With the NASDAQ ripping higher valuing these new growth businesses on metrics more and more on a sales basis. These companies continue to spend and spend with blatant disregard and have become short run cash incinerators.
 
Valuations have gone parabolic, with Names trading 10, 15 even 20x Sales for Sub 20% growth. Where is your margin of safety?
 
But what happens on the other side of that story… when multiples come in, capital becomes tight and you have to grow within current capital structure. Well you get the TSXV….
 
That is where the opportunity lies, and I want to highlight 3 names that are growing within these secular hot spaces that priced very attractively.
 
In the next couple of words, I want to highlight 4 key areas where/how companies are able to accelerate topline revenue growth without uncontrolled spend on customer acquisition and racking up massive losses on Sales & Marketing.
 
The 4 areas I want to highlight;
 
  1. Usage Based SaaS Pricing – The shift in the Enterprise SaaS model is to more of a usage-based pricing method. This allows for a type of pay for value method and allows the customer value to increase along with the growth in the customer’s business. This allows the software provider business to grow alongside and provides incremental revenue growth at zero cost within the pre-existing customer base. The effectiveness of this pricing is greatly accelerated in businesses that are in strong secular end markets where the entire market is growing at a rapid pace.  
 
  1. Vertical Integration - Many SaaS businesses are bolt on solutions or functions apart of a larger function/solution. The most traditional model is the hardware add on with high margin SaaS solution. The sales funnel expansion from hardware sales is a very efficient way of add customers even if the hardware is being sold at contribution dollar breakeven or even a loss. The more you can integrate a customer into your ecosystem your churn should be reduced and increasing the life time value of a customer by capturing more of customer spend within a business function.
 
  1. Product Line Expansion – When you sell a specific product within a given niche you are capturing a customer base. The concept of being able to offer a broader suite of value-added service to a like minded group of customers where you are uniquely positioned to see their needs and able to address them. The ability to bolt on additional services within a captured customers base allows the provider to increase the customer value of each preexisting customer with cost advantages on implementation and scale.
 
  1. Channel Partner/Integration Growth – This is critical especially down-market cap for product validation in the marketplace and it allows for more value to be created not only for the solution provider but the customer. It creates relationships where both partiers benefit and a lot of times offer cross selling opportunities and complimentary products and services. There are also large cost benefits to have these channel relationships for customer awareness and top of the funnel sales.
 
 
 
So let’s Highlight Three Companies that highlight the ability to grow in a Cashflow Positive Manner;
 
Urbanimmersive – UI.V – 1.0x Sales w Last Q Growth of 50%
 
Usage Based SaaS Pricing – They have gone all in on Usage based pricing for their core Business Solution SaaS product. There is no monthly fee or contract. Revenue is bases on a per page delivery and a per invoice basis.   This allows direct entry into the product with little to no friction or upfront costs. This is critical especially for this business, they are trying to stimulate a new behavior of online digital and 3D photography for real estate. When you are trying to change/stimulate behavior friction/cost is the enemy. In such a secular hot space in a post COVID world they will be able to grow with the space and their customers.
 
Vertical Integration – This was the home-run move for them in 2020. They recently went vertical and acquired Immersoltuion a reseller of 3D and 360-lens cameras. To add the hardware side for their sales funnel for their SaaS offering. The thing I don’t thing they planned for is that in the last Q they did $901K in hardware revenue which was greater than the revenue for the entire 2019 calendar year for that business. You can add on top of that the fact they are stocking the sales funnel with a hardware business that put up 20%+ Gross margins and 10% Operating margins.
 
Product Line Expansion – This is where the push into 3D virtual tours makes so much sense for them. They already have a captive audience in the digital real estate photography. This is the next natural value add for the preexisting business.  They are able to slowly introduce it to their preexisting customer base in BETA to work through the product design and development with your customers.
 
Channel Partner/Integration Growth – You have seen four integrations for the company since May, PixVId, FastOffice, Virtual Access Tours & Local Logic. Not much more to say here other than let these partnerships speak for themselves. The ability for such a niche player to get access and to these platforms to build with is great validation what they are building and the direction they want to take the company
 
Urbanimmersive is rare to find all four of these cost-effective growth drivers in a single name, as they shift to more of a vertically integrated model and launching 3D tours in this moment of time I think if this story is ever going to work its going to be in 2020.
 
 
RenoWorks Software – 3.0x Sales w Last Q Design Service Growth of 60%
 
Usage Based SaaS Pricing – A real hybrid model that I think works very well for the company, as they sell through a B2B relationship on a licenses basis and then the company benefits on the backend of it and is able to grow with their enterprise customers as they get a piece of ticket on their sales.  The more effective the SaaS product is for their B2B customers the more the company benefits, these win/win relationships based on performance I think is where the industry is going.  
 
Product Line Expansion – They continue to innovate around the products it offers customers and is encompassed around their FastTrack offering that brings many of them together. From Web Visualizer, Product Configuration, 3D Models/Measurements and on the service side Design, API integration and Analytics. The ability to provide more and more services into the same customer base allows them to build, innovate and adapt with its client base. Big element here is the supply relationships its sets up to lock in customers.
 
Channel Partner/Integration Growth – This is where I think they have such a strong foothold which gives them the ability to grow without having to blow the bank on Sales & Marketing. They have 123 Clients now on the B2B side that sell through their product from Roofing, Windows & Flooring. This ability to have this many product disciples within a niche is critical and allows them to grow. This is then taken to the next level with the EagleView partnership announced in February, a great example of complimentary services that increase the value to the customer by integrating the services.
 
The RenoWorks Software example is my favourite example of channel partner integration and the effect it can have on growing the business without incremental costs. There is massive operating leverage hidden within this business as the customer acquisition cost is minimal and they are able to grow with success of the solution with its preexisting client base.    
 
 
BeWhere Holdinsg – 2.0x Sales w Last Q Recurring Growth of 57%
 
Vertical Integration – This is critical to the model but I think they are struggling a bit here as the product has been commoditized to a degree. They are selling hardware to drive Recurring Data revenue where all the margin is on the business. This is effective; however, the problem is price has been driven down to the point where they are selling hardware at breakeven to even a loss on gross margin basis. In the long run, this comes down to churn on the recurring side of the business. As long as customers are sticky and don’t churn they make up for it over time on the high margin recurring data revenue.
 
Product Line Expansion – Timely as they are launching their ‘Mini” tracker. They key here is the expanding use case for the technology even highlighting drone flight. I think the bigger thing here is the potential for B2C application growth. Regardless, for such a new technology the expansion of use case and product awareness for connected IoT devices/environments is the right tactic.  
 
Channel Partner/Integration Growth – Walking a fine line here between channel partners and channel resellers. In this industry having validation from these multibillion-dollar channel partners selling/promoting your product is massive validation. With a major partner in Canada, US, Europe they are well positioned. Compound that with the fact that their main Canadian partner has a sizable equity stake in the business is a massive vote of confidence and critical for the competitive positioning of the business in the market.
 
The BeWhere example is a tough one for me but I think a good example, they fit perfect into 3 of the 4 categories but unit economics are less defined by selling a more commoditized hardware product at minimal to negative margins.      
 
 
 
 
In Conclusion, there is going to come a day when controlled growth will matter again. Don’t be the last man out of those momentum SaaS names that are spending well outside of cashflow with valuations 2 -5x higher historical averages. I just highlighted 4 factors I look for and applied it to 3 names I like right here.
 
In a world of uncertainty, I think all 3 of these provide a margin safety with attractive growth profiles that are very attractively priced.
 
 
*LONG UI.V RW.V BEW.V