SaaS goes to space as some software startups are in a race to survive

This week Mary Ann Azevedo, Kirsten Korosec, and Alex Wilhelm gathered to hash out the news over some coffee and good times. Here’s what the gang got into today: Deals of the Week: Simply Homes raises $22 million for an interesting property play, SoftBank buys majority share of connected-vehicles company Cubic Telecom, and OurSky raises $9.2 million for its space-viewing software system. Troubles in Fintech: With ZestMoney shutting down, and layoffs at Navan (fka TripAction) it seems that fintech is not out of the woods yet. That said, Alex has some notes on enthusiasm in one area of financial technology. What’s up with software? TechCrunch coverage of tech earnings is leading to a mess of mixed signals for startups, and VCs to interpolate; are valuations rising again, or will 2023 end as it began? For more on the software market today, head here. For episode transcripts and more, head to Equity’s Simplecast website. Equity drops at 7 a.m. PT every Monday, Wednesday and Friday, so subscribe to us on Apple Podcasts, Overcast, Spotify and all the casts. TechCrunch also has a great show on crypto, a show that interviews foundersand more! Credits: Equity is produced by Theresa Loconsolo with editing by Kell. Bryce Durbin is our Illustrator. We'd also like to thank the audience development team and Henry Pickavet, who manages TechCrunch audio products. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:10Speaker 00

  Hello and welcome back to Equity, a podcast all about the business of startups, where we unpack the numbers and the nuance behind the headlines. My name is Alex and I'm joined today by Senior TechCrunch Reporter on the FinTech Beat. It's Maryann Asaveto. Maryann, we were just discussing how important Mexican food is to our lives. And so now I have to ask, how is the Mexican food in Austin?

• 0:29Speaker 01

  It's pretty good, I have to admit. Lots of good choices and now you're making me hungry.

• 0:35Speaker 00

  Yeah, we are recording right around lunchtime, which is very dangerous, I think about it. We also have Kirsten Korosec here, Senior TechCrunch Manager, Editor, Person on the Transport Beat. How is the Mexican food in your neck of the woods?

• 0:47Kirsten Korosec?

  Well, I live in Sonora, so Southeast Arizona. It's excellent, as you might guess. And we have, you know, the Sonoran hot dog as well, which is like a special thing here.

• 0:57Speaker 00

  I've never heard of that.

• 0:59Kirsten Korosec?

  Yeah, it's amazing.

• 1:00Speaker 00

  Clearly, I'm asking for more here, Kirsten.

• 1:02Kirsten Korosec?

  Oh, I thought you were just looking to visit. So it's hot dog wrapped in bacon and just covered in all sorts of fun things. Also, mayo. I'm not a mayo fan, so, you know, I kind of avoid that. But yeah, it's just an over the top Sonoran hot dog.

• 1:21Speaker 00

  Sounds absolutely amazing. I may just be hungry, but if you wrap it in bacon, I'll probably eat it. But we are not here to discuss culinary options. We do have a lot of technology and startup and venture capital news for you on the pod today. Deals of the week are Simply Homes, Cubic Telecom, and Our Sky. The next theme is hard times in FinTech and then Q3 results that are changing the technology narrative a little bit. So we're going to end with some good news. But to kick things off, Maryann, Simply Homes, a company with a fascinating business model in a hot part of the market, real estate.

• 1:52Speaker 01

  Yeah, so, you know, I've been covering prop tech or real estate tech for a number of years. And I'll have to say, this is probably one of the more unique startups in the space that I've heard of in a while. And the reason for that is so many startups in the prop tech world. Are focused on either the upper end of the market. There's a lot that are focused on like luxury vacation homes, for example, or just in general, more, more even middle class, like iBuy was buying homes and flipping them, so on. But, but Simply Homes caught my eye because they're actually focused on the lower income neighborhoods and properties, which I think is extremely important and sorely needed.

