[HN Gopher] Revenue is easy, profit is harder
___________________________________________________________________
Revenue is easy, profit is harder
Author : rwaliany
Score : 224 points
Date : 2023-02-19 15:24 UTC (7 hours ago)
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(TXT) w3m dump (www.edge.ceo)
| codegeek wrote:
| I would nitpick the title a bit. Revenue is never easy. I think
| they should rephrase as "Revenue is relatively easier than profit
| especially if you have PMF". Once you hit PMF (which is where
| most startups fail), you can just pour money into growth and
| that's when revenue generation becomes relatively easier.
| spencerchubb wrote:
| If we're nitpicking, then it's redundant to say that revenue is
| relatively easier than profit. Profit is a subset of revenue
| qup wrote:
| That's entirely more accurate, but a terrible title
| whiplash451 wrote:
| Can you elaborate on why most startups fail when they hit PMF?
| whatever1 wrote:
| As seen at Amazon.com
| hef19898 wrote:
| How so? Amazon didn't jave that many unprofitable quarters,
| even less years, during its history. That Amazon was never
| profitable because they prioritized growth is a meme made up
| buy various start-ups to explain their lack of profits and/or
| positive cash flow.
| wpietri wrote:
| Are we looking at the same numbers? I think Amazon was
| basically breakeven for 20 years, from 1997 to 2017:
| https://www.marketplacepulse.com/stats/amazon-net-income-112
|
| And it looks like that recent profitability is more about AWS
| than their traditional core business:
| https://www.visualcapitalist.com/aws-powering-the-
| internet-a...
| gizmo wrote:
| Yes, but how do you get to breakeven? By reinvesting all
| your profits. High capex and no taxes because you don't
| have any income. And you can still raise money by issuing
| stock, which goes up in line with your FCF. You maximize
| growth at 0 profit and this also maximizes shareholder
| value.
| kgwgk wrote:
| > High capex and no taxes because you don't have any
| income. And you can still raise money by issuing stock,
| which goes up in line with your FCF.
|
| With high capex your free cash flow will be even lower
| than your net income.
| wpietri wrote:
| So it sounds like you agree that they were "never
| profitable because they prioritized growth"? I'm not
| saying that's a bad thing; I think that ones of the
| things Bezos did right, and very much in contradiction to
| standard business dogma. I'
| hef19898 wrote:
| I see three negative Q3s before the chart basically
| explodes in the last couple of years. All other quarters
| saw profits around 100 million. It is only the chart that
| looks break even...
|
| And a couple of negative Q3 results are absolutely normal
| in commerce, especially eCommerece. All the stuff sold
| during Q4 needs to come from somewhere.
|
| So no, Amazon was definitelway more than just break even
| with three negative quarters between 2004 (!) and end of
| 2021 (!). Then you have two tremendously negative quarters,
| Q1 and 2 2022, after equally tremendous profits in 2021.
| And those losses are driven by write offs on investments
| and aquisitions, so by no means operations driven.
|
| That AWS is 10% or revenue and 90% of profits is not really
| impoetant as long as AWS is not spun off from Amazon's
| retail business. Which, by the way, generates most of
| Amazon's free cash flow.
| di456 wrote:
| Amazon never cared about profit, only free cash flow.
| They kept profits low because every penny of earnings got
| reinvested back into the business.
| wpietri wrote:
| It's not just the graph. Their revenues were growing
| rapidly at the same time they were basically breaking
| even: https://www.marketplacepulse.com/stats/amazon-net-
| sales-94
|
| So their profitability as a percentage of revenue was
| actually drastically declining. All during a period where
| investors were grumbling that they should start giving
| the money back to investors. But Amazon was intentionally
| keeping their profits very low because they thought they
| had better things to spend the money on. This was not a
| myth, this was a strategy. A long-running one. See, among
| many articles:
| https://www.nytimes.com/2013/10/22/technology/sales-are-
| colo...
| hef19898 wrote:
| Man, break even means zero profit but also no losses. If
| EBITDA goes down or not is a different, and unrelated,
| question. And a different financial metric all together.
|
| Amazon was, in its entire history as a public company,
| profitable in _every single quarter_ , except 5 (!). So
| no, they never spend all their money on growth (they did
| spend a lot so but never in unsustainable ways, which is
| the key here). Using Amazon as an example to spend
| everything on growth, and profits will come, is
| fundamentally wrong.
| wpietri wrote:
| I totally believe that a lot of startups are misusing the
| Amazon example. I also believe many of those startups
| will be royally screwed now that an era of easy money is
| ending. And personally, I'll be popping plenty of popcorn
| when they get their comeuppance.
|
| But that doesn't mean I'm going to uncritically accept
| your claim that "Amazon was never profitable because they
| prioritized growth is a meme". Because it was basically
| true for a very long time. It was something many Amazon
| investors complained about long and loud because they
| wanted the cash, not future growth potential that they
| were skeptical of.
| hef19898 wrote:
| Can we at least agree that any profits above zero are
| actually profits? And the question of just _how_
| profitable is a different financial metric?
| gizmo wrote:
| No? Because if you need tons of capital to make a
| minuscule profit your company is worth nothing. (A
| company has to outperform at least the interest people
| can get on bonds plus some equity premium.)
|
| Amazon _could_ make a significant profit, if Bezos
| wanted. But that's a different question.
| wpietri wrote:
| I see you've edited and added more, so let me also reply
| to this bit:
|
| > That AWS is 10% or revenue and 90% of profits is not
| really impoetant
|
| It's important if we're examining your claim that "Amazon
| was never profitable because they prioritized growth is a
| meme", because we're looking at the extent to which they
| reinvested gross profits from their core business.
| hef19898 wrote:
| Sometimes I am really puzzled by the lack of financial
| literacy on a forum aimed at start-ups. I really am.
