Taking over $24.7B Hubspot

🧠 The Takeaways

Today, we’re buying an activist stake in HubSpot to force a proxy vote to clean up this biz.

1. Get this biz in line with the Rule of 40.

2. Get M&S costs in line < 50% of Rev.

3. Find the 2nd biz model to monetize the customer base to actually make money. 

+ Which biz is actually better to run. Brand. Agency or SaaS.

Let’s Community - Which Model Makes More Money in eCom?

Everyone in this space always wants to be on the other side of the table. 

• eCom founders want to get into SaaS. 

• SaaSers want to found Brands.  

• Agency owners want to do anything that isn’t an agency.

As someone who’s worked in + on, started, and invested in every model, I thought it’d be helpful to run everyone through each. The grass is always greener, but not many people really understand the finances of eCom vs. Agency vs. SaaS.

So let’s break down the models and what size of biz you need to build for each to make financial sense.

1. As someone currently looking to acquire $10–$100m brands and $1–$10m SaaS

2. Shedding more light on why we picked these biz sizes. 

3. Then, I’ll get into how Agency plays in this space. 

To keep math simple, I’m going to give benchmarks and what a  $1m topline biz would look like for each. The ranges and numbers change as each model scales. But today let’s keep it simple.

I’m going to judge each of these opportunities on:

• Net Income opportunity

• Exit multiple

• Actual take home $ 

Let’s start with everyone’s favorite: eCom brand averages (<$50m Topline):

• Net Income: 15%

• Exit Multiple: 3–6x Net Income

So, a brand making $1m in Rev would generate:

• Net Income: $150k

• Exit Valuation: $450k–$900k

• Annual Take home: ~$100k (Pre-tax)

How to think about it:

1. The challenge: Anything <$1m in Earnings (~$10m Topline) has no real exit value. And they require a ton of cash to get to $10-$20m.

2. The opportunity: eCom brands are highly scalable once you’ve hit the ~$10m mark. If you can get there, it’s highly likely you can get to $50m-$100m where real exits occur.

3. Takeaway: eCom is a good model if you're looking to build a huge biz ($10m+), but it’s difficult to do and doesn’t generate a lot of cash until you get to massive scale.

Next, let’s talk about SaaS. Because SaaS is a recurring Rev w/ high Gross Margins biz model, less topline is needed to create similar exit value.

The general Averages for a sub-scale (<$10m) SaaS biz:

• Net Income: 30–40% (If you didn’t raise/aren’t burning crazy $)

• Exit Multiple: 2–4x Rev

So a $1m ARR SaaS biz would generate:

• Net Income: $400k

• Exit Valuation: $2m–$4m

• Annual Take Home: $400k (Pre-Tax)

How to think about it:

1. The Challenge: Usually, you have to aggressively burn to get to $1-2m in ARR. The hamster wheel of needing to raise capital to grow a big biz rapidly kills profits.

2. The Opportunity: If you’re growing fast (+100% YoY) and hit $8–10m in ARR, the exit multiples quickly jump up, and you could be looking at a $75–$100m sale price.

3. Takeaway: SaaS is a good biz model if you’re optimizing for equity value and have the cash to fund the growth on the way up.

Last but not least, there's the Agency model. It’s usually where most people start, but it’s often the least desired model.

But an agency actually has the highest take-home potential at the ~$1m Topline scale.

The general averages for a sub-scale Agency (<$5m):

• Net Income: 50%

• Exit Multiple: 1.8x Net Income

So a $1m Agency would generate:

• Net Income: $500k

• Exit Valuation: $900k

• Annual Take Home: $500k (pre-tax)

How to think about it:

• The Challenge: Agencies are hard to scale past $1m in ARR, and the Net Income Margin plummets as you scale. 

• The Opportunity: A small, lean agency can produce a considerable amount of cash for someone looking to considerably increase their short-term earnings. 

• Takeaway: Agencies are actually the most lucrative sub scale biz for owners, but are the hardest to scale and have the least equity value. They’re essentially ATMs.

At the end of the day, the decision on what biz makes the most sense really comes down to your skill set and what kind of biz you want to run.

How I think about it:

1. If you want to keep the biz small and earn a lot, an Agency makes the most sense.

2. If you want to build a medium-sized biz and play the long game for a big equity outcome without high take-home now: SaaS.

3. If you want to build a really big biz, don't have a lot of cash now, and can have cash tied up for the next couple of years: eCom brand is the route to go.

Each has plenty of advantages and disadvantages. And each has a very different skill set required to be successful. 

