a blog for capturing lessons

Metrics

https://www.thetwentyminutevc.com/everett-randle - Ev makes some good points around performance measurement in the AI era.

COGs: The common frame from SaaS era investing is to see companies with high gross margins of c.80% as an indicator of health. AI companies are seeing much lower GM % (c.50% or less) as the inference spend is still high on a relative basis. Doesn’t mean it’s a bad business. The second order benefits of lower GM is potentially higher gross profit dollar per customer - simply AI companies command greater spend. He argues that this is visible in the cloud spend line items as well.

I agree the desire around high COGs is a blunt tool - consider the enterprise software company that has onboarding charges, the incremental (year 2,3,4+) gross margin per customer is far higher once you strip out the initial loaded implementation. Doesn’t mean that a static one-year GM% <60% is a cause for concern.

Revenue Retention - This week we looked at an investment where there was a stark difference between the overall annual view of NRR vs monthly cohorted view. We were seeing monthly cohorts churn to c.85% NRR after 12 months despite showing annual net retained numbers north of 100%. It’s a good reminder to consider the differences of each methodology. Annual snowballs measure the over time diminishment (or expansion) of your revenue base with a starting number that contains many old vintages of customers. What happens over time to show this difference is - if you have an incredibly sticky set of long term customers, those might eventually become healthy expansion cohorts. You may be signing on a large batch of new customers. The monthly cohorts lifted over a 24 month period, suggesting that early batches had segmentation and ICP mix problems.

The other issue in this business was that new customers weren’t growing fast enough for there to be enough of a drag on churn or downsell - vs the expansion from old customers coming through.

Zoetis

Bullish ZTS at current price levels.

• Trading at all time low PE c.19 and EV/fwd EBITDA of c.15x (10Y average is c.23x)

• High quality business.

  • 40% margins that have always grown in spite of competition

  • ROIC >20%

  • Number 1 player across multiple categories

• Underlying fundamentals are strong.

  • US pet adoption is already high but there are growth in product categories like Dermatology and Pain to drive revenue.

  • Continue to see underlying market growth rates at c.6% (driven by the humanisation of pets and general shift towards pet ownership in developed economies).

  • Brazil, China and Europe are all very large markets with more companion animals than the U.S. and are very early in ZTS penetration.

• Market seems to be worried about macro and competition. My view is that it’s all short term headwinds that are temporary and ZTS has levers to play with to drive growth/compete

  • Macro: consumer discretionary health might impact new revenue growth slightly due to vet visits but overall demand is sticky (healthcare) and will tick up agaain.

  • Competition: my view is that short-term pain can be competed against, Elanco is operating on 57% vs 70% gp margins and 20% EBITDA vs 40% EBITDA margins which suggests to be that Zoetis is nowhere near a scenario where they can’t defend their share.

Reflections

Where I want to be in 3 years time - inverting from the top to plug gaps in my skillset.

Areas to work on: 1) Network 2) Dealflow and 3) Leadership.