Product Management Confabulation
What Product Managers are talking about.
It appears emerging price points for AI-powered software products will boost the total addressable market (TAM) for technology products, and help reaccelerate growth at tech companies big and small.
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Everbridge's deal shows that startups shouldn't expect their valuations to be salvaged that much by cash generation if their growth is all but zero.
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Nvidia’s blockbuster quarterly results make it plain that the race to build generative AI products is well and truly afoot. The GPU giant crushed earnings expectations in the second quarter and forecast a monster future. Investors, already content to value Nvidia north of $1 trillion, added tens of billions more to its market cap after the report.
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The hardware story is simple enough to write: Many tech companies are buying hardware to train their own AI models, and major cloud providers are also bulking up, both for their own purposes and to offer a service on their public platforms. Nvidia, meanwhile, is minting cash while taking orders.
But what about the software side of the equation? How are software companies faring in the generative AI era? There’s some hope that AI-related revenues can boost growth, but the real question is just how and when tech companies should charge more for AI-powered software tools, in addition to their current products.
Microsoft has taken big strides in monetizing AI. Not only can you pay for generative AI services on its public cloud platform, Azure, you can also pony up for GitHub Copilot, which can generate code for you for $10 to $19 per month, per user. And, the company is rolling out a $30 per user, per month add-on to its Office suite as well.
We’ve touched on how companies may charge for AI products. In May, we noted that some tech companies were planning to offer paid add-ons, which has become the Microsoft model to a degree. In contrast, some tech companies appeared content to bake new AI-powered tooling into their existing software for no extra fee. In June, we reported that a number of tech shops were waxing poetic about the power of proprietary customer data as a way to make their own AI projects more valuable.
Recent conversations with Amplitude and Appian, both public software companies, gave us much needed clarity on this crucial question of AI pricing. Amplitude CEO Spenser Skates, in an interview with TechCrunch’s Equity podcast, differentiated when to charge and when not to along the axis of new functionality versus accelerated functionality. And Appian CEO Matt Calkins had an interesting take on how companies can earn more from their existing software products with AI but not have to even raise prices. Let’s talk turkey.
When asked why Amplitude is not charging its customers for new AI features, Skates said (emphasis ours):
Now past the halfway mark of the third quarter, we are quickly chewing through 2023. Soon it will be Disrupt season, and then we’ll head straight into the fourth quarter. For tech companies, that means the window to file for an IPO this year is beginning to close.
Happily, some companies are expected to actually go public before 2023 ends.
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Instacart, the heavily venture-backed grocery delivery and software company, is expected by some to file for its IPO as early as this week, aiming for an early-September debut. Databricks remains an IPO candidate, though it is unlikely to go “first” among former startups looking to list. The ARM transaction is also coming, putting another big-name company on the list.
The flurry of news — and, likely, progress in IPO prep and planning at some of tech’s biggest private names — comes in the middle of a slightly bad time for tech shares. Still, tech stocks have regained around half of their losses since the last tech boom faded. A week of selling can’t dent real progress by tech companies on the public markets, even if this market could trim revenue multiples for upcoming IPOs.
To get here, we needed a lot of time, the SPAC bubble had to fade, revenue multiples had to reinflate, and two companies with good IPO pricing and early trading runs had to generate a lot of publicity with their own listings. If you’re hoping that your employer will finally get out the door in the next few quarters, then swing by a Cava location wearing Oddity cosmetics, because those two companies did you and your illiquid holdings a real solid by listing well earlier this year.
Technology and finance media have recently had a lot to say on the IPO matter. The Information broke news regarding Instacart’s and Databricks’ growth rates, helping frame their impending listings with real numbers. The Financial Times has news about each of the core IPO candidates we’ve discussed ad nauseam. Bloomberg has notes as well. And Yahoo Finance reported that as the tech IPO market gets off its backside, it could have a massively busy 2024.
New data shows that net retention at software companies has been halved in recent quarters, partially explaining the slowdown of revenue growth at tech firms.
This isn’t wholly surprising, since net retention forms a core plank of the SaaS economic model, and has been under extreme pressure, as we noted last week. This is because software companies are finding themselves trying to meet two, seemingly contradictory asks: tighten costs and stop letting growth slow too much while your existing customer base reins in spending.
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If you need a refresher: Net retention (AKA: net dollar retention and net revenue retention) is a measure of how much existing software customers spend on your product over time. The metric is normalized to 100%, which indicates that a software company’s existing customers are spending no more and no less than they did before. Net retention metrics over 100% tell us that existing customers are spending more, while anything less than 100% signifies a fall in total spending.
Enterprise software companies are expected to enjoy net retention comfortably above 100%. The higher this metric, the better, because if you can land customers that continue to spend more on your product over time, your company not only buys revenue with sales and marketing spend, it also nets future growth. And since software revenue tends to be high-margin by nature, that boost to revenue brings with it gobs of gross profit that can offset costs.
In other words, declining net retention not only makes the SaaS economic model dicier than it was before, it also means software companies will find it harder to lose less money and keep expanding at the same time.
Now, to the new data. According to Altimeter investor Jamin Ball, median net retention at public SaaS companies has followed the following curve in recent quarters:
As we are more interested in how far above 100% these numbers are, this decline from 120% to 111% is not a difference of just 7.5%, but a shocking 45% fall over just two, short quarters. It appears the trend we detailed last week was not only described accurately, it was uglier than expected.
Worse, as we are discussing median net retention rates, we can assume that at least half of all public software companies were under the 111% mark. We’ll get more data as companies continue to report their quarterly results, so expect the numbers to move a little, but this does not look good.
Lower net retention, slowing growth and lots of SaaS companies still in the red. Is software really just not that good a business? I think there’s more nuance to what’s happening here.
You can get a subscription to Slack for as little as $7.25 per user, per month. Sure, that’s the cheap tier, but still it’s incredibly inexpensive. You can spend more — a stonking $12.50 per month — for the next tier up, or you can get an enterprise plan like my parent company Yahoo for more features, though I presume it’s possible to negotiate a volume discount at that point.
The CEO of Amplitude is glad that his company went public in 2021, despite a sharp contraction in the value of tech shares since its IPO.
In a wide-ranging conversation on TechCrunch’s Equity Podcast, Spenser Skates, who also co-founded Amplitude, told me that going public was the “totally correct” move for the digital analytics company at the time.
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“If we were still private now we would be in a world of hurt,” he said. “There would be all this pressure to go public, but then there wouldn’t be an appetite for it. And so [it would] be harder to get out,” he added, going on to detail how delaying the IPO would have harmed Amplitude’s ability to operate, grow and acquire.
Skates’ clear answer is notable, because while Amplitude had an incredibly strong run when it was still privately owned, it has been forced to endure the same sharp correction in tech valuations that every public technology company has suffered. Moreover, the company was early to tell the market about its concerns around the macroeconomy, and swallowed a lot of the bitterness of that repricing in a single gulp.
To see the CEO staunchly in favor of running a public company at a time when the market is this volatile makes me suspect other unicorns’ decisions to not go public during 2021. In hindsight, you could argue that it was smart to hunker down and wait out the storm given how things have been since the bubble popped, but what was their logic when things were fine and dandy?
Let’s dig deeper into Skates’ decision to go public, and why he stands by it even now.
Companies have a bunch of good reasons for doing a public offering. Besides the headlines and public image that doing an IPO gets you, usually, going public lets you show customers that you’re financially healthy (BigCommcere’s CEO has stressed this point several times to this column), capital is easier to raise, your market position is clearer to your customers and competitors, and you become part of a bigger cohort of large companies that are supposedly really good at what they do.