• 2:34Speaker 01

  So what the company does, they identify single family homes and in certain neighborhoods that have the potential to be good investments. They buy them, they renovate them, and then they rent them out to very low income families through the Section 8 voucher program. So, you know, my first thought, of course, was, are they doing this responsibly? I mean, how can you, it almost feels contradictory, right? Like, okay, we want to help people, but at the same time, we're trying to make money. And we're, we're raising funding when they raised $22 million from a bunch of investors. So part of me has to be skeptical, like, are you, are you really able to do good while you're trying to make money?

• 3:15Speaker 01

  The founders insist that, that they really are, that they've, they took at least two, three years almost to come up with a model where they could automate underwriting for these homes, identify very carefully properties that could be good investments, and then, you know, rent them out to people who really need them. I think they said 70 to 80% are single parent households. And their goal is to help improve chances for economic and social mobility for these families, while also making a profit.

• 3:43Kirsten Korosec?

  This model is really interesting to me because particularly around the Section 8 piece, because for those who are unfamiliar, it's, it's very hard to qualify for Section 8. And if you're the property owner, the benefit to the landlord is that those rental checks are deposited directly into a Bing account. So there's, it takes some of the risk out. There's also for the, the tenant, certain requirements that that home needs to meet. Now, does that happen all the time? Are there huge gaps where really terrible Section 8 housing exists? Yes. But I find this kind of interesting because it does de-risk a little bit for Simply Homes. What I'm interested in is, is how they're selecting homes?

• 4:28Kirsten Korosec?

  And are they clustering them or are these sprinkled throughout? You know, a, a city.

• 4:34Speaker 01

  Yeah, they have different ways of selecting homes and they, I think they also, they work with the housing authority for one, they work with realtors for off-market properties to identify them. So far they've bought, I think by the end of the year, it's going to be over a hundred and maybe a hundred and six homes. And some of them are near each other, some of them are not. They're focused on, on markets that don't have a lot of like wild fluctuations and, and pricing, you know, so like Austin, for example, would not be a target market anytime soon. They are right now in Pittsburgh, Pennsylvania, Cleveland, Ohio, they're looking to expand into Baltimore and other parts of the Midwest. So they look, yeah, they look for these stable markets. And you're right, they said that this is predictable income because of that,

• 5:17Speaker 01

  the reason you mentioned. And I think the tenant is only responsible for a certain amount, and then the, the voucher program picks up the balance. So there's definitely less risk there, which they say is a factor. They said they also factored in the high, high interest rates as part of their risk very early on. So that, because that was one of my first questions is like, oh my gosh, I mean, mortgage interest rates are so high right now. I mean, anybody in this space is hurting. How can you do this? And they said very early on, they factored in worst case scenario into their models. So they're not freaked out or messed up by the high interest rates right now is what they claim.

• 5:57Speaker 00

  Well, also they raised a bunch of money. So presumably they could just buy some of these homes with cash. I don't think that's going to be super attractive, just given how much money it costs these days. But with a hundred and eight properties, thinking about overall rental payments, how big of a business does this become? I guess is kind of my question. It does seem capital intensive to a degree. I like to continuing revenue streams, but being a landlord is not easy.

• 6:23Speaker 01

  Or cheap.

• 6:25Speaker 00

  Or cheap. So I guess I, I, I guess what I don't want to do is sound negative for just, just to be a doubter. But I will be very curious to see how the economics of this play out over a slightly longer timeframe.

• 6:36Speaker 01

  I see what you mean, Alex, but this is where I, I come in and say, you know what? Not every business has to become a unicorn to be successful. Not every business has to have some crazy valuation or a certain milestone in revenues. If they can make money, one day become profitable and help people in the process, should that not be enough?

• 6:58Speaker 00

  You're right, except for the fact that they raised money from, I presume, private investors who will expect a certain return on that money. So you are dead on. You can build a nice small business. You can run it. You can keep it profitable. Hell, yeah. But when you take on external capital, it does come with a timer and expectation.

• 7:16Speaker 01

  And pressure.

• 7:17Speaker 00

  That's, that's why I'm concerned here. Cause what if they get pressured to grow faster and they have to cut corners or whatever? I know I'm sure they thought this through, but that's where my, my worried mind goes.

