CIO Gavin Baker on SaaS

Gavin Baker who runs a hedge fund and formerly the very successful manager of the Fidelity OTC fund tweeted this yesterday:

  1. We are about to find out if software contracts actually are “better than first lien debt.”

Regardless, the days of customers paying upfront are over and payment terms will lengthen significantly which will combine to have a significant impact on cash flow for software.

  1. I would take the under on businesses that are effectively shut down - retail, restaurants, hotels, airlines and all SMBs - paying their software bills on time.

Contracts will be adjusted to reflect lower utilization and lower seats.

And some bills will never be paid.

  1. A survey of 500 businesses by AvidXchange published on 3/18 found that only 54% of businesses had the technology necessary to pay all bills remotely.

Some PE firms are asking their portfolio companies to stop paying all bills. No cash out the door.

  1. Software was already moving away from multi year subscription models billed upfront towards usage based models billed in arrears in-line with hyperscale IaaS.

The virus will accelerate this change.

Cash is king and working capital dynamics are shifting against software."

Gavin on videogame investing and other things:



Here’s the tweet. I thought the board might want to see it. Personally, I don’t fully understand what he or most of the comments are saying. Obviously he’s bearish but he also seems to be deliberately vague. Anyway if everybody was a huge SAAS fan, then there would be no wall of worry to climb. Also, this may not even have anything to do with Saul’s stocks.

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Thanks for that, it’s interesting to consider which companies are easily replaceable or not.

ESTC, MDB → Very difficult to replace. You could consider going with the open-source versions, but if you’re using any of their paid services? Very difficult.

DDOG → Um. Relatively easy to switch out for monitoring, but are there cheaper alternatives other than ESTC?

AYX → Hmm. This one is more difficult. AYX is value-add (IMO) rather than must-have. Could see DBNER drop for this one as companies stop buying extra seats.

ZM → Immune.

CRWD, OKTA, ZS → Immune?

WORK → Immune.

Thoughts on others? If significant companies start going bankrupt, all bets are off, but the trend of digital transformation is not going away and most of the companies discussed here are enterprise-focussed and aren’t heavily weighted in any single customer which should de-risk them.