The way that I see it: all are different evolutions someone can have in their career. It’s all about knowing when you are ready for each stage.

Let’s Examine This Biz

HubSpot still isn’t profitable. And it’s actually been losing more money over the past 3 years. 

Trading at $537.14/share with a $27.6B market cap, HubSpot is +248% L5. They’re the perfect ex. of how a good narrative can carry a biz well past its performance.

Financial Summary

TLDR Analysis: This is what Financial Games looks like.

• Gross Profits are expanding because Rev is growing faster than COGS. 😍

• Overhead is insane. Spending 49% of Rev on Marketing + giving out $432m in SBC. 🤮 

• Throwing off $392m in Free cash which is +44% YoY  😍

This biz has such a weird combo of incredible + terrible financial performance.

Incredible:

• $2.2B in Sales

• 84% Gross Margins

• FCF: $392m (growing quickly)

Terrible:

1. Net Loss of $176m (which is growing faster YoY)

2. Spending 49% of Rev on marketing

3. Topline only growing at 26% YoY

Despite being unprofitable and not growing that quickly, this stock is still up +248% over the last 5 years. That is an incredible combo of “money looking for a place to invest” + “a great narrative beats fundamentals.” That can’t last forever.

HubSpot needs to reverse these trends and find a way to become more profitable as it grows. Otherwise investors will eventually wise up and move their money elsewhere.

Let’s Scale This Biz!

Here are the 3 ways I’d clean up Hubspot so that when investors have real choices in the market again, HubSpot will actually be an appealing biz to invest in.

1) It doesn’t pass the rule of 40

If you aren’t familiar with the Rule of 40, it’s a simple ratio that says a good SaaS investment has to have a Growth Rate % + a Net Profit % > 40%. HubSpot doesn’t pass this test.

HubSpot’s Growth Rate + Profit % is 18%.

1. Their Rev growth is 26% YoY

2. Their Net Margin income is -8%

It honestly blows my mind that a biz with a stock price +248% the last 5 years doesn’t pass the basic sniff test of Software investing.

Translation, HubSpot isn’t growing quickly + isn’t profitable. They don’t fit any normal narrative for why an investor would invest in them.

Their 1 saving grace (other than riding on Salesforce’s coattails) is it throws off $392.5m in Free Cash Flow a year.

HubSpot is at a fork in the road and is still going straight. Growth is consistent from a raw $$$ perspective, adding ~$432m in Rev in each of the last 2 years, but they haven’t gotten fit yet. 

They’d actually be breakeven if they weren’t giving out a comical amount of stock-based compensation (20% of Rev). In 2021 this was 13%. 

If they maintained the 13% level, they'd barely break even this year, which is wild to even think about for an 18-year-old biz that has been public for a decade. 

I also don’t prescribe to the “adjust out SBC” modern BS accounting because it isn’t a real cash cost. If those costs are what is required to hire the best talent, you’d have to give them the same value in cash if you didn’t give them equity. I’d rather they give them cash. That doesn’t dilute shareholders.

For such a large “successful” biz their “above the line” P&L is great. Their “below the line” P&L is terrible.

Takeaway: HubSpot needs to get profitable or back to growth.

2) Is HubSpot’s Entire Value Prop still relevant?

Over time, HubSpot’s value prop and messaging has evolved, but for everyone who remembers the early 2010s, HubSpot was really an early CMS that tied together Blogging + CRM and made SEO for B2B a thing.

But as we can see in their numbers, Inbound isn’t the great CAC Hack that was promised, and at scale, a B2B biz still needs to spend big bucks if they want to bring in new biz.

HubSpot spends 50% of its Rev on Marketing & Sales (M&S). For a biz that built its brand around “Inbound marketing” as cost effective marketing, they aren’t seeing the fruits of their labor.

We’re talking about the best Inbound marketing team in the game. Their brand is Inbound Marketing. The ones that built: 

1. The media machine w/ a top SEO performing blog.

2. The platform for service partners. 

3. The Freemium model with tons of traffic from a mega brand.

And they can’t even bring their M&S costs down. Just for context: 

1. Shopify, which spent slightly more (~9%) on M&S, but that only represents 17% of their Rev.

2. Affirm, which is a very B2B heavy brand in the “Mid-Market” segment, spent 25% of their Rev.

3. Klaviyo spends a similar % (57%) of their Rev on M&S, but Klaviyo is 1/3 of HubSpot’s size and went public last year.

The great promise that Inbound marketing + brand building was going to unlock a massive unit economic shift (where you would make it financially viable to support the little guy) looks to be yet another ZIRP-era myth that we still believe.

