WEBVTT - Jared Sleeper on Which Software Companies Will Survive the "SaaSpocalypse" 0:00:03.040 --> 0:00:14.360 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.040 --> 0:00:21.520 Hello and welcome to another episode of the Odd Lots podcast. 0:00:21.600 --> 0:00:24.639 I'm Joe Wasnal and I'm Tracy Alloway. Tracy. 0:00:24.680 --> 0:00:29.120 We're recording this February eleventh, and IGV the software ETF 0:00:29.160 --> 0:00:31.280 down another three percent today. 0:00:31.600 --> 0:00:35.720 It has been ugly in software. Everyone's throwing around the 0:00:35.760 --> 0:00:38.560 term SaaS apocalypse. I mean, the great thing about SaaS 0:00:38.680 --> 0:00:40.160 is there are a lot of things that like rhyme 0:00:40.200 --> 0:00:42.120 with it, a lot of hominems, so you can you 0:00:42.159 --> 0:00:46.240 can make all those puns. Yeah, exactly, SaaS is trash whatever. 0:00:46.600 --> 0:00:50.000 But I'm looking at the share price of Salesforce, oh yeah, 0:00:50.000 --> 0:00:52.800 in particular because I always think of Salesforce as sort 0:00:52.840 --> 0:00:56.720 of like emblematic poster child. Yeah, post child of like 0:00:56.760 --> 0:01:00.520 a software company that I'm not really sure what they do, 0:01:01.080 --> 0:01:02.800 but yeah, it's it's just ugly. 0:01:03.000 --> 0:01:05.160 It's basically been cut in half, hasn't it. Since it's 0:01:05.200 --> 0:01:08.080 peaked like an early twenty twenty five. Right now it's 0:01:08.120 --> 0:01:09.560 one eighty four eighty. 0:01:09.319 --> 0:01:12.039 Four, and it's all your fault, shoe. 0:01:12.040 --> 0:01:12.920 It's all my fault. 0:01:13.000 --> 0:01:16.119 That's right, because earlier in the year, after we got 0:01:16.160 --> 0:01:19.520 back from Christmas, vacation or Christmas break, you know, around 0:01:19.520 --> 0:01:22.920 that I'd seen everyone playing around with claud code, and 0:01:22.959 --> 0:01:25.080 then I had to do it. We did an episode, 0:01:25.120 --> 0:01:27.360 and so people were like, oh, if Joe Wisittal can 0:01:27.600 --> 0:01:30.160 like figure out claud code, that there must not be 0:01:30.200 --> 0:01:33.000 any value to any of these companies at all. 0:01:33.080 --> 0:01:33.360 There. 0:01:33.360 --> 0:01:36.680 You know, you mentioned Salesforce. That's far from the ugliest one. 0:01:36.720 --> 0:01:38.959 I'm looking at Atlassian, which makes a lot of like 0:01:39.000 --> 0:01:43.039 workforce productivity companies, like some Slack competitors and stuff. That 0:01:43.120 --> 0:01:44.880 was a four hundred and fifty dollars stock back in 0:01:44.920 --> 0:01:48.040 twenty twenty one. That's an eighty six dollars stock. So like, yeah, 0:01:48.040 --> 0:01:50.559 it's ugly, and yeah, as you said, everyone is realizing 0:01:50.680 --> 0:01:54.720 that if any old fool can write software, maybe these companies, yeah, 0:01:54.800 --> 0:01:55.720 I don't have much value. 0:01:55.840 --> 0:01:58.080 I mean, I will just say it's not just software 0:01:58.360 --> 0:02:02.080 right now. So we're seeing sort of rolling series of 0:02:02.200 --> 0:02:06.920 concerns where like every time AI does something or create 0:02:07.040 --> 0:02:10.000 some new product, it hits a particular industry. So on 0:02:10.080 --> 0:02:14.240 Monday it was the insurance industry, insurance brokers, and you 0:02:14.240 --> 0:02:17.800 know today Wednesday, February eleventh, I think it's some of 0:02:17.840 --> 0:02:20.120 the stockbroker firms. 0:02:19.840 --> 0:02:21.480 And yeah, all you have to do is just say 0:02:21.520 --> 0:02:24.320 AI industry and there's a you know, it's really there's 0:02:24.320 --> 0:02:26.360 a lot of anxiety. But there's something that doesn't make 0:02:26.400 --> 0:02:28.200 any sense to me about this or the thing that 0:02:28.200 --> 0:02:29.200 I'm wrapping my head around. 0:02:29.240 --> 0:02:30.520 It's like, sure, any of. 0:02:30.520 --> 0:02:34.079 Us could easily like write some software, but like writing 0:02:34.120 --> 0:02:36.160 software is a cost center for these companies. 