Here's a riddle for you: How do you connect startup metrics with the 2024 Summer Olympics?
Battery Ventures has an answer. The firm is rethinking how it evaluates revenue in its industrial tech and life-science tools division, and in doing so is proposing a new framework—the firm calls it the “revenue-quality podium.”
The podium, of course, is a reference to the podium at the Olympics, where the gold, silver, and bronze medalists stand as a national anthem plays.
“We thought it was interesting and topical for folks, given the Summer Olympics," Battery general partner Zack Smotherman tells Term Sheet. "There are, of course, many other factors that influence valuation, but I think this is a way to highlight…the continual trend in public markets and private markets, where there’s a desire for more predictable, higher-quality revenue."
A company can generate revenue in myriad ways, from one-time purchases and sporadic incidental purchases to long-term contracts and subscriptions. With its new scorecard, Battery is making the point that all revenue isn’t equally valuable to the long-term prospects (and, ultimately, the valuation) of the business. What does it matter, after all, if you can show one or two good years of sales? And, when it comes to metrics themselves, what makes them valuable is that they’re actually predictive and indicative of future potential.
So, how does a company make it onto the podium in the Battery Games?
To earn a gold medal, a company must derive 66% or more of its revenue from recurring sources like subscriptions, long-term contracts, and high-volume consumable sales associated with their products. A company is silver if it has between 33-66% of revenue from these stable streams. And, at the bottom, a company is bronze if it’s generating less than 33% of its revenue predictably over time.
In Battery’s report, the goldest of the gold is Danaher, a publicly traded medical and industrial conglomerate that has a roughly $197 billion market cap while 78.2% of its revenue is deemed by Battery to be recurring. And the bronze-est of the bronze was engineering company Sandvik, with 4.2% of recurring revenue. Then, there’s the silver: Skalar, an automated chemical analyzer maker that was acquired by Battery in 2023. 40% of Skalar's revenue is defined as high-quality today—up from 29% last year, which would have been bronze.
It’s worth drawing a line right about here that this is meant for non-software businesses and is pretty specific to "industrial tech and life science tools." It's an off-kilter grouping—businesses in this bucket are pretty diverse, ranging from lab and industrial automation to analytical instruments to medtech. And while it’s not a totally Battery-specific category, it isn't a broadly used grouping either.
"These businesses, they’re not truly software businesses or purely product businesses,” Smotherman says. “They tend to have a mix of services, a mix of consumables, a mix of products, sometimes software or emerging software products."
By Battery’s calculation, the overall investable market opportunity for these categories is about $2.1 trillion, with industrial tech adding $1.3 trillion, and life science tools adding $800 billion. It’s also important to draw another distinction—when it comes to traditional software businesses, Battery is still prioritizing ARR in the way we usually talk about it.
But there’s something nagging me about Battery’s podium. With these parameters, isn’t everyone on the podium? What’s the point of having a medallists’ podium if everyone is on it?
The goal of the framework, Smotherman says, was to give Battery an easy-to-understand benchmark to compare the businesses in its portfolio: “From my perspective, there's value to be created from kind of moving each step along the way, right?”
Sure, but the goal is gold, right? Smotherman and I have a laugh over the Jerry Seinfeld bit that goes:
“I have a problem with that silver medal…If you win that silver, that's like congratulations, you almost won! Of all the losers, you came in first of that group. You’re the number one loser!”
Seinfeld bemoans how a sprinter prepares their entire lives for that fleeting moment, mimicking the photo finish of an Olympic sprinting event. He inches his neck forward for gold: "Greatest guy in the world.” He draws his neck back, representing silver: "Never heard of him.”
So, maybe Seinfeld gives us another answer to this Rorschach test of a riddle: that startups and their metrics, like the Olympics, can become games of inches.
See you tomorrow,
Allie Garfinkle
Twitter: @agarfinks
Email: alexandra.garfinkle@fortune.com
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