• 7:27Speaker 01

  Valid, valid points. Hopefully the pressure from investors won't screw them up as they hopefully continue to grow. I'd love to see a company like this succeed for many reasons. We'll keep an eye, see how they're doing in the future.

• 7:40Speaker 00

  Yeah. Speaking about keeping an eye on things, one thing we have been tracking is the development of connected cars. Who does not want to have wifi on the go or to have a smart car? And Kirsten, there's been some big news in transactions in that space.

• 7:52Kirsten Korosec?

  Yeah. So Cubic Telecom, which for the close, this is a deep cut. This is a tech crunch deep cut because this company actually was in the first ever battlefield in 2007. A little bit of a different business model at the time. But if you remember at that time, Internet of Things was a really big deal. It was sort of the talk and they were focused at the time of helping consumers connect mobile phones to international networks. And then also to Internet of Things. Well, what ended up happening is I'm not going to call it a pivot, but certainly an adjustment of the business to focus on specifically vehicles.

• 8:32Kirsten Korosec?

  And this is how they have now gained a lot of traction, notably from SoftBank Corp. Basically getting about 513 million from SoftBank. They're taking a 51% stake in the Dublin-based startup, which puts the valuation at about a billion dollars. So they've come a long way since 2007. But specifically what they do is they've created a software-based networking solution for vehicles. Also other devices, I should mention, to help it link up with mobile networks in whatever country they Happen to be this matters because it used to be that carmakers would have to cut special

• 9:14Kirsten Korosec?

  separate deals with individual carriers by region. Not only is it super time consuming, it's expensive and most notably it is a bad experience. So when you want to get in your vehicle and seamlessly get your Spotify and all this other stuff, Cubic Telecom is there to help with that.

• 9:33Speaker 00

  But not just cars, they're also working in the agricultural space and not just consumer stuff, also diagnostics and other sort of like in the machine itself, information.

• 9:43Kirsten Korosec?

  Yeah, absolutely. So I think that they're, you know, smartly probably diversifying, but the connected car business is a big one. To me, what's interesting, however, is that one of their investors and board members, I believe, is Keriad, which is the Volkswagen unit in China that's supposed to be working on software, but it is like been doing a terrible job of it as of late. There have been a lot of executive shuffling layoffs, software and VW cars is not excellent. So I'm very interested to know if Cubic Telecom is going to be helping and stepping in with that, or if they already are.

• 10:24Speaker 00

  Just one thing to keep in mind, if you're asking yourself, why is SoftBank Corp. doing this and not a SoftBank subsidiary like the Vision Fund? Don't forget SoftBank is a Japanese conglomerate. It has more than just been money on startups. It also runs telco in Japan. So it was already working with Cubic Telecom ahead of this. And as we move towards a more self-driving car future and more cars become connected, Cubic has a big thesis about that. We're going to see more cars needing information in real time across networks and also, I would say, between one another. And so to me, this is like one of those boring set with love background stories that's going to lead to more intelligent automotive that will hopefully unlock things like self-driving cars. So that way Mary Ann can have the pants scared off of her on a regular basis.

• 11:05Speaker 01

  I knew you'd have to get that in there somehow.

• 11:07Speaker 00

  I had to work my way towards it, but yes.

• 11:09Speaker 01

  I will, I will say that I really love when we're talking about about a field startup years later in this sort of capacity, you know, 2007, 16 years ago, first ever Battlefield, right? That's just so cool. And here we are now talking about this company. That's raised $513 million in a, in a very challenging environment. So just, I don't know, makes me sort of proud. I think it's cool.

• 11:33Speaker 00

  I don't think I was there for that one. I don't think I was at any tech conference in 2007, but I think I started going like 2009. But man, 2007 is a deep cut. That's like pre financial crisis.

• 11:44Speaker 01

  Right.

• 11:44Kirsten Korosec?

  Yeah. I will say, I will say my, my last sort of like caveat, like, let's see, this seems like they've made a lot of progress. They've picked a, a good area. It's not, they're not the only company out there that is promising a single platform that creates this ease for automakers, right? This has been talked about and bandied about for a really long time. So I'll be really interested to see what kind of progress they make and what other companies start working with them. Audi is one, which is part of VW Group. So are they going to continue and will they have success that they can really point to?

