The BigC Multiple arbitrage game

TLDR:

Hello from Asia!!!

Playing the Multiple arbitrage game w/ BigC

I have no idea what time it is for you!

I’m back with another short intro as I’m recovering from wedding #2 this weekend. After we got married in Brooklyn last weekend (Saturday #1) we jumped on a plane and came to Taiwan to get married this Saturday (#2) as well!
From the tea ceremony, to the party to the incredible week it’s truly been an amazing experience. Once I unpack it all I an’t wait to share it with you all.

The one insight I can share. Travel more and see if you can go to weddings in other places. Learning how other people celebrate major life moments is a truly eye-opening experience.

Appreciate the 1,225 of you spending part of your Saturday with me. Today we’re taking the newsletter in another interesting direction. I want to highlight an interesting trend that PE professionals play that is important for when you’re focused on the valuation of your business. (Aka about to exit the biz).

Playing the Multiples Arbitrage Game with BigCommerce

For all the Rebels on this newsletter you may or may not be too familiar with BigCommerce, the Shopify Mid-market alternative. It doesn’t get as much love or attention in the eCommerce ecosystem as the DTC platform empowering entrepreneurship across the globe, but it did go public back in 2018 for $2.4B.

At a ~$750m market cap, BigCommerce is a steal to take private. Down -69% all-time since its IPO trading at $10.05/share. That’s an incredible low price for a B2B SaaS business, a 2.5x multiple on their 2022 Revenue.

For Context: 30-year average for an 80% Gross Margin SaaS businesses trades at 10x ARR (aka Revenue).

I don’t think there’s even much of a turnaround here. I’d acquire it and just ride this current market out and play the multiple arbitrage game (4 min video on what that means for anyone who’s curious). If you don’t want to watch the whole video the concept is:

1. Every business trades at a multiple of either Revenue or EBITDA.

2. Buy and reposition the business into a better multiple category.

3. Sell it at the higher multiple.

It’s a great way to make more money if someone doesn’t properly understand the value an asset they own without you having to invest a ton of resources/time into a business. You create value by just understanding the market better than others.

The Financial breakdown

The Financial TLDR:

Yet another company still running the growth-at-all-costs playbook. ‘22 OPEX was 125% of Rev!!!! That’s unjustifiably too high of a percentage. I get it. Growth was the name of the game in SaaS for the past 6 years, but for a company to burn $139m for 27% YoY growth is too much.

There isn’t a crazy game plan here. Honestly it’s very Elon-Twitter inspired, without the publicity stunts, existential threat to the core platform, and the sheer chaos he brought to that business.

80% margin SaaS businesses usually trade at 10x ARR. BigCommerce is currently trading at 2.5x.

The Game plan:

1) Buy BigCommerce for < $800m

2) Get GM % to 80% + OPEX under control

3) Re-list it when markets normalize and SaaS multiples are 10x ARR again.

Let’s assume the company doesn’t grow at all in that time, based on its ‘22 Revenue at 10x ARR it would be worth $2.79B.

The flip would be worth $2B.

Here’s my 3 Step plan to make $2B flipping BigCommerce.

1) Scale back growth investments.

Revenue growth at +27% YoY vs. Growth Spending (Sales + Marketing) +36% YoY doesn’t align. The math isn’t mathing.

Sales and Marketing should always be ahead of the org to invest in growth, but a 10% delta shows there are inefficiencies in their Go-To-Market (GTM). They also aren’t growing fast enough (50-100%+) where investors are willing to look past that bad math.

eCommerce platforms are feeling the post-COVID boom growth challenges brands are facing. Their growth investment as a % of Rev increased from 45% → 48% in 2022. Roughly 50% isn’t a terrible standard for a fast growing SaaS business, but it’s falling into the “juice isn’t worth the squeeze” category on the massive growth investments they’re making.

Takeaway: Pace growth spending to Revenue growth.

2) Get Gross Margins (GM %) → 80%

This is the cardinal rule for top tier SaaS multiples. In ‘22 GM % slipped from 78% -> 75%. This is the exact trend you don’t want to see. All SaaS businesses need to trend to higher gross margins over time. 80% is the standards. 90%+ is the dream.

This may take some time to get Margins consistently at 80%, but this is a must do. Even above 80% if possible.

The reason investors are willing to give SaaS businesses a valuation at 10X their revenue, is because 80% Gross margin businesses are basically ATMs. And an easy to predict ATM at that.

This is the core difference between SaaS and Consumer/DTC brands.

At 80% high recurring revenue, investors can do dumb math and say for every $1 the company makes its basically $1 in profit. As the business is stable with a high source of repeat revenue you can reduce R&D and Growth budgets to reduce the OPEX and truly have this business operate like an ATM.

But the absolutely crucial component is GM % >= 80%.

Takeaway: Solidify 80% margins to secure the bag.

3) Get OPEX under control

This is by far and away the most obvious one to me. OPEX at 125% of Revenue needs to be completely overhauled. OPEX increased +41% YoY in a year Topline only increased +27% YoY.

As a comp, Shopify’s ‘22 OPEX was 64% of Rev. Half the % of what BigC’s was.

