The Metrics Brothers
00:00:10 · Dave Kellogg, Ray Rike
[00:00:10] S0: Live from Schenectady, New York at Saas Talk with The Metrics Brothers, Growth and CAC. [00:00:16] S1: And I'm Growth, better known as Ray Rike, founder and COO of Benchmark. [00:00:20] S0: And I'm CAC, better known as Dave Kellogg, EIR at Balderton Capital, independent consultants, and the author of Kellblog. [00:00:27] S1: And together, we are the Metrics Brothers. [00:00:30] S0: And we go together like Iconiq and benchmark reports. [00:00:34] S1: Oh, brother cack. I think you were supposed to say benchmark it and market research. [00:00:39] S0: Well, Ray, I hate to break this to you, but other firms do produce benchmark reports and Iconiq is one of them. [00:00:46] S1: Yeah, know you're right, Dave, and they do fine work. [00:00:49] S0: They do, Ray. And you know, look, I think there's something we should commend them upfront for, which is we've struggled with definitions and methodologies in some of the recent reports we reviewed. And Iconiq does a great job of being descriptive and transparent, both about what they're calculating and how they calculate it. [00:01:07] S1: Yes, Dave, they're exemplary. Oh, excuse me. Just as we are here at Benchmark. [00:01:13] S0: Exemplary, easy for you to say, Ray. They are and I know you guys are too. But before we dive into today's topic, which is Iconiq's new State of Software 2025 report, let's hear a word from our sponsor.
00:01:13 · Dave Kellogg, Ray Rike
[00:01:13] S0: Exemplary, easy for you to say, Ray. They are and I know you guys are too. But before we dive into today's topic, which is Iconiq's new State of Software 2025 report, let's hear a word from our sponsor. [00:01:27] S1: The Metrics Brothers is proudly sponsored by Benchmark, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Rike have put The Metrics Brothers podcast on hiatus for remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave at Kellblog and Ray on LinkedIn at Ray Rike. Thank you so much for listening to The Metrics Brothers podcast. [00:02:03] S0: So, Ray, this is a new report. It was published in September. It's called State of Software 2025. It's 73 pages long, as we go through the episode, we will mention what slide we're looking at as we go through. Here on slide four, 127 companies are included, Iconiq companies are included, as well as 10 public companies who are not Iconiq, 25 who are, and ergo 92 private companies. Some of the names in the report, people like Airtable, DataIQ, FloQast, Vic.ai, some of the publics, Alteryx, DocuSign, Snowflake, Zoom. Other publics include Atlassian, Cloudflare, HubSpot, and Monday. So Ray, this is gonna be a tough set of comparables. [00:02:47] S1: It is. These are the Ivy League of SaaS companies, but let's go.
00:02:47 · Ray Rike, Dave Kellogg
[00:02:47] S1: It is. These are the Ivy League of SaaS companies, but let's go. [00:02:52] S0: Oh, okay. Let's look at more specifically the firmographics on this thing. So of the 127 companies, there's a healthy distribution across ARR size range, across industry sector, About 75% are private, 25% roughly public. Most of the companies are selling to mid market to enterprise targets. 43% in the Bay Area, basically about 50% in the rest of America and 10% in Asia Pac and Europe. Anything else in the firmographics, Ray? [00:03:25] S1: You know, the only thing that jumped out at me was they did it by AI product maturity. And they say that 59% of these companies are non AI. And I think it's important that they define that as SaaS companies without AI products or features. That jumped out at me. [00:03:40] S0: Yeah, that's a surprising thing to have there, Ray. Not entirely sure what to make of it, but we'll talk about it as we go through the report. Now, I'm going to hit the tops of waves on this slide eight of their report, but look, company valuations remain below historical peaks. We know that. Rule of 40 has emerged as the strongest predictor of valuation. We'll cover that in an upcoming slide. Beat rates are recovering. Interesting because they're talking about public companies beating earnings, so that's a good sign. AI is a pervasive theme. This was a fun one, Ray, where they looked at earnings call transcripts and they found that 94% of them mentioned AI. Thoughts on that one? And how is that consistent with the other one?
00:03:40 · Dave Kellogg, Ray Rike
[00:03:40] S0: Yeah, that's a surprising thing to have there, Ray. Not entirely sure what to make of it, but we'll talk about it as we go through the report. Now, I'm going to hit the tops of waves on this slide eight of their report, but look, company valuations remain below historical peaks. We know that. Rule of 40 has emerged as the strongest predictor of valuation. We'll cover that in an upcoming slide. Beat rates are recovering. Interesting because they're talking about public companies beating earnings, so that's a good sign. AI is a pervasive theme. This was a fun one, Ray, where they looked at earnings call transcripts and they found that 94% of them mentioned AI. Thoughts on that one? And how is that consistent with the other one? [00:04:25] S1: Well, 94% of the market's talking about AI and only 59% of SaaS companies have an AI product, I think there's a market opportunity or issue there. [00:04:35] S0: Yeah, yeah. There's something going on we don't totally understand. Look, just skimming tops away from this report on slide 12, they talk about revenue multiples, which is a forward looking enterprise value to revenue multiple. For public SaaS companies, the median is stable at around five. The high growth companies, quote unquote, those growing greater than 20%, it's at 12. But we should mention here, Ray, that one of the few criticisms we have of their market research is that they flip a lot between looking at the median and looking at the top quartile. Did you notice that?
00:04:35 · Dave Kellogg, Ray Rike
[00:04:35] S0: Yeah, yeah. There's something going on we don't totally understand. Look, just skimming tops away from this report on slide 12, they talk about revenue multiples, which is a forward looking enterprise value to revenue multiple. For public SaaS companies, the median is stable at around five. The high growth companies, quote unquote, those growing greater than 20%, it's at 12. But we should mention here, Ray, that one of the few criticisms we have of their market research is that they flip a lot between looking at the median and looking at the top quartile. Did you notice that? [00:05:10] S1: I do, and that's why as the readers go through this report, look at the top of every one and see if it says top quartile or if it says medium in the footnotes.
00:05:10 · Ray Rike, Dave Kellogg
[00:05:10] S1: I do, and that's why as the readers go through this report, look at the top of every one and see if it says top quartile or if it says medium in the footnotes. [00:05:20] S0: Now, I'm gonna look at slide 13 real quick way on rule of 40. I know there's some inconsistent data out there, so this can be confusing. Quick history on the rule of 40. It was actually created on the theory that a metric that measured a balance of growth and profit would be a better predictor of revenue multiple than say growth alone or profit alone or some other metrics. So this thing was kind of invented to predict revenue. Years later Bessemer came along with rule of X and said, Hey, we can do roughly a 2.0, 2.3 X growth weighted rule of 40, and that's going to predict revenue even better. And now people measure the R squared between different metrics and how well they predict enterprise value to revenue multiple. And in their latest sample here in Q2 twenty twenty five, the strongest predictor is rule of 40 with a 34% R squared to the EV revenue multiple. Revenue alone looks to be 20%. R40 is doing its job. It's predicting value better than revenue alone. What are your thoughts on this topic, Ray?