• 12:22Speaker 00

  I wonder if we're going to see more startups try to build stuff for either car manufacturers or car consumers. Once we do have like an expectation that all new cars are connected, if you will, to wireless networks at all times. I wonder what that unlocks. I wonder what we can do with it.

• 12:37Kirsten Korosec?

  Well, in a way, you're kind of seeing that a little bit already in the app space. So with companies like specifically Google built in, it's been rebranded a million times, but essentially the underlying operating system that sells also a bunch of services to automakers. It was called Android Automotive. This is not middleware. This is not CarPlay. This is not Android Auto. This is something else. But what it's doing is also allowing this underlying operating system that third-party companies like a Spotify could build an app that will seamlessly go into your vehicle. So you're seeing a little bit of that. So you're seeing more third-party apps go into vehicles, specifically for vehicles. What's

• 13:19Kirsten Korosec?

  the next piece of the ecosystem that gets built out? I'm not totally sure.

• 13:24Speaker 00

  Yeah, well, something to watch. And if you are building in that space, tell Kirsten about it because we'd love to learn more. All right. My deal of the week. We all worry about satellites spying on us from above. What if we spied on satellites from below? That is the thesis over at a company called Our Sky. Just landed a $9.5 million seed round to build out a platform for space data. And at first I was a little bit confused about what they did, but I've kind of figured it out. So if you don't know, in low Earth orbit, there's a lot of stuff, satellites and a lot of debris. And keeping track of everything up there is a lot of work. So what you need to do is have a network of telescopes around the world. And then you can keep track of lots of things that are up in the air as you want. And the company, Our Sky, wants to provide access to that information from both its own telescopes

• 14:10Speaker 00

  and those of amateur astronomers through an API so that people can basically just plug in and see what's up there. I think it's awesome. It's a cool way to like use terrestrial technology to keep track of things that are above us. I love it.

• 14:21Kirsten Korosec?

  So is this, I don't want to overly simplify this, but is it essentially like crowdsourced information based on all these telescopes? Is that, explain to someone who has zero background in space, is that how you would position it?

• 14:39Speaker 00

  I'm trying to think about how I would say it's because it's a mix. So they do own their own telescopes that they do use. But there are a lot of people out there that have telescopes that can provide information to them. And the company was talking about how they don't want to say that they are monetizing amateur telescope work astronomy, if you will. But instead of trying to just lever what's out there in the market, because there's a lot of people that are already looking up. So why not pull from them as well? I have a lot of questions about how they handle the supply side of this in time. Now that they have more capital, how much of that goes into building out more of their own technology versus using others? But it's a really neat way to kind of keep track of what's up there, hopefully with a lot of individual eyes looking up.

• 15:16Kirsten Korosec?

  So it's like, I was, I wanted to make it like the ways of space trash.

• 15:21Speaker 00

  Oh, I see where you're going with that.

• 15:23Kirsten Korosec?

  But it's not. But I will say this, this is a really interesting example of what's been happening in the space startup ecosystem. When it was at one time focused on one thing, reusable rockets, and now as a result of SpaceX and other success, really we're starting to see this broadening of different types of startups that seemed a little silly at the time. And now, no, actually, we should be tracking these satellites. And there's a lot of space trash up there. So that's an opportunity that's been carved out because of the progress we already made in other areas of space.

• 16:00Speaker 00

  It's a really good point. And on the SpaceX front, we wouldn't have Starlink or competing products if we didn't have much cheaper launches. So cheaper launches leading to more satellites, more, you know, sky pollution, but also just more stuff you can run into. And keeping track of this stuff is not a really small market, I don't think, because a lot of people want to know what's in the sky. It's not just NatSec, it's other folks as well. So I think it's really great. And I do like how clear their pricing is. I was on their website earlier today, and they have a free option, which is very cool. Then they also have other kind of like corporate options that run from 2,500 and up per month. So it's definitely aimed at corporations versus individuals, not a huge shock. But I do love a clear pricing page when I look at a new company, try to better understand

• 16:42Speaker 00

  its economics, because this is essentially SaaS, just SaaS is predicated on telescopes. How cool is that?