|
| Also the goal post moving. I said Amazon basically never
| reported losses, which they didn't. You said they barely
| broke even, which they didn't, as the numbers behind the
| chart show. And that Amazon prioritizes growth is hardly
| news. That they do so at the expense of profitablility is
| just plain wrong so. And the chart you shared _yourself_
| tells as much.
| wpietri wrote:
| I tried to work in good faith here, but now that you're
| just getting insulting, I'm done. You and your literal
| illiteracy are no longer my problem.
| grogenaut wrote:
| Amazon typically isn't spending the lion share on user
| acquisition, it's plowing it into expansion and infra. Most
| recent issues/losses were due to a massive investment in
| physical fulfillment centers due to pandemic demand.
| wpietri wrote:
| I agree with what you say, but your tone to me sounds
| contradictory, so I'm puzzled. Amazon "plowing it into
| expansion and infra" sounds exactly like "they
| prioritized growth", doesn't it?
| TrueSlacker0 wrote:
| Or they are investing internally for the future. You can
| plow lots of money into internal improvements for little
| to no growth in revenue, but at their scale saving just
| 1% more is a large amount of money. Not to mention a
| possible strategic advantage.
| Ekaros wrote:
| The key point to takeaway might be that it is different
| to invest in things than it is to essentially dump your
| product to gain market share or customers. First is
| building datacentres, ware houses and so on. Later would
| be providing services like taxis below cost.
|
| With infra, you still have the stuff next quarter and
| following quarters. With later it is already gone.
| maCDzP wrote:
| So I am a Silicon Valley outsider. I live in the northern EU and
| work with project management in the construction industry
| representing the owner. It's mostly infrastructure, roads, water.
| Old industry, conservative, we basically hate new things. On my
| spare time I tinker with my computer, learn assembly or whatever.
| Hence HN.
|
| I have recently started a course in corporate finance at my local
| uni because my new role requires me to understand accounting,
| making business decision and so on.
|
| I haven't finished my course, and I have to admit that I skimmed
| the article. So what I am about to say is probably wrong. It's a
| feeling I have.
|
| I have the feeling that a lot of theses articles are pretty basic
| corporate finance. What I mean is that if you study and try to
| understand basic CF, you will gain the insights that many of
| these articles talk about.
|
| When I then read in the comments that there are cases where tech
| leads with no business experience get millions in funding and
| basically are learning by doing. Silicon Valley seems to be on
| another planet for me. It's sounds surreal to me.
|
| If I was an investor I would never give that person money since
| projects are so extremely difficult. The wicked problem is a real
| thing. Or maybe I am just poor and don't get how people with
| large amounts of cash think. I get that it's a numbers game and
| you have a portfolio of companies, but still.
|
| Guys that are closer to SV, I would love to hear your thoughts on
| my thoughts.
| fxtentacle wrote:
| In some cases, your goal as an investor is not to hold on to
| the investment until it becomes a viable company and IPOs.
| Instead, you just try to sell your shares to the next person as
| quick as possible.
|
| If you're in the latter situation, then hype is way more
| important than actual fundamentals.
| threeseed wrote:
| This is a rare situation. Most VCs are not interested in a
| quick exit/entry with a 10x return.
|
| They need the 100x/1000x outliers in order to return their
| fund and that means holding on to investments until IPO.
| danenania wrote:
| You say it's difficult, but you yourself will learn the key
| principles from a single course.
|
| Learning to create a successful product is much harder and
| requires a much rarer set of skills. There's no course you can
| take that will give you this ability. Knowing lots of details
| about accounting and business administration won't help you
| unless you can make something that sells.
| boulos wrote:
| At the beginning of a company, it's all hope anyway [1].
|
| Investors are sophisticated enough to quickly reason about
| basic margin opportunity, and decide if the company could
| _ever_ be profitable, even if the founders have no real
| business experience. The assumption is that by the second round
| or so, you can refine the estimate of "Could ever be
| profitable".
|
| More importantly for venture capital, is that there are many
| profitable businesses in the world that have people with
| finance expertise. If you just wanted to invest in profitable
| companies, you wouldn't be doing venture capital. Instead,
| you're seeking companies that will have massive returns and
| become profitable _some day_.
|
| If the founders still don't know how to do finance, but they're
| making a ton of money, _you_ send them a CFO to tighten that
| up. Same way you send them names for VP of Sales, or whatever
| else they need.
|
| Deciding to give up on a company that seems to be generating
| lots of money, and "just" needs to improve margins is hard. If
| you tighten too early, you've blunted growth. If you tighten
| too late, you've thrown away the money. For the last few years,
| the amount of money sloshing around meant you saw more of the
| latter. The firms "had" to keep investing their funds, so they
| were chasing more and more deals on hope. But $10M out of a $1B
| fund is still no big deal.
|
| tl;dr: the rare thing is rocket ships, not financial
| sophistication.
|
| [1] https://www.k9ventures.com/blog/2012/05/31/hope-and-
| numbers/
| 13415 wrote:
| Most innovation of internet and computer-related business come
| from Silicon Valley, so it seems reasonably clear to me that
| investors there are doing the right thing. To be honest, I find
| it hard to name any highly successful EU companies whose main
| business is internet-based or software-related, at least not in
| the b2c sector. There are some, but the major players seem to
| come from the US and more recently also from China.
|
| I've always considered the risk-averse investment culture and
| bureaucracy in Europe to be a major factor.
| ivalm wrote:
| Skype, Spotify. But both grew with SV venture. EU venture is
| not as good for early companies because they are much more
| conservative.
| polynox wrote:
| So you would refuse to fund Google (Larry and Sergei being PhD
| students at Stanford at the time) because they "[have] no
| business experience"?
