Another provocative post here. Agree with you that you just HAVE to focus on breaking through to higher growth with AI if you want to survive. Lock-in ain’t what it used to be.
And those 22% FCF “profits” are illusory when you factor in SBC.
Turns out the median SBC cost % of ARR in my public data set is about 20%. At least the accounting value. As you know (and wrote about a few years ago) that “cost” isn’t necessarily tied to reality since for many it was set based on valuations for those shares that are long gone.
I’m thinking the trued up SBC cost is more like 10%, rather than 20% (a guess admittedly but I’m gonna see if I can put some meat in that) — meaning these companies are still generating real profits on average.
But yeah even that won’t be enough! And going away pretty quick. And of course it’s not like the companies won’t need to re-up their options pools to keep their good folks!
Yeah, I didn’t want to get too deep on the SBC stuff but definitely some nuance. Overall, dilution still needs to come down for the majority of software companies. But it’s GAAP expense may make it look worse than it actually is
Good read. I am about 80% with you. Profitably is always a path, one huge reason. People, it is what is the difference. The question is more, what do you do when you are creating cash flow. Acquire, invest in innovation or go after adjacent markets. Profitably gives you options. My 2 cents…
It’s a good point. And profit path has worked in the past, but…I think you will get too far behind if you focus on profitability in the age of AI. And those profits will be short-lived.
Certainly those with much stronger moats can do it for longer and call sell at a good price. But I think it will catch up to everyone who doesn’t accelerate.
So IMO the best path to long term profitability (and sometimes short term as well) is acceleration.
But agree. If you have the right people, then the right decisions will likely be made either way
Another provocative post here. Agree with you that you just HAVE to focus on breaking through to higher growth with AI if you want to survive. Lock-in ain’t what it used to be.
And those 22% FCF “profits” are illusory when you factor in SBC.
Turns out the median SBC cost % of ARR in my public data set is about 20%. At least the accounting value. As you know (and wrote about a few years ago) that “cost” isn’t necessarily tied to reality since for many it was set based on valuations for those shares that are long gone.
I’m thinking the trued up SBC cost is more like 10%, rather than 20% (a guess admittedly but I’m gonna see if I can put some meat in that) — meaning these companies are still generating real profits on average.
But yeah even that won’t be enough! And going away pretty quick. And of course it’s not like the companies won’t need to re-up their options pools to keep their good folks!
Yeah, I didn’t want to get too deep on the SBC stuff but definitely some nuance. Overall, dilution still needs to come down for the majority of software companies. But it’s GAAP expense may make it look worse than it actually is
Good read. I am about 80% with you. Profitably is always a path, one huge reason. People, it is what is the difference. The question is more, what do you do when you are creating cash flow. Acquire, invest in innovation or go after adjacent markets. Profitably gives you options. My 2 cents…
It’s a good point. And profit path has worked in the past, but…I think you will get too far behind if you focus on profitability in the age of AI. And those profits will be short-lived.
Certainly those with much stronger moats can do it for longer and call sell at a good price. But I think it will catch up to everyone who doesn’t accelerate.
So IMO the best path to long term profitability (and sometimes short term as well) is acceleration.
But agree. If you have the right people, then the right decisions will likely be made either way