Storytelling is a very effective way to interview job candidates. It's a good way to tear down inflated candidates to get to the truth, but more importantly it's a good way to uncover and find talented high potential people.
U.S. could probably address this issue if they moved to a territorial tax regime. It would bring a lot of offshore cash back to the United States (especially in tech) that can later be redistributed back to investors and the economy via buybacks, dividends, and domestic M&A.
The United States currently has a "worldwide" tax system and taxes U.S. companies on income earned both domestically and abroad in foreign countries. The tax on foreign earnings usually isn't assessed until the company brings it back to the United States (you'll hear companies talk about getting hit with a repatriation tax if they bring their "trapped" offshore cash back onshore to the U.S.). Most U.S. companies will try to avoid paying repatriation tax and keep substantial portions of their foreign cash earnings overseas to "reinvest" indefinitely.
At this point, the United States is one of the few advanced economies that still taxes its companies on their active foreign earnings (I believe only 8 of the 34 OECD countries use worldwide tax system) and also has one of the highest tax rates. Most OECD countries use a territorial tax systems that largely exempts active foreign earnings from domestic taxation.
So what parts of the "American Dream" are cut and/or subsidized with debt to fit reality? Median household income is about $50K so there's about a $80K shortfall between the $130K "American Dream" and the $50K "Median American". Assuming $20K of the $80K shortfall are taxes you wouldn't have to pay due to earning $50K instead of $130K, you would still need to cut $60K out of expenses. Looking at the list, the line items most likely to see cuts are:
Housing at $17k per year
Groceries at $13k per year
Car at $11k per year
Medical at $9k per year
Education at $4K per year
Apparel at $2.6K per year
Vacation/Entertainment/Discretionary at $17k per year
Savings/College Investments at $22.5k per year
What's scary is you can completely cut savings, discretionary, and medical (~$50k total) and still need to find another $10k to cut. This is how we end up with people in debt and/or are forced to live without a safety net (no insurance/savings) to fund everyday expenses.
So what's the fix? Tough to say. Near term you're definitely seeing a rise in "sharing economy" type activities to better utilize/monetize assets. Provider gets another revenue stream (to supplement flat/stagnant wages). Consumer gets an end product at an affordable price (since they can't afford it otherwise).
From what I've seen, low churn businesses tend to have 1 or more of the following characteristics:
1. Network effects: Your product is a key (or highly integrated) part of an industry's value chain.
2. Process lock-in: Your product is a key (or highly integrated) part of your customer's work flow/process.
3. High ROI and/or Low Cost of Ownership for the Customer: Use of your product generates compelling economics for the customer.
4. Behavioral lock-in: The network effects are eroding, the work flow is changing, and the ROI is shrinking, but the customer still uses your product out of habit/familiarity/convenience/culture/loyalty/etc.
Here's one way to figure out the valuation of your bootstrapped company.
If you continue running the business and pursue your current operating plan, how much cash will you have in the bank in year 5 and year 10? (Broad estimates are fine)
Generally speaking, your year 5 and year 10 estimate is going to represent a reasonable approximation of your company's valuation range.
For example, let's say you believe you will have $5.5m in the bank in year 5 and $12m in the bank in year 10. Your valuation will approximately be $5.5m to $12m.
Financial buyers will generally offer $5.5m. Strategic buyers will generally be willing to pay $12m or more depending on the prospective synergies/option value of the assets.
That said, you'll need to ask yourself how much money are you willing to accept today to walk away from $12m over 10 years. Are you willing to accept $5.5m in exchange for more freedom/time to devote to other things that may add more personal/financial value over those 10 years.
(Many startups are optimizing for high option value and this approach might not be appropriate for those companies)
For those interested in getting a good overview of perpetual vs. SaaS business model I highly recommend Dave Kellog's post on the topic. He discusses both the operational and valuation impacts and walks through an example of a hypothetical startup under both models.
1. Wall Street "sees through" the differences in models and value perpetual and SaaS companies roughly equivalently. SaaS companies are worth 1.8x the revenue multiple of perpetual companies (he walks through the math in the post)
2. There are many good reasons for perpetual companies to move to SaaS models but valuation isn't one of them
3. You get roughly twice the EV/R multiple as a SaaS model but building the revenue stream is just about twice as hard. CEOs who have done the transition from perpetual to SaaS say it takes 3 years to makes the transitions and it must be a top 3 company goal for that entire period.
4. SaaS dampens revenue volatility - for better and for worse. Makes it harder to grow the revenue stream quickly and makes it harder to change once established. (This has an impact on investor psychology and reactions to a bad quarter can be very different in a SaaS model vs. perpetual)
5. Sales compensation is a tricky issue with SaaS model. Sales people still want dollar compensation similar to a perpetual sale despite ratable revenue profile of SaaS.
6. The implicit assumption that an annual subscription to use a service should cost less than equivalent perpetual license can be invalid when looking at the product from a customer Total Cost of Ownership viewpoint. (Companies are also outsourcing the capital intensity of having perpetual software)
I am also curious on founder stakes in SAAS companies Vs larger enterprise companies. My hunch was that that the customer acquisition cost (before it was paid back in say ~24 Months) are being financed by VCs instead of customers in the previous enterprise license worlds.
Since, 1) VCs are more sophisticated than the typical customers, 2) have more bargaining power - Are founders being diluted more in SAAS companies (Box.net) vs enterprise companies (e.g. Oracle)?
Great summary. Another thing that's small but interesting to me is the discount rate. When calculating LTV, (Annual Recurring Revenue x Gross Margin) ÷ (% Churn + Discount Rate) the discount rate is effectively 0 right now due to historically low interest rates. I think that's helping a lot of SaaS companies get going right now. Or who know, maybe I'm missing something here.
On your point 5--amen. If marketing is using affiliates, you see the same problem, plus issues of fake sign ups. Have to make sure affiliates are compensated only on 90 day + signups.