• 16:48Speaker 01

  I think it's really cool. I'm not, I am not super knowledgeable on telescopes, to be honest with you. But I did like how they, this network has different sources for their, their data, not just their own telescopes, but to your point, Kirsten, that they use data from scopes from professional amateurs and just more like everyday amateurs. So like, there must be a ton, ton of cool information and data that they are, they're able to collect. And for people who really understand this, I can imagine that that is fascinating.

• 17:20Speaker 00

  Yeah, and there's a lot more of this coming. I mean, I've talked to a number of startups in the last couple of years that want to deploy microsatellites with certain refueling capabilities in orbit to get lower down, to take images and then kind of come back up and refuel. And there's just so much cool stuff going on in space. It's all super complicated and super tough, but I do love seeing it as well. In this case, companies built around that effort to help us keep track of what's going on in aggregate. All very, very good. All right. When we come back, we're going to talk about what's going on in fintech, the good news and the bad. But first, a quick break.

• 17:53Speaker 00

  Mary Ann, I'm going to start calling you the Grim Reaper of TechCrunch because I feel like you just bring us the scythe and the bad news. What's going on in fintech?

• 18:01Speaker 01

  Well, we did have a couple of, I guess you could say, downer stories in the space this week. We had a report out of India from Manish Singh, who's brilliant, by the way, covering Zest Money's closure. And, you know, this one hit hard. The company was once valued at 450 million. Zest Money is a buy now, pay later startup, and their goal was to underwrite like smaller ticket loans to first time internet customers. They got a bunch of high profile investors, including Goldman Sachs, Ribbit Capital. I think that this made me sad most of all because one of the things that had drew me to fintech to begin with was the the ability or the potential to boost inclusion, especially in other parts of the world.

• 18:46Speaker 01

  So I feel like Zest Money was an example of this, a company that had that potential. So to see it shut down, it makes me sad. And there's, it's not a huge shock. The founders quit the startup earlier this year after acquisition talks fell through. And so they've struggled since then, I think, to raise more money. I think the new founders or new leaders raised just a few million dollars. It's not a big shock, but disappointing nonetheless.

• 19:11Kirsten Korosec?

  So I'd love to dig into what happened here. Is this just the end result of many fintech companies struggling, economic uncertainty, or was there a flaw within this specific business model itself?

• 19:27Speaker 00

  Why does it have to be either or?

• 19:28Kirsten Korosec?

  Well, it could be both. It's complicated.

• 19:31Speaker 01

  Yeah. I would say that part of it is because they were targeting the lower income consumers. It was a big struggle for them. These are people who are not used to loans. I honestly don't know all the details, other than the fact that the acquisition talks shut down, didn't work out, and then that really put them in a bad position. But you know, if you look at the buy now, pay later startups that are doing pretty well right now, there are Klarna, Affirm, they're higher ticket items, consumers that may struggle to get traditional credit, but they're not necessarily what you would call like low income or first time internet customers. Alex, would you agree with that?

• 20:11Speaker 00

  Yeah, absolutely. And like, just thinking about, I'm going to make an analogy here that might not work out, but you know, software companies talk about selling to enterprise customers, larger account values, longer term horizons and more resales. And then if you sell to SMBs, it's really tough. And maybe in the consumer space, selling to more wealthy consumers, buying larger ticket items is kind of the equivalent of enterprise SaaS and doing lower, sorry, smaller loans to less wealthy people is more like the SMB equivalent. And that's just a tougher market because you have, you know, you still have customer acquisition costs, but once you get those customers in, they're not worth as much. And just because they have less economic heft, they might also have higher default rates. So I can see it being harder to grow, harder to maintain your margins.

• 20:55Speaker 00

  And also there being risk in kind of the overall quality of the loan book, which is too bad. It's too bad to see a company go actually to zero, but we have seen, I would say more of this, Mary Ann. So what's up with Navon?