0:02:36.360 --> 0:02:36.520 Right. 0:02:36.720 --> 0:02:40.440 If you're salesforce and you can trivially reduce the cost 0:02:40.480 --> 0:02:43.600 of building software, that's also a benefit for you. And 0:02:43.639 --> 0:02:45.680 there's a lot more to a software company than just 0:02:45.760 --> 0:02:49.080 code generation, because there's all kinds of you know, network 0:02:49.080 --> 0:02:52.079 effects and links into this. It's like a software company 0:02:52.120 --> 0:02:55.000 is clearly more than just code, and so the fact 0:02:55.040 --> 0:02:57.959 that maybe code can be generated a lot cheaper does 0:02:58.040 --> 0:03:00.400 not screen to me, like, oh, these companies are worth 0:03:00.480 --> 0:03:01.040 lessing views. 0:03:01.360 --> 0:03:04.639 Sure, but at the same time they've been pricing. Their 0:03:04.680 --> 0:03:08.040 pricing is based on that assumption, right, like that there 0:03:08.120 --> 0:03:10.480 is no competitor for what they're doing, and suddenly you 0:03:10.560 --> 0:03:12.000 might have an in house competitor. 0:03:12.880 --> 0:03:15.360 Absolutely, But you know, it's like network effects and do 0:03:15.440 --> 0:03:18.280 companies want to start like building their own like payroll 0:03:18.480 --> 0:03:21.760 software Anyway, I have a lot of questions about this 0:03:21.880 --> 0:03:23.200 sell off, and to your point. 0:03:23.120 --> 0:03:27.000 No, no, no, this is you doing like penance first, 0:03:27.240 --> 0:03:29.720 for causing causing the sell off. 0:03:29.760 --> 0:03:31.640 All right, let's talk to someone who actually might be 0:03:31.639 --> 0:03:35.120 able to answer some of these questions for us. We're 0:03:35.160 --> 0:03:37.240 gonna be speaking to someone who's been in the software space, 0:03:37.240 --> 0:03:39.160 an investor in the software space for a long time, 0:03:39.200 --> 0:03:43.880 recently put out a great deck really diving into SaaS 0:03:43.880 --> 0:03:46.800 of the SaaS apocalypse and what kinds of companies are 0:03:46.840 --> 0:03:49.640 thriving and what kinds of companies were struggling even before 0:03:50.000 --> 0:03:52.840 everyone started talking about AI code generation and all that. 0:03:53.080 --> 0:03:55.160 We're gonna be speaking with Jared Sleeper. He is a 0:03:55.160 --> 0:03:58.320 partner at Avenue, which does a growth investing private company. 0:03:58.440 --> 0:03:59.920 So, Jared, thanks for coming on off. 0:04:00.240 --> 0:04:01.720 Yeah, my pleasure. Excited to be here. 0:04:01.720 --> 0:04:03.440 Why are we talking to you? Just you know, for 0:04:03.480 --> 0:04:06.400 our listeners. Apparently your first time on a podcast, which 0:04:06.440 --> 0:04:07.840 is crazy. But why are we talking you? Give us 0:04:07.840 --> 0:04:08.720 a little bit about. 0:04:08.480 --> 0:04:11.520 Your background investing in software and understanding the space. 0:04:11.600 --> 0:04:14.880 Yeah, my pleasure. So I think one thing that makes 0:04:14.920 --> 0:04:17.400 me a little bit different in the investor world is 0:04:17.400 --> 0:04:21.040 that I've spent time investing in early stage startups, public companies, 0:04:21.080 --> 0:04:22.719 and everything in between. So I spent a chunk of 0:04:22.720 --> 0:04:24.920 my career at an early stage venture fund in Boston 0:04:24.960 --> 0:04:28.039 called Matrix Partners, working with an og SaaS investor named 0:04:28.080 --> 0:04:30.279 David Scock, and then was also at ko TU where 0:04:30.279 --> 0:04:32.800 I ran public software. And so I've kind of have 0:04:32.920 --> 0:04:36.560 this like experience across a spectrum from ground floor startups 0:04:36.560 --> 0:04:38.280 to looking at the big public companies, which I've done 0:04:38.279 --> 0:04:39.080 for the last ten years. 0:04:39.080 --> 0:04:40.480 Perfect guest, Perfect guests. 