitability (or lack thereof).

#2 FCF Margins

If you can’t show strong profits at just 2% revenue growth, then you probably never will. Fastly had a negative $35.7M in FCF off of just 7% total revenue growth in 2024.

The expectation in SaaS is that as revenue growth slows, profits will skyrocket. Well…Fastly was losing lots of money before, but they are just losing a lot less money now.

A company that can’t generate positive profits is worth approximately $0 in the long-run…

NRR Death Spiral

Fastly is also in a NRR Death Spiral, which helps partially explain Fastly’s issues. NRR is currently at 102%, which down from 105% from last quarter and 113% last year. That is a rapid decline in NRR!

The unit economics were not that great when NRR was much higher so at 102% NRR the unit economics certainly won’t work. Fastly MUST improve its NRR in order to get back to growth and start to become efficient.

Glassdoor Rating

I don’t look at Glassdoor ratings/reviews a lot because most public cloud companies are within a reasonable range where I don’t really care.

But I have personally talked to several people who have worked at Fastly that speak about how toxic the environment is. Fastly’s Glassdoor rating supports that…I don’t know of any other major public SaaS company that has a lower rating.

Fastly is in a culture/people death spiral, which is probably the most important problem to fix. It’s really hard to build great stuff if lots of employees hate the company and are continually leaving.

Below is a fun recent Glassdoor review….If your company has this low of a rating and employees are telling everyone to run away, then you will not get the best people.

Final Thoughts

Seems like a big change would have to happen to turn Fastly around. The type of change often only possible by a PE take-private, but it would be a pretty big gamble that PE might not want to take.

In order of priorities, Fastly needs to fix the people/culture problem first. Then it MAY be able to solve its other issues (starting with NRR).

I really do want every software company to win and think most companies can turn things around if they have the right people in place. Good luck Fastly!

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Lessons From Amplitude

Amplitude went public in September 2021 via a direct listing (instead of a traditional IPO). Like many cloud companies over the past several years however, Amplitude’s valuation multiple peaked in late 2021 at the top of the SaaS bubble.

Amplitude is currently the 7th worst performing public SaaS stock since the peak of SaaS and has since fallen by 84%.

Today’s Outline:

1. Relics of ZIRP (FREE)

   1. Direct Listings vs IPO

   2. Extended Post-Termination Exercise Periods

2. Lessons from Amplitude (PAID) 🔒

   1. Stock performance

   2. Gross margin

   3. Rule of 40

   4. Revenue Growth

   5. Profitability

   6. Amplitude’s NRR issues

   7. What Amplitude needs to do

📜Relics of ZIRP

Amplitude did two fairly unique things that are worth exploring pros/cons. Neither is necessarily bad (they are probably good in some circumstances), but they are discussed less in a non-ZIRP era.

1. Direct Listing (instead of traditional IPO)

2. Extended post-termination exercise period (PTEP) of 10 years

1. Direct Listings

Amplitude was the last cloud company to go public via direct listing instead of the traditional IPO path. While not many cloud companies have gone public since 2021….they have all chosen the traditional IPO path.

I don’t think direct listings are bad/dead, but I think they will be even more rare over the next couple of years. Few companies have gone public in the last three years so there is less appetite for taking a riskier path to becoming public

Below are the cloud companies that have gone public via direct listing in the past several years:

Below are the pros/cons of the traditional IPO path and a direct listing is mostly just the opposite.

Pros of IPO

• Raise additional capital

• Banker expertise and support

• Stock price stabilization by enabling banks to sell additional shares to reduce volatility

• Roadshow and bankers help create demand for stock which can help valuation

• Increased investor confidence by having strong bankers behind them

Disadvantages to IPO

• Higher costs (3.5% - 7% of capital raised)

• Additional dilution from raising additional capital.

• Lock-up period of typically 180 days where insiders (employees, early investors) cannot sell their shares immediately on the open market.

• Money Left on the Table: The “IPO Pop” means the company discounted the shares too much.

Amplitude’s CEO said the following on why companies should do direct listings:

You have to do a direct listing as a CEO. If you aren't, you're being a poor fiduciary to your current shareholders. Last year, on average, traditional IPOs underpriced the stock by 50% so you're basically selling a dollar for 50 cents.

I once heard one public company CFO call it "the largest arbitrage opportunity in all of finance"

While he is not wrong on IPO pops, which have been massive (see below), I disagree that the IPO pop exactly equates to “money left on the table”. Some of the pop comes from the fact they are doing a traditional IPO, small float, the types of investors that are brought on to support the IPO, etc.

What would the price have been if a company did a direct listing instead of an IPO? My hypothesis is it would have been quite a bit lower in most cases…

Having said the above, I do think a direct listing makes good sense in some circumstances but it is certainly not the default right decision. In stable conditions where the market has digested a few recent IPOs, then we may see direct listings pick up a bit for top quartile companies. This will be especially true as more companies go public when they are profitable and don’t need to raise money from a traditional IPO.

2. 10 Year PTEP

A 10 year post-termination exercise period (PTEP) is a relic of ZIRP that should die. It is overly employee friendly to the determent of the company. I am pushing all of my portfolio companies that have extended PTEPs to rethink it. — Anonymous Tier-1 VC

Amplitude was one of the early tech companies to radically change the standard stock option PTEP, by giving employees up to a 10 year exercise period after termination.

99% of tech companies give a standard 90 day window for employees to exercise after they are terminated, but Amplitude changed their policy to give the maximum allowable PTEP of 10 years.

Employees of private companies are typically given stock options, which is a right to buy a certain number of shares at the current fair value price. In order to own shares, employees much “exercise” or buy the shares at the defined price. If they don’t exercise within the PTEP window then they lose their stock options.

Amplitude changed their 90 day window to be 10 years. So as long as employees vest (earn) their stock options then they have up to 10 years to exercise.

Pros of extended PTEPs:

• Employee Cash For Exercise: The main benefit is employees don’t have to come up with the cash to exercise (and cash for potential tax consequences) when they terminate from the company. The exercise price and tax impact can be huge if the valuation has increased a lot.

• Recruiting: Can help with recruiting efforts as an employee perk.

Cons of extended PTEPs:

• Employee Retention: Forcing employees to spend their cash to walk away encourages employees to stay at least through a liquidation event. It is much easier to leave a company when you don’t have to make that decision. Some will argue this can also be a pro because you want people that don’t want to be at your company to leave (they are just hanging out until a liquidity event).

• Equity Overhand and Dilution: There can be massive amounts of additional dilution resulting from extended PTEPs. A LOT of employees choose not to exercise when they leave a company because of the cash impact, but with an extended PTEP all that dilution hangs around a long time.

Given the change in environment since 2021 (it’s currently an employer’s market), there is a lot less discussion about extended PTEPs. In fact, I have heard from multiple companies that did extended PTEPs that they are eliminating it for new hires.

Was extended PTEPs just a relic of ZIRP?

It is certainly very employee friendly so companies need to at least fully consider the dilution impact. There are lots of ways to potentially structure an extended PTEP that can be more of a middle ground.

And investors need to be aware of their companies that have this huge dilution overhang because I don’t think many understand the potential dilution impact to their investment.

What Happened to Amplitude?

In late 2021, Amplitude sat in the top 10 highest revenue multiples amongst cloud companies but has since been on a steady decline and now trades at just a 4x NTM revenue multiple which is near bottom quartile.

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