• 21:06Speaker 01

  Oh yeah. So we also talked about layoffs this week, which, you know, again, has been just a recurring theme over the past, what, two years now, I think. Navon, which was formerly called Trip Actions, cut 5% of its staff this week and that amounted to about 145 people. Now, 5% doesn't seem like a lot. I think 145 people sounds worse, obviously, because you know, that's not insignificant. What's, what's interesting about this is Navon late last year had filed confidentially to go public. It had planned to go public this year, did not, and Trip Actions was once very focused only on travel expense management.

• 21:47Speaker 01

  And then when the pandemic hit, it amped up its product called Liquid that was more of a general expense management offering. And so it really kind of became more of a fintech at that point. And that Liquid side of its business supposedly was growing quite a lot. So I don't know exactly what led to the layoffs. They claim it's an effort to move faster toward profitability. There are reports that it's planning to go public sometime next year. I know you and I talked about this a little bit, Alex, that sometimes companies that are planning to go public, when they conduct layoffs, it can be seen as this effort to be financially prudent and, you know, make themselves look better on paper.

• 22:28Speaker 01

  But, you know, regardless, layoffs are layoffs and they're never really a good thing.

• 22:33Kirsten Korosec?

  Yeah, it's sort of like, you know, working out so you're in shape to go to the gym. Terrible analogy, but it's like, let's cut, let's trim the fat so we look attractive to the IPO market.

• 22:45Speaker 01

  That's a great analogy.

• 22:46Kirsten Korosec?

  I've seen a lot of this, actually. And so it's interesting and for our listeners to sort of think and parse, like, not all layoffs are created equal. There are the layoffs that signal like, everything is bad, bailing out and things are winding down. And then there's the layoffs that are meant to show the company in the best possible light and trim through some sort of cost efficiencies. So the hard part, though, is that some companies spin it that way, but they're really actually in trouble. So sometimes it can take a bit to kind of see how the chips fall. I'll be interested to see with this company, if they actually do, you know, end up, you know, filing for an IPO.

• 23:30Speaker 00

  They better, given how much we've talked about them. I mean, I've had to relearn their fricking name. Trip Actions, by the way, great name. Nirvan, it's the most like generic sounding name. It just falls out of my head and onto the ground every time I say it. Last theme of the day is all about software growth. And this is one of my absolute favorite things. But while we're seeing some fintech companies struggle, even as Coinbase and Robinhood get a little bit better as consumer activity there picks up, we are seeing a similar mixed set of results in the world of enterprise software. And I've been tracking the earnings beat. Kirsten and I love to talk about earnings. In fact, I think we talk about earnings more than anything else, frankly. But the good news is that some companies are doing well.

• 24:12Speaker 00

  We are seeing in general an improvement in overall net new ARR growth amongst public software companies. But there are also some companies that are really struggling. And so I've been trying to like, figure out what the through line is here. And Kirsten, I think after reading a whole bunch of things, I think I can say this. Some software companies that are public are crushing it. And a bunch of other ones are still waiting for the economy to improve. And my question for you is, is that similar to what you're seeing in the kind of the transport space? Or is this more of a unique thing to SaaS itself?

• 24:48Kirsten Korosec?

  Well, I think there might be some parallels, but I'm not clear what you mean by they're just waiting. Because if you have a terrible business, no amount of waiting is going to actually help.

• 24:57Speaker 00

  Yeah, no, it's a good clarification. So by waiting, I mean trying to keep their costs low, trying to keep their expectations that they're giving to investors modest. And then if the economy improves, they'll have a low cost basis and they'll be able to grow more quickly than expected. Because a lot of companies are just seeing limited net retention growth. They're struggling to land new clients and they're seeing slightly elevated churn. An improved macroeconomic picture could resolve a lot of that, especially if we get out of this moment in which the layoffs that Mary Ann has mentioned, lead to many companies cutting their SaaS spend because it's often charged on a per seat basis. So you come up for renewal, if you have 145 fewer employees, well, you might save a couple of bucks on Slack or, I don't know, Convo or Workday. Does that make sense?

• 25:40Kirsten Korosec?