0:04:40.560 --> 0:04:43.480 So give us some color on the mood in software 0:04:43.560 --> 0:04:46.120 at the moment. Are people like I don't know, hunkering 0:04:46.160 --> 0:04:48.000 down in their bunkers. How bad is it? 0:04:48.279 --> 0:04:48.520 Yeah? 0:04:48.560 --> 0:04:51.800 I get texted constantly from folks on the byside, just 0:04:52.240 --> 0:04:55.760 you know, retrenching. I can't believe this is happening, can't 0:04:55.920 --> 0:04:58.120 go lower. I keep saying that it's one hundredth time 0:04:58.160 --> 0:05:00.600 I bought the DIP. You use the SaaS apocalypse like 0:05:00.680 --> 0:05:05.560 casastrophe is my science. It's definitely one of those moments. 0:05:05.560 --> 0:05:07.239 And we were talking about this a little bit earlier 0:05:07.240 --> 0:05:09.720 before starting, But one of the things about software that's 0:05:09.760 --> 0:05:12.240 really fascinating is there's very few folks, even on the 0:05:12.240 --> 0:05:15.960 buy side who really understand how software works. It's one 0:05:15.960 --> 0:05:19.040 of those roar shot tests kind of sectors where no 0:05:19.040 --> 0:05:21.880 almost no one's logged into Salesforce and clicked around much 0:05:21.920 --> 0:05:24.720 less than a Salesforce admin and understood the full complexity. 0:05:25.080 --> 0:05:27.839 And so when there's panic, there's not a lot of 0:05:27.880 --> 0:05:30.719 support for the stocks, and people, you know, get scared 0:05:30.800 --> 0:05:31.280 very easily. 0:05:31.560 --> 0:05:32.760 Well, explain what this means. 0:05:32.800 --> 0:05:37.279 So, for example, in a lot of companies, it's like 0:05:37.560 --> 0:05:40.360 you're saying that the people who investor trade these stocks, 0:05:40.720 --> 0:05:45.120 they just know them as financial tables basically, and they 0:05:45.120 --> 0:05:47.280 have some idea of their financials and some idea of 0:05:47.279 --> 0:05:49.599 their customer base, et cetera. But they don't have like 0:05:49.640 --> 0:05:53.760 a great intuition for the product onlike say, you know 0:05:54.120 --> 0:05:56.360 people who use Instagram and therefore might have a feel 0:05:56.400 --> 0:05:57.320 about meta for example. 0:05:57.360 --> 0:05:59.440 Yeah, if you're an investor in Lulu Lemon, you have 0:05:59.480 --> 0:06:01.680 a pretty solid conception of what that business is. You 0:06:01.680 --> 0:06:04.360 can go into the scioga pants exactly. You can buy 0:06:04.360 --> 0:06:06.400 the product to ship it to yourself. If you're an 0:06:06.400 --> 0:06:10.040 investor in Viva, which makes CRM software for pharmaceutical reps, 0:06:10.279 --> 0:06:12.760 I bet you there's almost no investors in Viva who 0:06:12.800 --> 0:06:15.600 have ever been inside the product even once, much less 0:06:15.720 --> 0:06:17.480 used it on a day to day basis and understood 0:06:17.480 --> 0:06:17.960 how it works. 0:06:18.720 --> 0:06:21.320 So I'm going to go way back in time and start, 0:06:21.480 --> 0:06:23.760 I guess the very beginning, But why is it that 0:06:23.920 --> 0:06:28.239 software like this, you know, payment management systems, whatever, Why 0:06:28.279 --> 0:06:31.440 were they historically not developed in house? 0:06:31.640 --> 0:06:31.760 Like? 0:06:31.800 --> 0:06:33.920 How did we get this model where we have these 0:06:34.000 --> 0:06:37.680 huge software companies that are really you know, to date 0:06:37.920 --> 0:06:40.320 have been really integral to a lot of businesses. 0:06:40.520 --> 0:06:42.760 Yeah, it's a great question. You know, back in the 0:06:42.880 --> 0:06:44.880 very early days of software, like back in the seventies 0:06:44.960 --> 0:06:46.960 or eighties, there was a lot done in house, and 0:06:46.960 --> 0:06:49.800 we've seen a very clear mixshift over time towards using 0:06:49.839 --> 0:06:53.000 third party software. And what it comes down to is 0:06:53.080 --> 0:06:56.720 the software was expensive to build and maintain, and there's 0:06:56.720 --> 0:07:00.200 this need for an ecosystem of integrations around it, which 0:07:00.200 --> 0:07:02.640 are also expensive to build and maintain. And so if 0:07:02.640 --> 0:07:04.440 you look at a software company, it can afford to 0:07:04.440 --> 0:07:08.880 have one, two, three thousand engineers plus partnership teams, et cetera, 0:07:09.080 --> 0:07:11.960 all working to build the perfect piece of software for 0:07:12.040 --> 0:07:15.320 a given application, and then what's striking And this will 0:07:15.320 --> 0:07:17.240 come up a lot more in this conversation, is not 0:07:17.360 --> 0:07:18.640 selling it for that much money. 