The truth continues to be that Marketing, Selling and Servicing SMBs is too expensive for these bizs to actually make the segment financially viable.

HubSpot is proving that no matter how brilliant your marketing strategy, how much your customer base can spend is still the single most important factor to your success.

Takeaway: Inbound isn’t the great budget savior that was promised.

3) They don’t have a 2nd biz

The fastest growing, most successful software bizs have a 2nd bigger biz on top of their primary biz. It’s not the one they advertise, but it’s where they make all the $$4. 

• Shopify (70% of Rev + 58% of Gross Profits comes from Payment processing)

• Amazon (52% of Rev and almost all profit comes from AWS, Ads, + Merchant fees)

• Affirm (52% of Rev comes from Interest income on loans)

HubSpot doesn’t have that second biz model where they’re monetizing their platform’s unique value for their customer base. These aren’t perfect 1:1 exs., but to get a sense of the scale from those other bizs:

1. Shopify makes 2.8x more Rev on payment processing than Sub Rev.

   1. That flows down to account for 58% of Gross Profits.

2. Amazon makes 0.9x more Rev on B2B offerings than B2C.

   1. But AWS accounts for 74% of Operating Income.

3. Affirm makes 1.8x more Rev from Interest-related products than their core payment offering.

   1. That flows down to account for 51% of Gross Profits.

When you think about it this way, HubSpot still has 2-3x the growth opportunities left if they found the second biz model. Monetizing the gargantuan amount of cash and data flowing through their platform seems like the most logical place to start.

Takeaway:  HubSpot needs to find its real 2nd biz.

Final Thought

Is supporting the Prosumer/lower SMB Segment worth it? This has been the greatest philosophical debate in SaaS over the last decade and we’re starting to see it’s not. ZIRP-era loose VC funding made us all temporarily believe this biz model works.

HubSpot was always the shining light of the Prosumer/All in on SMB SaaS movement. Whenever someone wants to raise money for the next great SMB idea they always pointed to Hubspot to say that it worked. They were the ones that made it the whole way by focusing on this segment (unlike everyone else who eventually featured up into Enterprise). 

But have we propped their stock price up on hopes and dreams?

The greatest challenge for HubSpot is that they still need to spend to compete against Salesforce in the market that matters the most for them (Mid-Market), but they still have to scrape together the pennies they make from 200k+ SMB bizs to acquire their most expensive customers.

Meanwhile, Salesforce ($277B) is leveraging the billions they make from Disney and Kaiser Permanente to acquire bizs that are a rounding error in their P&L. And while we have carried the banner that “HubSpot cares more about those Mid-Market brands”, at what point is HubSpot bringing a tuk-tuk to a race against a Ferrari?

Because let’s be honest. While everyone in our game might care greatly about having the best-in-class software, the majority of Mid-Market bizs in the Manufacturing or Medical space don’t really care about HubSpot’s hundreds of integrations. 

They’re looking for the safest option (that will secure their data) that won’t get them fired + is easy to manage.

That’s almost always the larger, more well-known brand in the space (i.e., Salesforce) that builds those features for Ent customers. That’s why their market cap is 10x Hubspot’s.

There’s always been a feature-up playbook in this space, where the startup enters the market with too-low prices, and as they evolve and feature up, they continue to move upmarket. 

This matches the SMB cashflow/buying cycles more than anything else. 

You need to sell to smaller brands that make buying decisions on <6 mo cycles because if you’ve only raised enough cash for 18 months, you won’t survive the Ent 24-month buying cycle.

There’s a long list of other bizs that have done this (Slack, Monday, Wix, Shopify). But HubSpot always said they weren’t moving up market. They’d always focus on the little guy. 

But as we’ve seen, that math doesn’t work, and now I’m starting to believe it never will. This great myth that Prosumer/SMB bizs are super low-touch, easy ways to make piles of money in SaaS isn’t proving true.

SMBs have insanely high churn. CAC in general is expensive in every segment, and usually the smallest customers need the most help (costly CS resources). Our economy has been fueled by a surge in SMB bizs, but is anyone supporting them actually making any money?

I still think there will be SMB-focused SaaS bizs.

But as we see HubSpot continue to miss the mark of being a highly investable SaaS biz (neither abiding by the Rule of 40 nor returning to freakish fast growth @ 50%+), SaaS like HubSpot that supports SMBs will continue to die out, or be forced to go up market.