  Right, yes, it does. So there's a little bit of parallel in transportation where you're seeing, where I think I'm also seeing the same thing happen, especially in the enterprise space, which is companies that are more mature. seem to be doing pretty okay. And the ones that are, I would put more in the upstart category are not. So in the transportation world, legacy automakers, even Tesla, which actually saw their profits drop in the third quarter by forty four percent, but they all were profitable. Whereas the EV startup world, I'm talking specifically SPACs, so they're publicly traded, really have not been doing well at all. And to me, it's

• 26:23Kirsten Korosec?

  a few things, but the economic conditions, massive cost overruns, and in some cases, products that just aren't really landing with consumers. And sadly, in many cases, just absolute shit show of internal operations that have actually created some of the most problems. So I'm waiting to see some of those companies die, which they're already on their way out. And what does 2024 bring in terms of stability? The ones who have survived, do they start gaining ground? One example is Rivian. Rivian is definitely, was not a SPAC, first of all. Biggest IPO of the year. Stocks majorly fell. They had a lot of problems.

• 27:07Kirsten Korosec?

  Now they seem to be rounding the bend a little bit in positive territory. So what do companies like that, like those growth companies, still startup-y, but do they find solid ground in 2024? I think so.

• 27:20Speaker 01

  One of the statistics I found interesting in your article, Alex, was that it could take up to two years for some companies to get back their CAC or customer acquisition costs.

• 27:31Speaker 00

  Yeah.

• 27:32Speaker 01

  And not every customer is going to even last two years. So when you think about that, I mean, it could, it could just take so long to actually get any money, make any money off of a customer if you can even keep them past that time. So, you know, you're, you're Idea of, okay, well, maybe they need to raise their prices so they can make up those costs quicker makes sense, but then you run the risk of turning off potential customers if your prices are too high. So it seems like a really delicate balance.

• 28:05Speaker 00

  Yeah, similar to how Tesla is trying to sell more cars at lower price points, which is harming their overall profitability and margins. A lot of software companies have a related but different issue, which is that, as Mary Ann said, the cost to actually land a customer is sufficiently large because there's salespeople and commissions and so forth, that by the time you make all that money back, it's several years down the line. And I pulled some data about how that kind of works out for start companies and software companies of different sizes. And so my thought was, looking at the earnings data, looking at CAC, payback periods and so forth, is simply that is software too cheap? And I was trying to kind of figure out why software is priced where it is, because, you know, if you have a developer, they're expensive. And if you get them GitHub Copilot, it's

• 28:48Speaker 00

  very cheap. And if it provides even like, you know, 5% productivity lift, it's underpriced. And I think it can do quite a lot more than that in many cases. Why is it so cheap? And so I think there's a couple of things. One is norms. And the other one is that there's a lot of competition. There's a lot of software companies out there. And, you know, looking at Box's earnings, which is a company that I've written about forever and tracked forever. And frankly, I have a little bit of a soft spot for it just because I've watched it for so long. They're not growing as fast as they'd like, but they are doing a lot of great product work and a lot of great partnering work. So what's the disconnect? Well, I think it's because if Box goes and says, hey, you know, raising all of our prices, everyone can say, well, we're going to take our bong, go to Dropbox, or we're going to go to Microsoft,

• 29:31Speaker 00

  or we're going to go to Alphabet. There's so many options out there in the market, it probably limits their ability to charge more. And therefore, software ends up, great for us, because it's cheap, but tough for companies to kind of like pull a lot of cash out of.

• 29:45Kirsten Korosec?

  Well, okay, so is it sort of a race to the bottom? Because you mentioned it's great for us, but at a certain point, if you're putting, if every company is keeping prices really, really low, there's also a saturation in the marketplace, and they're continuing to try and put more product development in, which is costly. At what point, what gives first? The cost of the software product or the R and D? And if it's the R and D or a product development, you can see where I'm going here. So again, is it a race to the bottom?

• 30:19Speaker 00

  Well, I mean, that's a great question. I think in certain cases, it's going to be a race to who can survive, which is similar but slightly different. So for example, one of my favorite startup clusters that I tracked during the last boom was the OKR software cohort. And I need to go back and check in with all those companies. But there were like, you know, four or five or six venture backed companies that were all building OKR software for other companies. Probably more than we need total that are focused on that particular thing. But venture capital put a lot of money into them so they could all afford to go into the market at the same time and compete, and probably offer attractive pricing for the end users and consumers. So venture capital can delay the reality that you're describing in time.