0:07:18.840 --> 0:07:19.040 Right. 0:07:19.160 --> 0:07:21.760 A lot of software companies report a stat which is 0:07:21.840 --> 0:07:23.560 the share of our customers that pay us more than 0:07:23.600 --> 0:07:26.239 one hundred thousand dollars a year, And one hundred thousand 0:07:26.280 --> 0:07:28.360 dollars a year is less than half of the fully 0:07:28.400 --> 0:07:31.560 loaded cost of a software engineer, right. And so the 0:07:31.640 --> 0:07:34.520 software model was build a product that can be applied 0:07:34.560 --> 0:07:36.920 to thousands of customers and it's the same product for 0:07:37.000 --> 0:07:39.680 every customer, and then sell it to them for way 0:07:39.760 --> 0:07:42.160 cheaper than they could ever hope to build it themselves, 0:07:42.200 --> 0:07:43.680 even less in the cost of one employee. 0:07:44.080 --> 0:07:46.880 Okay, I'd love to just talk long term software history 0:07:46.920 --> 0:07:49.480 even before you know, we think a lot about SaaS 0:07:49.520 --> 0:07:51.760 and these startups and stuff like that. But like a 0:07:51.800 --> 0:07:54.320 lot of the big companies that we think of in software, 0:07:54.520 --> 0:08:00.440 especially like pre Salesforce, whether it's like SAP Oracle Microsoft obviously, 0:08:00.600 --> 0:08:03.480 aren't there a bunch of third party companies whose job 0:08:03.600 --> 0:08:05.680 is to just like help install it for you, Ye, 0:08:05.840 --> 0:08:08.640 like an SAP installed, And that'll be a totally separate company. 0:08:08.640 --> 0:08:11.840 Because it's so big and it's so unwieldy and complex 0:08:12.040 --> 0:08:14.480 that you actually you can't just like install it yourself, 0:08:14.560 --> 0:08:16.280 or it has to be customized or whatever. 0:08:17.000 --> 0:08:19.120 And there's two parts to that which I think are important. 0:08:19.360 --> 0:08:23.080 One is the integrations into your existing systems. Right, a 0:08:23.120 --> 0:08:26.960 lot of big old companies have old databases, old applications, 0:08:26.960 --> 0:08:29.520 and it's important for everything to be stitched together. So 0:08:29.560 --> 0:08:32.640 you need software engineers and you know, consultants to go 0:08:32.679 --> 0:08:35.200 in and understand those existing systems and kind of get 0:08:35.240 --> 0:08:38.000 them linked up to the new systems. But the other one, 0:08:38.000 --> 0:08:41.960 which is probably bigger, is just people management and change management. 0:08:42.200 --> 0:08:44.720 You know, any software system is the combination of the 0:08:44.760 --> 0:08:48.040 code and all of the individual users who have learned 0:08:48.040 --> 0:08:49.640 how to use it. If you're trying to change out 0:08:49.679 --> 0:08:52.880 your CRM at a company, that means training every single 0:08:52.960 --> 0:08:55.840 sales rep on how to use the new CRM and 0:08:55.880 --> 0:08:58.120 getting it right. And if they get it wrong, then 0:08:58.160 --> 0:09:01.040 you lose deals that quarter. And so, you know, one 0:09:01.080 --> 0:09:03.439 of the kind of tropes in investing is if you 0:09:03.480 --> 0:09:06.400 see a company that's doing an ERP transition. ERP stands 0:09:06.400 --> 0:09:09.360 for Enterprise Resource planning. It's the kind of core software 0:09:09.480 --> 0:09:13.000 accounting you know, supply chain, et cetera. That company's probably 0:09:13.000 --> 0:09:14.719 going to miss its earnings over the next one or 0:09:14.720 --> 0:09:18.080 two quarters because those transitions are so painful and so yes, 0:09:18.120 --> 0:09:21.280 there's a big consulting complex around it that does its 0:09:21.320 --> 0:09:23.520 best to come in and parachute in the talent that's 0:09:23.559 --> 0:09:26.200 required to make those transitions smooth. And that tells you 0:09:26.240 --> 0:09:28.800 something about what makes software so sticky, or at least 0:09:28.800 --> 0:09:29.560 has historically. 