This is a clear and continued behavior. They are chasing growth regardless of the consequences. At a certain point someone at the board level needs to have the tough conversation. What is the right growth investment and when is good money chasing after bad?

Too many public businesses still have the wrong assumption about this Recession. They believe they need to grow through it vs. realized the #1 most important goal every business should have. To Survive it.

The reason so many well-known brands did so well is because they survived tough economic times, consolidated market share, and had the best position to grow aggressively when the market opened back up. They didn’t burn all their fuel flying into the headwinds. They waited for all their competitors to do so and when the headwinds turned into tailwinds they scooped up their competitors customers.

This is the best reason why the stock got obliterated in ‘23. Now let’s be fair. The market’s expectations changed on them. But iverall the numbers are tough to justify in the new reality and not in line when looking at the “similar businesses” in the industry.

There are $50m in Acquisitions, Restructuring and Amortization here as well, so it won’t be ongoing expenses, but even if we “adjusted” those out that’s still $300m OPEX for a company with $279m in Revenue.

This doesn’t mean there needs to necessarily be RIFs, but the company has to get OPEX to <70% of Rev and this biz is Operating cash flow positive.

Going back to our meeting math:

Net Income = [Revenue - COGS - SG&A]

>0 = [100% - 20% - 70%]

This one shift will save the company from its current trajectory (Bankruptcy court). Yes, they won’t grow as fast, but this puts them on a guaranteed path to survival. In this market that is the #1 goal.

Takeaway: We’re in the Win Column w/ OPEX < 70% of Rev.

Final Thoughts

Focusing on the $2B outcome would shift focus to sustainable growth, instead of trying to will this company to a $10b valuation and putting it on the fast track to bankruptcy court. I’m not on the board, but why not give it a more guaranteed shot at a $2b outcome. I’d consider that a massive win.

There’s potential for a bigger BigC play here, but it isn’t necessary. We just need the ‘SaaS Warren Buffet’ to realize an undervalued asset. Play the long game, and take home a pile of cash.

—

Want the bigger play?

If I was going to go after the $10B opp. Instead of competing with Shopify and trying to win every Mid-Market deal against them I think they actually have a much better trend to ride.

I’d run the Avis vs. Hertz playbook and be the cost savings but too complicated for Shopify Mid-Market platform.

They should feast on the bones of the old Magento ecosystem and be the Custom/Complicated eCommerce platform. Abode has completely botched that acquisition and all Merchants are fleeing for the hills. Shopify has been catching a high volume of those deals and has capitalized well disrupting Magento’s ecoystem.

But, Shopify’s greatest strength (templatized, simple, done-for-you eCommerce) is also its greatest weakness. There are plenty of brands who haven’t made the switch to Shopify yet or unhappy with the switch because their catalog/business is too complex for Shopify’s out-of-the-box offering.

Currently their options are needing to figure out how to make Shopify, SFCC or CommerceTools work. None are a no-brainer decision.

• SFCC is REALLLLY slow and expensive.

  • Plus you need to buy into the whole ecosystem (platforms, providers etc), which are also very expensive.

• Commerce Tools is really meant for strong internal dev teams at Ent companies.

But no one has really wedged themselves into that fat less sexy part of the Mid-Market, Complex businesses moving online that need to drive efficiency through digital channels.

Where this becomes a really valuable play from a platform perspective is it’s a great model for Dev agencies. Complex custom eCommerce sites require more more intense dev work to build, maintain, and improve. It’d be a cash cow for agencies who are experts in complex site builds, tech stack integrations etc. Fueling the ecosystem growth that allows a biz to hyper scale. Early players are already seeing it.

But we haven’t even gotten to the best part!

The biggest Sales opportunity is migrating larger brands off of custom/home-grown stacks. The brands that are still maintaining Ecommerce platforms they built themselves.

That’s really why Shopify launched Commerce Components. It’s basically a sampler for larger more complex eCommerce builds to start using Shopify before making the switch.

BigCommerce could reposition itself as the platform for Complex B2B eCommerce. It might not make it a $100B biz, but it would give it key positioning in a massive “niche” that it’s suited to enter. The B2B eCommerce tidal wave is just starting to gain real momentum.

🧠 The Takeaways

Markets determine valuations always know the multiple comps in your market are trading at. That’s the foundation of all valuation arguments.

1. If you aren’t growing 50%+ YoY, Growth investments need to match actual growth.

2. SaaS gets crazy valuations because of 80% margins on recurring Rev.

3. OPEX at 125% of Rev is too much. Non-debatable.

👷 What can you do about this?

1. Do you know who your public market comps are? And what multiple they trade at?

2. Higher Gross margins unlock different playbooks. Especially north of 70%.

3. Market positioning determines your company’s narrative.

The best ideas in business are usually approaching your same problems with a different approach.

Aspiring Acquirer

P.S. If you’d like to learn more check out some of our other resources:

1. Have a brand looking to partner/exit? Send them my way!

   1. In the next 18 mos. I’m looking to acquire an eCommerce business doing $1m - $10m in EBITDA.

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