• 31:02Speaker 00

  And then the other factor at play here is big tech companies are so broad today. It's not, it's hard to find a place in tech where they don't play. And so if you're Apple and your competitor is Spotify, which is much smaller and much less wealthy, then if you keep the price of Apple Music low, Spotify can't afford to raise its prices. That dynamic probably exists in many parts of the business software world, and that could also lead to a bit of price anchoring, which does harm smaller companies' ability to be meaningfully profitable. I think when the macro conditions improve, Kirsten, that we'll see prices go up and companies look healthier. And that will lead to a lot of the earnings estimates I mentioned earlier looking a little bit silly in retrospect. But I don't think we've reached that unlock.

• 31:46Speaker 00

  Part yet of the kind of like economic picture. And so I'm hoping for folks out there who are building and selling software that next year is just a stronger overall market condition for them. Cause it's been a tough couple of years, you know?

• 32:00Speaker 01

  It has, it has been.

• 32:01Speaker 00

  I hope that made sense. I'm trying to avoid getting super numerical on the pod because it doesn't translate well. So that was my attempt at kind of doing that all with words.

• 32:10Speaker 01

  I do think though, Alex, one point that is important that you make. Some of these software companies that you've mentioned actually beat earnings expectations. And, you know, I feel like that's two, that's counter narrative to what we're seeing a lot of in other industries or other spaces. I mean, cause it's very, much more common for me to read or hear lately that a company fell short or missed analyst estimates. So I was impressed by that.

• 32:39Speaker 00

  There's, there's, I know we're running a little bit short on time, so we'll compress this a lot, but there's, there's two forms of reporting that companies do when they drop earnings. One is how well did we do? And then most companies say, and here's what we expect for the coming quarter or the coming rest of the year. And a company like, if memory serves, Asana had earnings that were pretty good looking backwards, but their forward projections were not what the market wanted or expected. And so they got whacked pretty hard. Yext, another company that I've known for a long time, reduced its overall fiscal year revenue expectations. Investors didn't like that. And so you can have results looking backwards that are fine, but if you're going to say, hey, but all the good times are behind us, investors are still going to really slash

• 33:23Speaker 00

  your valuation, which is why you can have the weird disconnect of good results, bad share price movement. It's, it's tough out there. I mean, capitalism is vicious.

• 33:32Speaker 01

  Very nuanced. Yeah, very nuanced.

• 33:34Kirsten Korosec?

  And that was a compressed thought from Alex.

• 33:37Speaker 00

  Look, Kirsten, you and I are famous for being wordy nerds.

• 33:41Kirsten Korosec?

  We are. We both talk a lot.

• 33:43Speaker 00

  We both talk a lot. And we'll still be talking on Equity next week. We're back Monday, Wednesday and Friday. And don't forget, we are also preparing an entire slate of excellent end of year shows to keep you engaged, informed and entertained throughout the entire rest of the year and the holiday period. But we actually need your help to close out this year. And we want to know one thing. If you put the year into a headline, how would you describe 2023? Please tweet that to us. Our Twitter handle or X handle is EquityPod. We are going to share our favorite entries on the show itself. So your name might be on the podcast. We did this last year. It was a lot of fun. So how do you describe 2023 in a headline? Let us know at EquityPod. And in the meantime, Mary Ann Kirsten, thank you so much.

• 34:27Kirsten Korosec?

  Thank you. Bye.

• 34:28Speaker 00

  Bye.

• 34:33Speaker 00

  Equity is hosted by myself, editor in chief of TechCrunch Plus, Alex Wilhelm, and TechCrunch senior reporter, Mary Ann Azevedo. We are produced by Teresa Locan Solo with editing by Kell. Bryce Durbin is our illustrator. And a big thank you to the audience development team and Henry Pickavet, who manages TechCrunch Audio Products. Thank you so much for listening, and we'll talk to you next time.