0:09:30.400 --> 0:09:32.720 It's third party agents all the way down, I feel. 0:09:32.880 --> 0:09:35.840 But actually, on this note, so we hear the integration 0:09:36.000 --> 0:09:38.719 point brought up a lot, and I think the very 0:09:38.760 --> 0:09:41.000 first episode we did on claud code we talked a 0:09:41.000 --> 0:09:43.240 little bit about it as well. But like, if you 0:09:43.320 --> 0:09:45.800 have something like claud code where you can just give 0:09:45.800 --> 0:09:49.520 it permissions to make changes to your computer, does some 0:09:49.600 --> 0:09:53.760 of that integration expertise actually start to go away, because 0:09:53.840 --> 0:09:57.760 presumably we are going to get AI. I would assume 0:09:57.840 --> 0:10:00.960 at some point, given the rate that it's developed and improving, 0:10:01.440 --> 0:10:03.600 that we'll be able to do this like plug itself 0:10:03.640 --> 0:10:04.720 into various systems. 0:10:04.840 --> 0:10:07.840 Yeah, one hundred percent. I think the challenge of writing 0:10:07.920 --> 0:10:12.560 the code for the integrations is going away. That's not 0:10:12.800 --> 0:10:15.560 the bulk of the challenge for a majority of integrations. 0:10:15.559 --> 0:10:19.480 It's about really deeply understanding the prior system and how 0:10:19.480 --> 0:10:21.880 it maps to the new system. And the reality is, 0:10:21.880 --> 0:10:25.760 within most organizations that's a human problem. It's hey, this 0:10:25.880 --> 0:10:30.640 column says status two thousand and four, what does that mean? Like? 0:10:30.679 --> 0:10:32.720 How does that map to the new system that we're building? 0:10:32.720 --> 0:10:34.199 So you have to go talk to someone and understand it. 0:10:34.280 --> 0:10:37.280 And so there's certain types of integrations where I think 0:10:37.320 --> 0:10:40.040 they're effectively solved problems now because you can write a 0:10:40.120 --> 0:10:42.319 quick write into chat in to clog code and get 0:10:42.360 --> 0:10:44.880 a perfectly written piece of software to make it happen. 0:10:45.120 --> 0:10:47.600 And then there's others that are just fundamentally human problems 0:10:47.640 --> 0:10:49.960 because the data doesn't exist in digital space. 0:10:50.480 --> 0:10:52.720 Let's talk more about that, because really it is pretty 0:10:52.720 --> 0:10:57.280 extraordinary the degree to which I don't know it's the 0:10:57.640 --> 0:10:59.840 working code. I don't know if it's high quality code, 0:11:00.160 --> 0:11:04.240 but certainly these models can generate working code, and it's 0:11:04.280 --> 0:11:06.960 just it blows my mind whenever I use it. But 0:11:07.080 --> 0:11:08.880 talk to us a little bit more about from the 0:11:08.920 --> 0:11:13.040 perspective of various software vendors, and I'm sure there's a 0:11:13.160 --> 0:11:15.520 range about what they're selling and how much is it 0:11:15.600 --> 0:11:18.200 code versus how much is it other stuff, and which 0:11:18.200 --> 0:11:22.400 ones are more exposed to the pure like code generation ability. 0:11:22.520 --> 0:11:24.600 Yeah, it's a great question, and you're one hundred percent right. 0:11:24.640 --> 0:11:27.160 It's producing working code, and frankly it has been for 0:11:27.280 --> 0:11:29.560 the last year or so. I built my first leveable 0:11:29.600 --> 0:11:32.800 app that was working in production about about a year ago, 0:11:33.120 --> 0:11:35.040 and it's even intensified in the last three months. 