| kristianc wrote:
| Google's initial VC funding round pre-IPO was something like
| $25m. Even allowing for inflation you see that kind of money
| tossed around on pre-revenue NFT startups based on a pitch
| deck today.
| threeseed wrote:
| Can you provide examples.
|
| Pre-revenue NFT startup raising $25m pre-seed in this
| market ?
| quickthrower2 wrote:
| It is a funny concept because with NFT they are selling
| the Brooklyn Bridge over and over again - there is no
| excuse to be pre revenue!
| lchengify wrote:
| When investing in different industries (construction vs tech),
| it's often useful to think about them in the context of asset
| classes.
|
| Specifically, construction is more tied to either real estate,
| hospitality or government contracts. These often raise money
| via a bond (debt) offering or an equity with a very well-worn
| finance model. These projects require a lot of upfront capital
| (billions not unusual for roads) and have long time horizons,
| with log() or linear returns, and have a very well understood
| model for packaging as a risk asset. These risk assets attract
| a certain kind of investor, or a certain risk profile in a
| large fund's portfolio.
|
| Venture capital as an asset class is a bit different. The
| expectation is that an idea can be proven out relatively
| cheaply, and the business will scale since the major leverage
| is intellectual property (vs physical assets). The expectation
| is also that most business will fail, with maybe a handful of
| successes capturing most of your return. VC's investing in
| startups with risk-appetite LPs, is very different than a real
| estate developer going to a large bank to build a housing
| project. The VC model is closer to investing in a TV show than
| a construction project.
|
| Put simply: Investing in a moderately sized government
| construction project ($2b or so for a toll road in latin
| America) is a totally different finance product than a startup
| that leverages IP. The aggregation of risk is also different
| (VC vs say, REITs) and the devices are different (equity vs
| debt / leverage). Most investors either run a balanced fund at
| a large size, or specialize, since they are so different.
|
| EDIT: Also important is relative size of each investment asset
| class. VC is hilariously small (222 billion in 2022) in
| comparison to something like energy (2.4 trillion in 2022). VC
| gets a lot of press but for most professional investors "real
| funds" start at about a billion table stakes.
| dopeboy wrote:
| This is a helpful reply. Any further literature (blogs or
| books) that you'd recommend to learn about these concepts?
| lchengify wrote:
| Unfortunately, I picked most of this up from school (shout
| out to Babin's Engineering Entrepreneurship class @ Penn)
| and from my stepmother who is a capital markets attorney.
|
| However the two finance podcasts I follow really closely
| are "Odd Lots" from Bloomberg [1] and "The Compound and
| Friends" from Josh Brown and Michael Batnick. Both take a
| more broader look at the economy than just venture capital,
| and are super smart folks. Also honestly, they're fun to
| listen to which makes it easier.
|
| [1] https://www.youtube.com/c/TheCompoundRWM
|
| [2] https://www.bloomberg.com/oddlots-podcast
| maCDzP wrote:
| Thank you for putting some perspective on construction
| and VC. I'll check out your recommendations since I am
| eager to learn more.
| lchengify wrote:
| No problem! Some other thoughts I had after thinking more
| about your question.
|
| - Companies that have physical assets often have a focus
| on operations work (e.g., where do I economically source
| asphalt near Berlin?). Intellectual Property businesses
| often have a focus on product work (e.g., what new
| software feature does EMEA sales need to make their
| quarter?). One is quite literally, building the value
| mile by mile at a relatively high cost. The other is more
| "unlocking" value that was so unbalanced something with
| minimal physical footprint can access it.
|
| - Since outcomes in IP are so binary, it winds up that
| having all the ingredients geographically focused
| produces the best outcomes. This is definitely true for
| talent, but also the money, risk appetite, specialized
| services, government, etc, all contribute to the
| ecosystem. This is why SV (tech) and LA (media and
| entertainment) exist. By comparison, NYC is still large,
| but is a deep secondary (1/10th the size) for both
| industries.
|
| - Asset classes aren't just about returns, they also have
| other dimensions like volatility ("beta") and liquidity.
| Being able to sell something easily is valuable, and not
| being subject to crazy swings is also valuable.
| Unfortunately those two often are at odds. These features
| make for different investment mixes, and also affect how
| you can get leverage (loans) with them as collateral.
| Specifically, real estate is super easy to get a loan on
| since it's not very volatile. Pre-IPO startup shares are
| very hard to get a loan on, because they are both
| volatile _and_ illiquid.
|
| - For non-public investments, a lot of the value is from
| either shaping the deal yourself or getting access to the
| right people. It's easy for me to invest $1000 in GE. I
| can't just walk up to Pixar and ask to invest $1000 in
| their next film. Same is true for startups. You either
| need to seed the deal (be the lead investor), or have the
| access to contribute. Building these relationships is a
| lifetime of work. This is why people specialize.
|
| - Adding to above, VCs themselves are even more
| specialized. VC's typically stratify by company stage
| (seed, A, B, C, mezzanine, etc), industry, geography,
| thesis, etc. These are often driven by the philosophies
| of the partners, fund size, or by the LPs with specific
| expectations. To give a very direct example, GV with
| exactly one LP and invests in A-stage or later, has very
| different goals than YC, which has very different goals
| than the venture arm of a big-12 pharma company like
| Roche (Pharma is also intellectual property based). It's
| specialization all the way down.
| bdw5204 wrote:
| One of the classics that explains the why behind VC backed
| tech companies is Peter Thiel's book Zero to One.
|
| A big takeaway for me from reading that book was that the
| companies that become extremely profitable are basically
| monopolies with no or few competitors that focus on scaling
| up rapidly. That was counterintuitive for me because I
| would have thought you'd ideally want to be profitable at
| all times. I'd also assumed that competing against
| incumbents that have little or no competition was the best
| way to get a profitable business running. That's actually a
| bad idea unless you're at least 10x better than the
| incumbent which you probably won't be.
