Amy Wu is a Partner at Lightspeed Venture Partners, a venture capital firm focused on enterprise tech, security, marketplace, gaming, and consumer companies in the US, India, and China. Lightspeed has $4B+ in AUM and notable exits / portfolio companies like Epic Games, Affirm, GIPHY, GrubHub, The Honest Company, Snap, and Stitch Fix.
Amy joined Lightspeed in 2019 as an early member of the growth team. She shared her investing criteria and views on direct listings/SPACs at a recent brunchwork workshop.
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1. When evaluating growth-stage startups, focus on a key set of metrics. The metrics depends on the startups’ category:
SaaS
•ARR growth
•Gross & net retention
•Gross margin
•General burn rate
•Net new booking growth rate
Consumer/marketplace
•LTV:CAC
•Long-term unit economics
Venture-style growth investors like Lightspeed target 75-100% yoy ARR growth — and have considerable tolerance on the burn and gross margin side.
You’d expect a late-stage PE-style investor to target 30% yoy ARR growth, with much less tolerance on burn.
2. When evaluating growth-stage start-ups, know where comparable public companies trade:
•SaaS: 50X revenue
•Marketplace: 5X revenue
•Consumer: 3X revenue
Given soaring stocks, there’s been a run-up in consumer company valuations, well beyond 3X revenue. Time will tell if public DTC valuations will revert back to their 10-year mean.
It’s fine to pay up for an early-stage start-up. But, you must believe in the:
• Size of the TAM
• #1 position for the company in their industry
• Fast growth trajectory
3. Is a start-up IPO ready? A top criteria:
How well can the company predict performance? Are they actually able to project and manage quarterly earnings?
Next, look at the start-ups internal operations:
• Do you have a CFO in place?
• How about controls?
• Is the board public-facing?
These questions are typically raised three years before an IPO.
As they write their S-1 and plan their IPO-ing companies must identify their tactical strengths and weaknesses. In the S-1 and roadshow, they’ll showcase the former as they build up the latter.
Start-up founders need to understand that the mentality of a public investor like Fidelity is very different from the mentality of an early-stage investor.
4. Direct listings are promising, if somewhat controversial. Since IPOs are generally mispriced, they pass value onto new shareholders who may flip their position at the expense of long-term shareholders. Direct listings are more accurately priced and may preserve value for current shareholders.
Direct listings are better suited for companies that don’t need the IPO as the top source of fundraising.
And in order for direct listings to yield maximum benefits, there needs to be a lot of brand recognition around the company. Think Spotify.
5. For SPACs, the quality of the sponsor is important. High-quality sponsors can be correlated with high-quality SPACs.
The diversity of SPACs is similar to the diversity of VC firms. Some will provide a lot of value to companies, and some will not.