0:11:35.160 --> 0:11:35.319 Right. 0:11:35.800 --> 0:11:38.960 I think when people buy software, there's a set of 0:11:38.960 --> 0:11:40.839 things that they're buying. One thing that I think is 0:11:40.840 --> 0:11:43.920 important for everyone understand is that open source software has 0:11:43.960 --> 0:11:45.920 been a thing, and there have been free, open source 0:11:46.000 --> 0:11:49.040 versions of almost any software you could buy for all 0:11:49.080 --> 0:11:52.480 of recorded history. There's actually some companies that are public 0:11:52.600 --> 0:11:55.480 that built their businesses packaging that open source software and 0:11:55.520 --> 0:11:58.680 adding a few custom features and then support on top 0:11:58.720 --> 0:12:01.760 of it. Because of the companies reliant on an open 0:12:01.800 --> 0:12:04.959 source database or a company like Elastic with its Elastic 0:12:05.000 --> 0:12:08.079 Search product, which is an infrastructure tool and it breaks, 0:12:08.400 --> 0:12:11.000 they need someone to call, both for COIA reasons and 0:12:11.120 --> 0:12:14.040 because it can be very complex and technical and they 0:12:14.040 --> 0:12:17.600 need to quickly understand it. And so that has been 0:12:18.040 --> 0:12:20.520 a big part of the story historically, is that need 0:12:20.559 --> 0:12:23.319 to you know, have support. Another thing that you sell 0:12:23.360 --> 0:12:25.440 when you sell as a software vendor is what I 0:12:25.520 --> 0:12:29.360 call herd familiarity, which means everyone on Earth knows how 0:12:29.400 --> 0:12:31.800 to use your software, which just simplifies the training and 0:12:31.920 --> 0:12:34.000 onboarding workflow. I'll give a few examples because I'm sure 0:12:34.000 --> 0:12:35.400 it's a new term for listeners since I. 0:12:35.320 --> 0:12:35.800 Made it up. 0:12:36.040 --> 0:12:40.280 You know, Zoom is a great business. Microsoft has been 0:12:40.280 --> 0:12:43.560 giving away a free version of the product forever in teams. 0:12:43.800 --> 0:12:47.560 Why do people use Zoom Because in certain industries almost 0:12:47.559 --> 0:12:50.240 everyone knows how to use Zoom. They have their Zoom setup, 0:12:50.320 --> 0:12:52.679 they have their virtual background chosen. They're not going to 0:12:52.720 --> 0:12:54.839 fumble around for the first minute or two on the call, 0:12:55.120 --> 0:12:57.680 and that's well worth the twenty dollars a month to 0:12:57.720 --> 0:13:00.240 have a Zoom plan. But that applies to lots of 0:13:00.280 --> 0:13:03.640 other areas as well. So think about Microsoft Excel for example. 0:13:04.440 --> 0:13:06.240 You might be able to use Google Sheets to do 0:13:06.320 --> 0:13:08.719 the same thing, but you really want to retrain every 0:13:08.760 --> 0:13:11.520 person who comes in on the Google Sheets shortcuts versus 0:13:11.640 --> 0:13:14.560 Excel shortcuts. It's not a good use of time, especially 0:13:14.559 --> 0:13:17.000 when the software is already so cheap. And so that's 0:13:17.040 --> 0:13:19.560 another plank in what people are buying when they buy 0:13:19.600 --> 0:13:22.160 software is the standardization and the knowledge that they'll be 0:13:22.200 --> 0:13:24.920 able to hire employees who have that, and then there's 0:13:24.960 --> 0:13:27.800 things like brand again, the kind of ecosystem that comes 0:13:27.800 --> 0:13:29.840 around it, and so it really is more than just 0:13:29.960 --> 0:13:30.720 the raw code. 0:13:30.880 --> 0:13:33.440 We've been joking about this, but the idea of software 0:13:33.520 --> 0:13:37.280 companies value lying in being a scapegoat essentially for when 0:13:37.320 --> 0:13:40.640 things go wrong is kind of funny and dystopian, I 0:13:40.679 --> 0:13:41.680 think in many ways. 0:13:42.000 --> 0:13:45.360 Yeah, I mean, I think you know, it's a real fear, 0:13:45.600 --> 0:13:47.679 right And the way I think about it is, there 0:13:47.679 --> 0:13:51.320 are two arguments against