| lumb63 wrote:
| This doesn't answer OPs question, IMO (or my interpretation
| of what OP was saying is wrong).
|
| Sure, construction and high-growth tech startups are
| different investment opportunities. They have different risk
| profiles. As someone managing money, shouldn't you be looking
| to mitigate risk to maximize returns? Why give money to the
| startup which has an idea and no experience running a
| business, managing capital, accounting, etc.? Wouldn't money
| be much better spent on a startup that had all those things?
|
| I have heard in the past that the majority of startups fail,
| and that successful startups are often founded by people who
| have founded (often unsuccessful) startups before. When
| looking for a company to invest in, shouldn't these be top
| priority? I don't buy that VC and high growth companies need
| to be as risky as they are. I suspect a lot of it is bad
| decisions and lack of due diligence.
| dragonwriter wrote:
| > I have heard in the past that the majority of startups
| fail, and that successful startups are often founded by
| people who have founded (often unsuccessful) startups
| before. When looking for a company to invest in, shouldn't
| these be top priority?
|
| If they already are, either directly, or because "founding
| a startup" (as if it doesn't get funded, its not really a
| startup) is heavily dependent on connections from the
| beginning, that would explain the effect itself.
| lchengify wrote:
| You beat me to the follow-up! I actually answered this
| below. I'll address it directly but it may get flagged as
| copy / paste so apologies in advance.
|
| > As someone managing money, shouldn't you be looking to
| mitigate risk to maximize returns?
|
| - Asset classes aren't just about returns, they also have
| other dimensions like volatility ("beta"), liquidity,
| correlation, and time horizon. Being able to sell something
| easily is valuable, and not being subject to crazy swings
| is also valuable. Unfortunately those two often are at
| odds. These features make for different investment mixes,
| and also affect how you can get leverage (loans) with them
| as collateral. Specifically, real estate is super easy to
| get a loan on since it's not very volatile. Pre-IPO startup
| shares are very hard to get a loan on, because they are
| both volatile and illiquid.
|
| > Why give money to the startup which has an idea and no
| experience running a business, managing capital,
| accounting, etc.?
|
| - Companies that have physical assets often have a focus on
| operations work (e.g., where do I economically source
| asphalt near Berlin?). Intellectual Property businesses
| often have a focus [exclusively] on product work (e.g.,
| what new software feature does EMEA sales need to make
| their quarter?), where accounting, etc is less correlated
| with outsized outcomes. One is quite literally, building
| the value mile by mile at a relatively high cost. The other
| is more "unlocking" value that was so unbalanced something
| with minimal physical footprint can access it.
|
| > Wouldn't money be much better spent on a startup that had
| all those things? When looking for a company to invest in,
| shouldn't these be top priority? I don't buy that VC and
| high growth companies need to be as risky as they are. I
| suspect a lot of it is bad decisions and lack of due
| diligence.
|
| - Ideally you have all those things, but sometimes you
| can't get all the things in a deal and shaping it is the
| value you provide. For non-public investments, a lot of the
| value is from either shaping the deal yourself or getting
| access to the right people. It's easy for me to invest
| $1000 in GE. I can't just walk up to Pixar and ask to
| invest $1000 in their next film. Same is true for startups.
| You either need to seed the deal (be the lead investor), or
| have the access to contribute. Building these relationships
| is a lifetime of work. This is why people specialize.
|
| - Adding to above, VCs themselves are even more
| specialized, and different stages require different
| balances of due diligence vs speed. VC's typically stratify
| by company stage (seed, A, B, C, mezzanine, etc), industry,
| geography, thesis, etc. These are often driven by the
| philosophies of the partners, fund size, or by the LPs with
| specific expectations. To give a very direct example, GV
| with exactly one LP and invests in A-stage or later, has
| very different goals than YC, which has very different
| goals than the venture arm of a big-12 pharma company like
| Roche (Pharma is also intellectual property based). It's
| specialization all the way down.
| JumpCrisscross wrote:
| > _a lot of theses articles are pretty basic corporate finance_
|
| One take: yes, and venture-backed companies often forget or
| ignore the basics of corporate finance.
|
| Another take: orthodox corporate finance isn't tailored for
| start-ups. If you're developing a product, GAAP income is
| meaningless. So we bootstrap interim financial metrics, _e.g._
| eyeballs and ARPUs and DAUs (oh my!).
|
| In truth, the latter dominates at the early stage. But firms
| grow. Some founders and VCs (see: Andreessen) are late to
| recognise when nontraditional metrics do more harm than good.
| When that ignorance becomes a point of pride, the former gains
| explanatory power.
| elefanten wrote:
| I'll add to this a quote that is (purportedly) native to gp's
| northern EU: "Do you not know, my son, with how very little
| wisdom the world is governed?"
| teddyh wrote:
| " _An nescis, mi fili, quantilla prudentia mundus regatur?_
| "
|
| -- Axel Oxenstierna, 1648
| notfromhere wrote:
| Difference is that corporate finance is focused on managing a
| company at its current size while startups are really focused
| on building a much larger company. Hence why the economics of
| it make no sense until it hits that mythical future size
| JumpCrisscross wrote:
| > _corporate finance is focused on managing a company at
| its current size while startups are really focused on
| building a much larger company_
|
| Circa 1810, maybe. Since the railroads corporate finance,
| particularly American finance, has been focussed on growth.
| Hell, the term venture capital pays homage to the financing
| of merchant vessels on high risk / high rewards voyages.
| threeseed wrote:
| Actually the problem with startups is that they focus on
| corporate finance too much.
