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GitHub Is Doing Much Better Than Bloomberg Thinks (medium.com/moritzplassnig)
68 points by jbernardo95 on Dec 20, 2016 | hide | past | favorite | 16 comments

I read somewhere that VCs don't mind burning cash at GitHub, because the fire helps power the greater Software ecosystem. If GitHub shuttered it doors, it would be like a bank closing. Something would fill the void, but the immediate shock would be hugely damaging.

Overall, GitHub should go the services route. Right now enterprises are footing the bill with private repositories and organizations. If they want to become positive by just jacking up the price, buyers are going to start shopping around, and GitLab looks better everyday. Services like setting up CI/CD pipelines for enterprises could be highly lucrative, especially if they can be templated with internal tools. Most software (and SaaS) companies eventually arrive at the conclusion that they are better off selling the expertise on how to use their software than selling the software itself.

Services are the worst route for a software company to go down. There's little to no economies of scale, they have no inherent advantage over other consulting companies beyond their brand, and companies are always looking to cut consulting costs from their books (since they're often considered OpEx vs CapEx for software).

Services only makes sense from the perspective that you can make your software "stickier" by adding consulting to help with implementation and customer success.

This is reflected in the multiples that VCs and acquirers give software vs. services companies - high-growth software companies often command a 10-14x trailing 12 month revenue, while services are lucky to get 4-5x. It's just a less attractive business.

> I read somewhere that VCs don't mind burning cash at GitHub, because the fire helps power the greater Software ecosystem.

That makes no sense at all. No LP would be in favor of paying an "investment tax" which is not broadly paid yet is broadly used. LPs put money into venture firms for higher than average returns. What you describe would make the investor's job harder.

In the Valley (and on HN) the VCs are the BSDs of the money scene. But they need their customers (LPs) and if you go to any LP meetings you'll see that most of the money comes comes from the actual BSDs of PE, hedge funds and pension funds. And since VC is such a tiny part of the financial world, you'll see that the folks that represent the big LPs at those LP meetings are just kids on their first job after an MBA, or even between college and MBA: all they really care about is reporting good returns to their bosses.

> Overall, GitHub should go the services route.

Could you give examples on how that route, in your opinion, could look like?

> Assuming GitHub calculates their ARR in a healthy and responsible manner, there is no issue with their burn rate since it will result in higher revenue

The original Bloomberg article [1] frames more than decides on this assumption. In any case, it deserves more than a hand wave.

On one hand, every successful start-up pays for future revenues with prudent but present losses. On the other, "a lobby modeled after the White House’s Oval Office" doesn't sound like that.

[1] https://www.bloomberg.com/news/articles/2016-12-15/github-is...

I've been in that lobby, it's funny but nothing special; I'm sure it costed a lot of money but it's not like they reproduced trump's bathrooms in the original materials...

I read Thiel's Zero To One recently and after reading it you can't help but think these kind of critiques are shortsighted. A technology company's worth is often a projection for what their value will be in 20 years. This is why tech startups can be expected to lose money for many years and still be valued highly.

Exactly - as long as the unit economics (revenue per unit is more than the variable cost to create and sell it) are positive, software companies can grow past their fixed costs. One SaaS companies grow past their fixed costs, they are machines for throwing out cash. People who are too short sighted to see this are better off investing in public equities rather than early ventures. If unit economics don't make sense, then the founders and early investors deserve to lose their money.

> Even if GitHub stops growing and doesn’t reduce the Marketing/Sales costs, it would still have enough money in the bank for another 20 months

20 months of runway if growth stops? That's it? Is that called "doing (much) better"?

Author here: The point I tried to make is that GitHub has plenty of time compared to most of the other companies the raised VC and burn a lot of $. GitHub's ARR went up drastically, the underlying assumption in the article is that their recognized revenue will perform well too because of that shortly. Because they have at least 20 more months of money (and that's a conservative projection, ignoring credit lines, pre-paid contracts, etc.), they will not go out of business before their actual revenue increases (which could make them even profitable again immediately).

"they will not go out of business before their actual revenue increases"

But how much will they have to increase spending to achieve those projected revenue increases? It's a classic error to think that the current trend of revenue growth will continue but expense growth will stop.

2 important factors: - High ARR ($140M) as of Aug'16. That ARR will result (unless the ARR metric is calculated wonky) in a recognized revenue close to $140M. GitHub spent to acquire the revenue. Costs are frontloaded (hiring Sales ppl, etc.), revenue is more backloaded (SaaS, monthly payments at least in terms of revenue recognition). GitHub lost $66M over 9 months, let's assume linear growth of that (to make it simpler), so $88M over 12 months. The growth from $98 to $140 in recognized revenue would already offset a lot of it ($98M+$88M-$140M = -$46M in losses). - Using those numbers, growth would have to be roughly another $50M, from $140M in ARR/Rec.Rev. to $190M which is realistic after they just went from $90M to $140M.

Yes, I agree - if the existing sales staff can increase the ARR by another $50M (which is plausible given the prior increase of $50M) while holding all other costs fixed then they will reach profitability.

My point is that "holding all other costs fixed" usually turns out to be a heroic assumption. More staff is needed to support the larger customer base, marginal sales become harder (i.e. more expensive), etc. Plus, as these revenue figures grow, a fixed churn rate becomes more expensive in absolutely dollars. So customer retention becomes more important, which means more sales resources, which means more money. And so on. And in the meantime competitors are cutting prices, so "fixed" revenues turn out to be not so fixed after all, even before factoring in churn.

Don't get me wrong - I'm not predicting that GitHub will fail. I just think the slog will be harder than this meta-analysis of Bloomberg's analysis suggests.

Bottom line - Are they overvalued, and is this an apology for their bloated value, with promises of stellar growth in the future?

I hate how the author, a purported CEO, doesn't know the difference between "lost" and "spent". For example, "That means that GitHub lost $27M while generating $95M in revenue."

GitHub spent $27M. To "lose" $27M, they would have had to spent $122M, and subtract their $95M in revenue.

A CEO should know these terms like the back of their hand, and should be more precise with their terminology.

GitHub didn't spend $27M. They spent far more, in a simplified calculation exactly how you described it: $122M in total spend - $95M in revenue = a loss of $27M.

To be more accurate, according to their P&L, GitHub made $95M in recognized revenue and showed a net loss of $27M.

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