software right now. One is the 0:13:51.320 --> 0:13:53.160 world is going to stay the same, but software just 0:13:53.160 --> 0:13:54.960 going to get a lot cheaper over time now that 0:13:54.960 --> 0:13:56.880 it's cheaper to build. And I think there's no one 0:13:56.920 --> 0:13:59.000 who would argue that it's not gotten dramatically cheaper to 0:13:59.000 --> 0:14:01.320 build for reasons that we laid out in our deck 0:14:01.360 --> 0:14:03.160 and we can talk through it more. We don't buy 0:14:03.200 --> 0:14:06.160 that argument. I don't buy that argument. But the second 0:14:06.280 --> 0:14:08.400 is the world's about to get really weird and the 0:14:08.440 --> 0:14:10.840 way that knowledge work happens is going to change. And 0:14:10.920 --> 0:14:13.320 if we think out three, four or five years, who 0:14:13.320 --> 0:14:15.559 knows if there will even be customer support reps or 0:14:15.600 --> 0:14:19.280 sales reps or software engineers, and I think that's what's 0:14:19.360 --> 0:14:21.440 causing the kind of hit to the share prices lately, 0:14:21.520 --> 0:14:23.360 is this terminal value concern. 0:14:23.760 --> 0:14:24.920 Yeah, it was interesting. 0:14:25.000 --> 0:14:28.040 So one of the companies that's been associated with the uh, 0:14:28.120 --> 0:14:29.600 what did you say casastrophe? 0:14:29.840 --> 0:14:31.400 One of those companies that's been. 0:14:31.280 --> 0:14:34.680 Caught up with this blue owl, the private investing firm 0:14:34.720 --> 0:14:37.400 Private Credit. I read through their conference call and their 0:14:37.480 --> 0:14:40.160 CEO was like, not only do we not see red lights, 0:14:40.320 --> 0:14:42.480 not only do we not even see yellow lights, we 0:14:42.520 --> 0:14:44.560 actually see a lot of green lights, which I think 0:14:44.640 --> 0:14:46.080 is really interesting. 0:14:45.920 --> 0:14:48.160 Because it can fit with this idea of. 0:14:48.560 --> 0:14:51.000 This year could be fine, next year could be fine, 0:14:51.080 --> 0:14:52.960 year after that could be fine, and then the year 0:14:52.960 --> 0:14:55.200 after that could be zero or at least that's the 0:14:55.240 --> 0:14:57.480 anxiety that there's this terminal value talking. 0:14:57.800 --> 0:14:58.720 That's like a cliff rest. 0:14:58.760 --> 0:15:01.480 Yeah, there's this cliff Yeah. I think it's really helpful. 0:15:01.680 --> 0:15:03.560 You know, this is our second iteration of the deck, 0:15:03.600 --> 0:15:05.560 and so we kind of force ourselves to recenter on 0:15:05.720 --> 0:15:09.760 what actually happened since the last deck, right, and there's 0:15:09.760 --> 0:15:12.120 a very clear pattern in software and what happened over 0:15:12.160 --> 0:15:15.640 the last five years, which is the pandemic. People freaked 0:15:15.640 --> 0:15:17.480 out at the beginning, but it was rapidly clear that 0:15:17.480 --> 0:15:20.080 it was an accelerant for SaaS as everyone tried to 0:15:20.120 --> 0:15:23.040 digitize their companies, and so you had a spike in 0:15:23.080 --> 0:15:25.680 the growth rate and net retention of the businesses. It 0:15:25.720 --> 0:15:28.520 peaked at just over forty percent and twenty twenty one 0:15:28.560 --> 0:15:31.920 for the median software companies. That's really nice annualized growth. 0:15:32.600 --> 0:15:35.040 And then there was a hangover and that slowed down, 0:15:35.280 --> 0:15:37.880 and we wrote eighteen months ago that that reflected the 0:15:37.880 --> 0:15:41.360 sector sort of maturing. The adoption had just slowed down 0:15:41.400 --> 0:15:43.680 because most folks had adopted the software that they needed 0:15:43.880 --> 0:15:46.280 under the pressure of the pandemic. And so for the 0:15:46.360 --> 0:15:49.200 last few years after that, we saw this degradation and 0:15:49.240 --> 0:15:52.120 growth rates across the sector. By the beginning of last year, 0:15:52.400 --> 0:15:55.040 the median company was growing eighteen percent instead of forty percent, 