|
| When in reality they should be acting like a small business
| e.g. florist.
|
| Often these startups are failing because of basic cash-flow
| management.
| ghaff wrote:
| Somewhat. But even if you (perhaps rightfully) roll your
| eyes at startup growth at all costs approaches, the
| thinking around cash flow at a VC-backed startup should
| often be different than that of a florist funded by
| savings, a bank load, or friends and family.
| gen220 wrote:
| There's an angle to consider - why is it that people who are
| technically skilled and financially experienced do not take on
| venture funding and build billion dollar plus companies? [1]
|
| Perhaps, they know (from business experience) that the VC
| treadmill is not in their best interests, when everything about
| that life is considered! :)
|
| Perhaps investors actually benefit from the naivete (read:
| _not_ incompetence, just naivete) of their portfolio companies?
|
| It's a symbiotic relationship, but there's a reason that the
| road between founder and VC is generally a one-way street.
|
| [1]: There are notable exceptions to this observations. They're
| worth understanding, too.
| [deleted]
| threeseed wrote:
| You have an issue with VC not SV specifically.
|
| a) Yes in some cases engineers with no business experience get
| funding. But in most cases there is significant due diligence
| being done on the capabilities of the team.
|
| b) There is plenty of history that engineers with great product
| sensibilities can learn to run a business and become
| successfully by augmenting their weaknesses with members of the
| SLT who are stronger at them.
|
| c) The whole point is for them to deploy their LPs money rather
| than just letting sit around waiting for the perfect
| idea/team/market etc combination to arrive on your lap. That
| simply doesn't happen.
| renewiltord wrote:
| Think of it like this. If you're a big fund you want a
| portfolio diversified in industry and risk.
|
| If the guys CalPERS allocated the 0.5% (a few billion) to (the
| VCs) decided to also not do the risky thing then you haven't
| got a diversified portfolio.
|
| The point is to put a small amount of your phenomenal wealth
| into risky bets with outsize returns precisely because you want
| to capture some of that other risk diversity.
| [deleted]
| ivan_gammel wrote:
| Let's say you distribute X million EUR to X startups (each one
| gets 1M) and you know that on average one of them will yield 2X
| in 5 years and the rest will just burn the money and die. This
| seems to be a good investment, right? You only need to pick
| those startups carefully. It appears, the criteria of selection
| may be quite different from what you would look at if you were
| to provide those money as a loan. I'm not sure how VCs really
| make their decisions, but this is just a case of having a good
| risk model based on variables that matter the most.
| kmonsen wrote:
| No the unicorn needs to do a lot better than 2x. I think you
| need an X and a Y there for it to make sense.
| ivan_gammel wrote:
| I don't know if every VC had an unicorn at least once in
| their portfolio, but for early stage investments to be a
| good idea they just need to beat consistently any other
| investment opportunities.
| crenwick wrote:
| I think you're right on most accounts.
|
| Yes, articles like this seem rudimentary to folks with
| MBA/accounting backgrounds.
|
| Yes, tech startups can get millions in seeds funding, even
| where the company doesn't have a CFO (or anyone with an MBA).
|
| However, at those super early stages for sw startups, it
| doesn't really matter. The money is to finance a product, prove
| the product's value, and build a team. And its that journey
| where that company may start looking for a CFO.
|
| By the time that company is raising a series A, they should
| have these things worked out.
| ChuckMcM wrote:
| Okay, as someone who has lived in the "heart" of Silicon Valley
| for a few decades I'll take a shot at this.
|
| To be fair, I didn't appreciate how unusual it looked until I
| helped a friend start their business in Illinois and saw what
| they dealt with at a bank.
|
| You are correct in your assessment that articles like the one
| linked here are pretty standard business explainers. The
| interesting thing for me is that it really is just math and
| systems so it "should" be interesting but for a lot of folks
| they don't seem interested and just want to sell product.
|
| So at least part of the venture community has convinced itself
| that it knows how to "productize" anything, if they just had
| something to work on. And along comes a person with an idea and
| hope. The venture capitalist (VC) thinks, "I'll provide the
| business sense, this person provides the creativity and the
| elbow work, and we'll split the profits." That can work out
| spectacularly well for the VC where they invest $X and get back
| 10 - 100 time $X in wealth. It doesn't always work out, but if
| it works out enough times, the VC can turn their money into
| more money faster that way than with say investing in
| government bonds.
|
| In Silicon Valley this works because of two things, one there
| was a tradition of providing equity to employees which, when
| companies grew, put a lot of the wealth generated in the hands
| of individuals rather than companies. And secondly, California
| had some pretty good laws on the books about disallowing "non-
| compete" employment agreements so people who thought they could
| do the same thing their company was doing, only better, could
| go out and start a new company doing the same thing without too
| much risk of getting sued.
|
| Having lived here I can tell you that 20 - 30 year old people
| are _much_ more willing to invest in something risky than 50 -
| 60 year old people. So getting that wealth into younger hands
| adds to the risk tolerance.
|
| To this point: _Or maybe I am just poor and don't get how
| people with large amounts of cash think._ I expect it is a
| scale thing.
|
| Imagine you have saved enough to pay for all your kids college
| education and you start your "retirement" fund. And you save
| money in that until the returns on that fund are actually
| enough to provide you with the same income, and in the US buy
| you the same medical coverage, you are currently experiencing
| working. Now you can "leave your job" and have a lot of free
| time. (It _doesn 't_ mean you can buy a yacht or an airplane
| and party all the time, just that you're new lifestyle looks
| like your old lifestyle with the single exception that you
| don't have to go into work every weekday). Now you end up with
| a few million $ more for this "third" account. What to do with
| that? Well a lot of people feel comfortable "gambling" some of
| that on new ventures because if they lose it, it won't change
| their life, and if they get a big winner, well it means more
| things they can try.
