Ramp Investment Memo

TL;DR

• Ramp has the culture, traction, and product to be one of the iconic enterprise companies of the 2020s
• The recent haircut in valuation brings the entry point to a fair (or even slightly cheap) level
• We’re excited to share this with our network, friends, and LPs, at excellent economics: 0.2% management fees (to help cover the costs of the management company) and 15% carry (ramping down to 10% for higher check sizes)
• GPs and deal partners are investing the first $100K personally

Market Opportunity

Most people think Ramp is a corporate card company. That’s a mistake.

Corporate cards — a $30-40B / year market — is Ramp’s wedge.

What’s the difference? As you can see from the snapshot of our circuit diagram for corporate operations below, financial tools (bank, cards, etc.) is important, but not nearly networked enough into every other aspect of a company’s finances.

On the other hand, finance policy and controls is the nerve center for half of a company’s P&L — their spend. It has tendrils everywhere.

It is adjacent to the financial “stack” — banking, corporate cards, treasury; to bookkeeping & accounting; to vendor management & procurement; to audit & tax; and to employee and contractor spend management.

This is not to say that Ramp will move into all of these spaces. Bookkeeping & accounting will likely be dominated by Netsuite, Quickbooks, and newer players like Puzzle. Financial Tools will likely be a fragmented market, with numerous players like Mercury, Brex, and others. And there are compelling players in vendor management — Zip in particular.

However, the fundamental difference is that Ramp’s chosen center of gravity sits at the heart of spend management. “Spend Management” is a big company problem, but putting the toothpaste back in the tube when you start with messy spending mechanisms is hard. But long before purchase orders and controllers comes credit card spend. By starting with fixing credit cards for early stage companies, Ramp is in a better position to start companies off with good spend hygiene and very basic & easy-to-use controls, and grow with customers into enterprise spend management. It shows — Ramp’s customer base includes a number of enterprises, including public companies like Shopify and Eventbrite. Those are very hard customers to serve because their requirements are incredibly complex and robust. The fact that Ramp has built a product to serve them in ~3 years(!!) is a testament to their knowledge of the space, vision, and ability to execute.

Mercury’s got a terrific team and product too, and our view is that they will likely dominate the business banking and cash management market, which is also massive. Zip is a promising startup that is making waves in procurement and vendor management, and may be a meaningful player. But our view is that Ramp will rule the graph for spend management and financial controls, specifically.

But don’t take our word for it:

A Brief Note on Talent & Product Velocity

In our opinion, Ramp has one of the highest talent densities — particularly of people who are a) incredibly well-networked, b) ship product at insane velocity, and c) have entrepreneurial DNA.

Many articles have been written on this, but it cannot be understated. We will simply link to a few articles, tweets, and quotes describing Ramp’s talent density, their unique approach to find and keep outliers, and building product at blazing fast velocity. (If there weren’t already dozens of articles and tweets on this topic, we would have dedicated half this memo to this topic.)

However, others have done the heavy lifting for us on this, so we’ll simply point to those resources :).

• Many have described that Ramp is a “talent vortex”.
• References to their talent density is a constant refrain on Twitter / X.
• The last company we heard & saw it this often about was Stripe — coincidentally, others say the same thing.
• Lenny Rachitsky wrote a breakdown of how Ramp builds product — with a particular emphasis on velocity. A great read.
• Ramp succeeded at making their culture an attractive landing spot for founders before they start their next thing.
• They celebrate employees moving on to the next great step… they’re 3 years in, and already well into building a Ramp mafia.
• Ramp won the 1st AND 2nd place in Hacker Cup (Meta’s annual programming competition).

Gross Profit & Fair Valuation

Ramp crossed $300M in annualized revenue mid-2023, and is estimated to be approaching $400M by EOY 2023 (according to Sacra). While their exact growth rate is uncertain, it is likely to be in the 60-100% CAGR range in the second half of 2023.

This is the one big open question in this valuation equation, and something that has not been analyzed or reported previously.

For the purpose of our theoretical valuation estimates, we assume a gross margin of approximately 50% on the previously stated revenue figures:

• Corporate card interchange revenue on card-not-present transactions is generally on the order of 2.7% + $0.10 (see page 11 here). Let’s say the average charge is $50, in which case this would work out to ~2.8-2.9%.
• Ramp is powered by 3rd party issuing infrastructure (Marqueta, Stripe), which charge ~0.4-0.5% in service fees on average. Ramp likely pays much less than the average (let’s say 0.3-0.4%).
• In addition, Ramp has a cost of capital for lending to its customers. Given this is effectively “secured” lending, it should be fairly low. The average carrying balance for Ramp is ~2 weeks (half a statement cycle), which at a 6% interest rate would work out to 0.2-0.4% in cost of capital; with the latest Fed indications as of Dec 2023, it is probably that this will trend down slightly to 0.2-0.3%.
• Ramp would have some costs associated with fraud, which from our prior industry experience and research would likely be in the low double digit basis point range (0.1%) — in the US, card fraud was $17B out of $19T in processing volume. Ramp is probably lower due to the numerous card protections and rules, so let’s assume this is 0.0-0.1%.
• Finally, Ramp offers 1.5% cash back. While all of this is probably not redeemed, it is likely that Ramp incurs on the order of 1.2-1.4% in cost.
• All told, Ramp’s Cost of Goods Sold should work out to 1.6-2.3%. 1.9% seems like a reasonable midpoint assumption, with a high confidence interval of 1.7-2.0%. This would imply a “net” take rate of ~0.9% and gradually rising with scale to ~1.0% (range of 0.8-1.1%).
• Sacra’s estimates of Ramp’s cut on transaction volume, used to calculate the revenue figures cited above, is ~2% on $16B in processing volume, so our gross profit estimates center around 45-50% of this 2% figure — while it is uncertain where Sacra derived 2% for revenue, a reasonable assumption is that this is net of Marqueta’s service fees and perhaps net of borrowing costs, but not net of any cash back or fraud CoGs.

So overall, we estimate that Ramp is generating approximately $180-200M in annualized gross profit as of the end of 2023, on $20B in processing volume.

Valuation Dynamics of this Deal

Ramp’s most recent round was at $5.5B premoney / $5.8B postmoney. Ex-cash, that probably puts Ramp at an enterprise value of $5.0-5.3B. Reportedly, a tender offer held shortly after that round priced common at the same level. We are currently purchasing early preferred shares for roughly the same share price.

It used to be the case that the best companies always looked expensive at the time and cheap in retrospect: Stripe and Shopify are two great fintech examples of this. And honestly, we’ve felt the same way looking at every prior Ramp round. The 2021 valuation priced them at ~75-80x annualized revenue. They were growing faster but even their forward multiple was probably 25-30x revenue.

For this deal: the proposed purchase implies a ≤15x revenue multiple.

More importantly, our view is that — when running valuation estimates and DCF analyses — both revenue and earnings are less useful than gross profit. See here for a white paper on this matter.

Based on our analysis above, we estimate that Ramp is generating approximately $180-200M in gross profit, growing 60-100% YoY. Our back of the envelope DCF valuation for those metrics — for a company with Ramp’s margins, growth, and stickiness — is in the range of $4-6B.

This is the first time that it’s felt like a compelling deal, thanks to a unique confluence of events:

• The watershed market correction in late stage means that companies that even the best companies that are crushing it — which Ramp is — can’t command the multiples of 2021.
• Normally, a company that’s doing well would just keep chugging rather than take a down round; by our math, Ramp could have broken even by ~now or early 2024, if they’d frozen hiring — something most companies did this year. (~800 Employees mid-2023 → $200M in spend which breaks even at $400M in revenue assuming ~50% in gross profit.)
• But the Ramp founders are old hands at this, and would rather take capital (even at a down round) to seize ground. In our view, they were zagging when the rest of the market was zigging. Not the first norm they’ve broken, and it seems to be working out for them so far.

Additional reading

Sacra’s free report on their LLM / AI workflows

Sacra’s overall page on Ramp

Contrary Research on Ramp

Lenny’s interview with Ramp’s head of product

20VC interview with Ramp’s head of product

Packy article #1

Packy article #2 — he’s never done 2 articles on one company before

Packy article #3 — he’s definitely never done 3 articles on one company before

Deal Structure & Economics

We are purchasing preferred shares at $20.50 per share. This is lower than the $30 per share the company raised at in 2022, reflecting the general changes in valuations, but at roughly the same price (a $0.50 or ~2% premium) as the company's Series D share price, announced in August 2023. These are mainly Series A shares we are purchasing from an early investor, who is selling a minority of their holdings in the company.

We are charging 15% carried interest, but for larger commitments larger than $50k this falls to 10%. We are charging a nominal management fee, with the intent of offsetting the cost of setting up and operating the self-advised deal.

Deal Specific Risks

• The credit card space is seeing increased competition, including from innovative startups (e.g. Brex, Mercury), and from vendor management (e.g., Zip).
• This is a secondary transaction and we are purchasing early preferred shares, with a lower liquidation preference than the recent raises the company has done. Hence, in an exit below the valuation we are investing at, we are worse placed than more senior preferred shares.

Additional disclaimer: The GP of this investment is an employee and advisor to AngelList and a registered representative of AngelList Securities, AngelList’s broker-dealer.