0:15:55.040 --> 0:15:58.160 so you saw a pretty significant draw down. What's fascinating 0:15:58.200 --> 0:16:00.760 is that if you look at the actual financial performance 0:16:00.800 --> 0:16:03.000 of the companies in the last year, it's been pretty good. 0:16:03.440 --> 0:16:05.720 That growth rate has held. It was eighteen percent again 0:16:05.800 --> 0:16:08.720 in Q three. Net retention has also been consistent at 0:16:08.720 --> 0:16:11.200 about one hundred and ten percent. That's revenue from existing 0:16:11.400 --> 0:16:14.400 customers over the same revenue from those customers a prior year. 0:16:14.640 --> 0:16:16.880 So there's not a churn issue developing or a lack 0:16:16.920 --> 0:16:19.120 of expansion within the customer base, and a lot of 0:16:19.160 --> 0:16:22.480 the companies are actually accelerating growth or guiding to accelerating growth. 0:16:22.520 --> 0:16:24.200 We have a chart showing the number of those companies 0:16:24.240 --> 0:16:27.120 has increased each quarter of the last three successive quarters. 0:16:27.400 --> 0:16:30.120 And so there's a lot going on right now with 0:16:30.160 --> 0:16:32.800 the terminal value. But it's very hard to argue that 0:16:32.840 --> 0:16:35.040 this is something that's happening today and showing up in 0:16:35.080 --> 0:16:37.720 the numbers. The thing is investors are sharp, right, and 0:16:37.720 --> 0:16:39.160 they're constantly looking at that booking. 0:16:39.320 --> 0:16:39.520 Yeah. 0:16:39.520 --> 0:16:41.280 I mean look at CHEG right, which went down very 0:16:41.320 --> 0:16:44.280 quickly in the aftermath of chat GPT coming out, and 0:16:44.320 --> 0:16:45.480 that was completely correct. 0:16:45.840 --> 0:16:46.040 Right. 0:16:46.120 --> 0:16:48.400 Investors were ahead of that, and of course for the 0:16:48.400 --> 0:16:51.240 first few quarters the management team of CHEG, you know, 0:16:51.560 --> 0:16:53.760 had their heads in the sand, but then it became 0:16:53.840 --> 0:16:55.760 clear that it really was existential to their business. 0:16:55.840 --> 0:16:57.040 That's a fun chart. 0:16:58.160 --> 0:17:01.440 I thought I was looking at a typo because I saw, wow, 0:17:01.840 --> 0:17:04.480 that was a near one hundred dollars stock in February 0:17:04.520 --> 0:17:05.280 twenty twenty one. 0:17:05.600 --> 0:17:07.159 It is now a sixty one cent. 0:17:07.000 --> 0:17:09.119 Stock and you have to give the markets credit. Like 0:17:09.160 --> 0:17:11.240 the second chat of T came out, people were like, 0:17:11.320 --> 0:17:13.480 this company's in big trouble. They didn't wait for it 0:17:13.520 --> 0:17:16.199 to hit the financial results, and so there is signal 0:17:16.240 --> 0:17:17.000 and what people think. 0:17:32.800 --> 0:17:35.400 I have a bunch more questions, but just briefly, where 0:17:35.440 --> 0:17:37.879 does data actually fit into all of this? Because the 0:17:37.960 --> 0:17:40.840 other thing we hear about AI is maybe the models 0:17:40.880 --> 0:17:43.719 don't matter that much, but it's the actual data that 0:17:43.800 --> 0:17:47.800 you have access to. And I imagine the customers themselves 0:17:47.920 --> 0:17:50.960 of SaaS companies, they have their own data. Do the 0:17:51.000 --> 0:17:53.000 SaaS companies have their own data as well? Can they 0:17:53.000 --> 0:17:53.600 build off of that? 0:17:53.840 --> 0:17:55.399 Yeah, it's a great question. And we're here at one 0:17:55.440 --> 0:17:58.840 of the world's biggest data companies, so very apt. Well, 0:17:58.880 --> 0:18:03.560 disclosure data is definitely something that gets more valuable in 0:18:03.640 --> 0:18:07.040 this world. If you think about a stylized AI model, 0:18:07.400 --> 0:18:10.040 it could have PhD level intelligence in a domain. But 0:18:10.119 --> 0:18:12.440 if you hired a PhD in your company and sat 0:18:12.480 --> 0:18:15.360 her down on her first day, she wouldn't be very useful, right. 0:18:15.440 --> 0:18:18.160