|
| So to understand it, you have to imagine that you've got enough
| savings for all of the life expenses you expect to have going
| forward, and you have enough savings on top of that such that
| those savings are providing the equivalent to having a good job
| (pay and benefits), and now you have savings on top of that.
|
| In the current batch, there are estimates of >100,000 former
| Google, Apple, Microsoft, and Facebook employees are in that
| position today. Money did a story on how the density of
| billionaires in San Francisco was the highest in the world [1]
| (post Crypto-crash I'm guessing this number went down :-)).
|
| So why do young millionaires and billionaires invest in crazy
| ideas? Maybe because it is more exciting than having a few
| million dollars sitting in a bank account doing "nothing"?
|
| [1] https://money.com/san-francisco-billionaire-density-
| income-i...
| ghaff wrote:
| I have a friend who retired somewhat early as CxO of a
| company with a (lowish 8 figure?) payday. Although, from a
| financial perspective he somewhat regretted spending about a
| decade doing a bunch of angel investing rather than just
| investing in big tech, I think it was also sort of a hobby
| and he still invests in a few companies he's particularly
| interested in. Along with also being involved in philanthropy
| with a large local institution.
|
| So, yeah, there's a level where you know you don't have the
| money to routinely fly private or buy a super-yacht or buy
| properties around the world. But you have enough for any
| expenses you reasonably want/need and may not even _want_ a
| bunch of the stuff that more money could buy. So you throw
| some money at interesting things.
| erenyeager wrote:
| My understanding as someone who worked in SV is that there's a
| lot of buzz in the area around new technologies and people are
| always doing something interesting/revolutionary/whatever.
| There are investors who diversify their portfolio by investing
| in multiple high risk high reward investments like these
| startups. So even if you invest in 100 companies and 99 fail,
| the one that succeeds might be that unicorn that pays off.
|
| Concurrently, there is a greater understanding that waterfall
| engineering is not the best for software. Instead, software is
| more agile, in that you build test prototypes and have a
| tightly integrated feedback loop instead of huge project plans
| that take months to even reach market.
|
| The philosophy is more around testing market hypotheses quickly
| and iterating quickly.
|
| Another factor is there is a lot of hype around SV that forms a
| positive feedback loop. Of course investors are not so easy to
| part with their money but it is inclining towards gambling in
| some fields flush with capital.
|
| This is not true for all fields in SV though, for example in
| the biotech and medtech field, getting investment is much
| harder from my experience, as there are more regulatory
| factors, higher barrier to startup, longer time periods for
| outcomes, etc.
| samcheng wrote:
| I live and work in Silicon Valley, and I agree that the
| concepts in the article are pretty elementary and critical to
| understand in any business, not just tech.
|
| However: if your software product has struck gold, it will have
| "rocket ship" nearly-free growth and negligible incremental
| costs. In that regime, only the top line really matters. This
| is the kind of home run that many people are looking for in
| Silicon Valley, both founders and investors, which explains the
| relative "traditional" financial illiteracy in startups around
| here.
| dsugarman wrote:
| A lot goes into making a product that people love, if you can
| master the customer, market dynamics, pricing, pitch, product,
| service, etc to be growing really fast, you can probably learn
| basic corporate finance. That's what the VCs are betting on and
| they will even give you a board member and resources to help
| you out! if your product is only successful because your unit
| economics are upside down which is giving an unfair market
| advantage where you have none otherwise, well then that's
| reckless
| JohnFen wrote:
| This reminds me of an exchange I had with someone who wanted to
| enter into a business deal with me. He bragged about how his
| company had X millions in revenue. Since revenue was a
| meaningless figure to me in this context, I asked what their
| profit margin was. After hemming and hawing about it, he admitted
| the company was not profitable, and it became clear it was
| unlikely to become profitable anytime soon.
| hackernewds wrote:
| You can just say you were talking to the founders of Lyft.
| blobbers wrote:
| GAAP accounting is for stable cash flows in well understood
| businesses.
|
| Bootstrapping (funding growth with revenue) isn't the silicon
| valley way; the silicon valley method is as follows: 1. get
| funding
|
| 2. grow team/build product
|
| 3. raise more funding and find product market fit
|
| 4. seize control of market / make large top line moneys
|
| 5. repeat 3/4 a as necessary.
|
| 6. acquisition/IPO, shareholders payout.
| photochemsyn wrote:
| Remaining profitable is likely even harder, as other people will
| rush in and start providing similar products or services at
| competitive prices. In a heavily financialized system, the common
| solution is monopolization (buying up startup competition using
| pools of capital) - leading to situations like TicketMaster,
| which gets away with providing low quality-of-service to artists
| and their fans because they have no alternative to turn to.
|
| Unregulated markets in a finance-centric economy inevitably drift
| toward the controlled monopolistic model for this reason.
| Advocates for unregulated free-markets either don't understand
| this or are simply being deceptive and are really trying to
| maximize profits by promoting the growth of monopolies.
| whitemary wrote:
| Regulated markets in a capital-centric economy serve, in
| aggregate, the interests of those who control capital, and
| therefore _also_ drift toward monopoly. Liberals either don 't
| understand this or are simply being deceptive by promoting the
| continuation of capitalism.
| photochemsyn wrote:
| Even highly socialist countries like Cuba found that
| introducing regulated markets was healthy for their
| economies. Now if 'those who control capital' are themselves
| a small minority of the overall population who act in concert
| - well, that's a financial monopoly, and of course there are
| ways to break up a financial monopoly of this nature, such as
| re-introducing Glass-Steagall provisions that separated
| commercial and investment banking, eliminating offshore and
| similar capital tax shelters, etc.
