Bill Gurley is General Partner at Benchmark Capital. Most of the companies that have really high multiples, and that have been highly respected by investors all have or have had organic growth: Yahoo, Ebay, Google, Facebook, Skype, OpenTable, Baidu. What this means is that investors love companies where, all things being equal, higher revenues create higher profit margins. View bill gurley’s profile on LinkedIn, the world's largest professional community. Customers that represent a large percentage of your revenue have “market power” that is likely to result in pricing, feature, or service demands over time. Investors expect Coke to be around in pretty much its same form 50 years from now. There are 4,000+ professionals named "The Gurley", who use LinkedIn to exchange information, ideas, and opportunities. I want to argue that for a variety of reasons, the price/revenue multiple is the crudest valuation tool of them all. In fact, companies with excessively low churn rates (5% annually or less) are very likely to have price/revenue multiples in the top decile. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. Nothing contributes to a higher valuation multiple like good ole’ growth. 2. All of which brings us to last week’s real world example, LinkedIn. Think about this simplistic example. Microsoft, Ebay, Skype, Google Adwords, and Facebook (in their prime) all benefited from network effects. The majority of companies that are heavy marketers trade at price/revenue multiples well below Netflix. This graph would suggest that the company’s revenue alone is a very poor guide. If high price/revenue multiple companies have wide moats or strong barriers to entry, then the opposite is also true. Consulting revenue is also typically one-time. What drives true equity value? Watch the video at the end of this post from the DLD15 conference in Europe (starting at 3:30 into the video), and you will see Travis Kalanick layout a vision for “the Perpetual Ride” whereby a driver would always have a customer in the car – an even more audacious vision. Warren Buffet famously refers to these barriers to entry as an “economic moat,” inferring an image of the body of water that protects access to a castle. And that is a very interesting question; it's a very common one. How long will this company hold off competition? The math department has plenty to do. By Bill Gurley Money Out of Nowhere: How Internet Marketplaces Unlock Economic Wealth. A few years back, Amazon was trading at 1x revenue and had just launched AWS. Benchmark's Bill Gurley said the change in direct listings approved by the SEC will "unquestionably" lead to the end of traditional IPOs. Bill has 32 jobs listed on their profile. See the complete profile on LinkedIn and discover Bill… As a general rule, game companies, where the “hit” nature of the product offering will eventually ensure a finite life of most of its products, typically trade at discounted price/revenue multiples. Since there are too many permutations for these problems to be accurately solved, sophisticated heuristic approximation methods have to be developed. Higher efficiencies through higher volumes and better algorithms could help deliver the desired lower price points and better cash flows. As an example, Kayak’s potential IPO buyers will need to get comfortable with Google’s acquisition of ITA, Kayak’s use of ITA, and whether or not Google goes from being a source of traffic to a competitor. “ Don’t you know that you are a shooting star, These dependencies are also disclosed in the S-1 under “Risk Factors.” Here is the example of the risk disclosure of Demand’s dependence on Google from an SEO perspective: “We depend in part on various Internet search engines, such as Google, Bing, Yahoo!, and other search engines to direct a significant amount of traffic to our owned and operated websites. This allows the company to “forward invest” capital to help these markets achieve lower consumer prices even faster. Armed with this new data, Uber leaned on its legendary “math department” to help drive prices even lower. There is a reason to save growth for last. Using the DCF framework, you cannot generate much cash from a revenue stream that is saddled with large, variable costs. The following table shows this statistically. On one end is Overstock, trading at 0.2X analyst’s 2012 revenue estimates. Cash flow / Earnings – Some companies generate way more cash flow than earnings, and some do the opposite (generate way more earnings than cash flow). , Amazon was trading at 1x revenue and had just launched AWS partner! Margin is better than your accounting net income margin, you could grow business... This list ) by many to be the best of the popular blog Above the Crowd also the reason “! Told journalist Eric Newcomer 18, 2017: the subject of the popular blog the., Ebay, Skype, google Adwords, and opportunities policy or algorithm change to have lower multiples! … Bill Gurley 's compensation, career history, education, &.... Can impact a company that is actually Uber ’ s largest professional community company `` burned '' of. Ipo, and obvious BHAG candidate for 2015 and beyond profit margins all customers that represent over 10 of... 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