|
| Note that if it is a state body that controls all the capital
| and hence controls economic decisions like infrastructure
| development, this isn't so different in practice from having
| a small group of financiers controlling all the capital - in
| both cases you have a centrally-planned economy controlled by
| a small cabal that puts their own interests ahead of everyone
| else's.
| [deleted]
| wpietri wrote:
| Is this true?
|
| > I have observed that few people understand these nuances and
| the significant role they play
|
| I've been out of the venture-backed world for a while, so it's an
| honest question. Few people understanding business basics would
| certainly explain a lot of recent behavior, but there are other
| possibilities too.
| gizmo wrote:
| Literally every founder is capable of figuring out the basic
| unit economics of their business. But when VC money is abundant
| the unit economics don't matter because growth is the only
| metric worth tracking.
| wpietri wrote:
| Oh, I believe they're capable of figuring these things out.
| My question is whether they did.
|
| For example, I could imagine a founder who knew what a real
| business was, but just said, "In crazy times we'll do crazy
| things", took the VC money, and mainly shut up about the
| problems, while quietly trying to mitigate the risks.
|
| Or I could imagine that the OP is literally correct here,
| that many never bothered to figure this stuff out because it
| did not matter for the short term, and in fact would
| interfere with them projecting an SBF-grade aura of extreme
| confidence.
|
| I've certainly met people in both camps. I'm just wondering
| if the latter have truly become very common, or even possibly
| the majority in some circles.
| kazinator wrote:
| Revenue is easy only if you ignore survivorship bias.
| Organizations without revenue perish. Organizations with revenue
| whose balance sheets don't show a profit don't necessarily
| perish.
| mrweasel wrote:
| Sure, you need revenue to generate a profit, otherwise you'd be
| generating profits from nothing. You can also have
| organisations who are specifically "Not for profit", they
| balance sheets will frequently end up with a 0 dollars in
| profits each year, and that's as expected, but they too need
| revenue to do anything.
|
| For certain types of companies, revenue is easy. I worked to a
| company that did mostly consulting, but would also sell you
| hardware or software licenses, so customers only need to
| interact with us, and no one else. Technically we could just
| have given away hardware, and we frequently did sell servers at
| a lose. That shows up as revenue. As long as you have money or
| credit to sell expensive stuff at a lose, then revenue is easy.
|
| That's not the main point though. The point is measuring
| companies on revenue is pretty stupid, without also looking
| that profitability.
| [deleted]
| gizmo wrote:
| This isn't another 2000 crash. The internet is much, much larger
| today. And the prize you get for being #1 in any market is
| enormous. It's so large that it pays to gamble with questionable
| growth strategies in the short term.
|
| Reasonable growth that balances LTV and CAC is nice and pragmatic
| but it's not a winning strategy when your competitors are putting
| the pedal to the metal.
| kolbe wrote:
| "the prize you get for being #1 in any market is enormous"
|
| I believe this for broad markets with network effects (though
| see how quickly tiktok obviated facebook), but for companies
| that send out text messages to your customers or host your
| application in the cloud, which are examples of the creme de la
| creme of 10s startup success, it matters a lot less. These
| companies have no moat, no future, and are purely designed to
| be vehicles that take money out of the pockets of pension funds
| and give it to financiers.
| ghiculescu wrote:
| On the contrary, I think the internet being bigger means the
| prize for being #2, 3, etc is great too. Very few markets are
| actually winner takes all.
| coffeebeqn wrote:
| Also people thinking that Google and Meta won't be looked at
| like Oracle and IBM in 10-20 years are probably way too
| confident in the status quo
| somsak2 wrote:
| Microsoft was founded before oracle and is among the top 5
| largest tech co's. IBM and oracle may not be as big as they
| used to but they're still huge. oracle in particular is at
| a near all time high.
| rrrrrrrrrrrryan wrote:
| It's funny to see how people on this site so vastly
| overvalue organic growth and undervalue inorganic growth.
| (It makes sense given the target audience, obviously.)
|
| You can absolutely grow a company by all metrics
| (revenue, income, market share, market cap) just by
| having a bunch of MBAs that make well-negotiated
| acquisitions.
|
| It's basically all IBM and Oracle do these days: buy up
| smaller B2B software, integrate it into their portfolio
| as a new product or a feature for an existing one, then
| sell the hell out of it to their existing customer base.
| leetrout wrote:
| Yep! And the second / late mover advantage.
|
| For any that are unfamiliar:
|
| https://insight.kellogg.northwestern.edu/article/the_second_.
| ..
| hackernewds wrote:
| Jack Dorsey often says. You don't need to be first to
| market. You just need to be best to market.
|
| Demonstrated through Twitter, and now Cashapp
| mostertoaster wrote:
| "This forced other disciplined startups to loosen their ad spend
| to be competitive in the venture-market industry and created an
| era of capital-inefficient businesses. With time, this will re-
| adjust back to historical norms and the process will be painful."
|
| I thought this was a pertinent quote.
|
| You're going to see many companies deciding to become cash flow
| positive instead of growing. And if the business is stable, the
| quickest way to get there is to drastically cut operating
| costs...
| wpietri wrote:
| One of the interesting questions for me is how long this
| adaptation will take. I think there are a bunch of things that
| could make it pretty laggy. E.g., the fact that so many execs
| have spent so many years in an unsustainable capital
| environment. Or the amount of VC money still sloshing around
| waiting to be applied. Or the number of VCs who basically built
| their careers on these kinds of unsustainable businesses. How
| many will be able to admit that their special genius no longer
| applies, and was in fact the cause of a lot of problems in the
| long term?
| coffeebeqn wrote:
| Also many companies are probably just praying that one set of
| layoffs and improving inflation will get them to the next era
| of easy funding sometime in 2024
| bboygravity wrote:
| > You're going to see many companies deciding to become cash
| flow positive instead of growing. And if the business is
| stable, the quickest way to get there is to drastically cut
| operating costs...
|
| Or or do a public stock offering at a relatively high stock
| price after a short squeeze.
| jossclimb wrote:
| Pretty much.
|
| I have seen so many startups over the past few years, with A
| rounds up to $25 even $50 million where the CEO has zero business
| experience, they are literally learning by the seat of their
| pants.. They have gone from some experience as a tech lead for a
| small team, to the next day to running a large company.
| Obviously, there will be the odd outlier Zuckerberg type, but
| many of them are going to be totally out of their depth when the
| burn rate and path to profit (or even revenue in some cases)
| start to close in.
|
| 2024 will be a bloodbath in the startup world.
| jasmer wrote:
| Zuck had no idea what he was doing, and a lot of these guys
| don't learn some basic things until much later on, or never do.
|
| When you have that kind of growth and that kind of money,
| frankly it's different anyhow - riding an explosionn is
| different than running a company, which is almost always
| 'operating'.
|
| CEO's are captains of ships with moving parts, experts,
| probably already a navigator, engineer, maps, standard port-to-
| port model etc.. In a way CEO's of established companies are
| 'overseers'.
|
| CEO's of compaanies blowing up is something different, it's not
| an optimization process it's usually a top-line process, and
| then maybe crude bottom line net-profit process while keeping
| enough wood in the fire.
| disgruntledphd2 wrote:
| To be fair, Zuckerberg hired lots and lots of experienced
| people early on, and listened to them. Honestly though, if he
| hadn't hired Sheryl Sandberg then Facebook would probably have
| failed as a business.
| fatfox wrote:
| We've created a generation of leadership people who never learned
| how to make a profit. Until last year, if you were focusing on
| unit economics, you were laughed out of the room. Fast growth and
| market share at all cost...
| [deleted]
| lumb63 wrote:
| I disagree wholly with the "revenue is easy, profit is harder"
| idea. I suppose it is tautologically true since profitable
| ventures are a subset of ones which generate revenue, so more
| businesses generate revenue than generate profits, thus it is is
| "easier". However, that is only at the present instant. That
| statement does not factor in all the companies that generated
| only revenue and no profit and are now extinct. When considering
| these, it is vastly easier to be profitable than to have revenue.
|
| Without infusions of external capital it is literally impossible
| to generate revenue without profit for any period longer than one
| can sustain their losses. Isn't it way easier to focus on
| businesses that do this, that meet a demand people have, and are
| thus profitable? Instead, investments are made in areas where
| demand has to be induced via advertising spend, expenses have to
| be reduced by relying on the ability to "rapidly scale", and the
| business has to sap round after round of investor capital at
| increasingly higher and increasingly more ridiculous valuations
| with the hopes that it can weather that storm.
|
| When considering the above, it seems to me that we are
| systematically mis-allocating capital to bad investments. As the
| saying goes, a bird in the hand is worth two in the bush. You can
| see people behaving in accordance with this during high-risk
| periods, e.g. COVID, when capital shifted toward durable goods
| and physical assets (pre QE infinity). But for some reason, when
| the risk is not literally right in front of investors, they do
| not see it. That risk, the integral of which increases over
| larger periods of time, eats away at the growth rates of
| companies. I suspect risk would spoil the math that makes a lot
| of the high-growth companies worth anything, if it were properly
| accounted for. Not to mention, negative externalities are unknown
| and thus largely ignored in startups, and thus cannot be
| accounted for.
| hinata08 wrote:
| Almost unrelated, but I also learned what was capital efficiency
| and payback period after playing Monopoly for the first time in
| years.
|
| Long story short, when the properties were eventually sold out, I
| burned my cash flow to buy more of them to other players, at a
| high price, when they needed money (it would also allow them to
| play longer)
|
| My logic was that by owning the most properties and by building
| houses and hotels, I would have the most revenue on the long run.
| And had the game been endless, I would have won.
|
| However, the chances of someone going on your property isn't even
| high in this game ! You can sometimes wait for several rounds
| before this happens.
|
| Unluckily, I stumbled on a rent I couldn't pay, mortgaged some
| properties. It happened again, and other players would only buy
| my properties at a price to cover the rent.
|
| And my empire (i had the most properties by far) was on the verge
| of collapse when I had to run to go to the station.
|
| So yeah, consider the payback period, even in the simplest models
| of the economy. Monopoly is economy taught to children, yet we
| adults can overlook its lessons.
| smeej wrote:
| There's one monopoly that matters in Monopoly: the houses
| themselves.
|
| The game only has 32 houses. If you get two 3-property
| monopolies and build four houses on each one, forgoing hotels,
| you have 24 houses and everyone else is fighting over the
| remaining 8. If you get max out houses on two 3-property
| monopolies and a 2-property one, the game is yours regardless
| of what anyone else has.
| whitemary wrote:
| Monopoly was literally invented to illustrate the deceptions of
| capitalism. Great game.
| JohnFen wrote:
| It's a great tool to teach about the evils of monopolies, but
| a terrible game.
| 8note wrote:
| It's also there to convince people to switch to a land tax,
| but it's really not successful at it. I think because there's
| no land owners separate from building developers
| robertlagrant wrote:
| It's the regulations that stop you building more places that
| are the issue : - )
| ipaddr wrote:
| The game has those rules. Can't build a hotel until you
| have 5 houses. In real life can't get a permit to build a
| hotel until you marry your first daughter off or can
| influence someone.
| warren-williams wrote:
| I might be off, but why are you adding CAC back into Contribution
| Margin to determine LTV? This seems like more of a sunk cost that
| would imply 1x LTV/CAC than the 2x that you show?
|
| Other than that, nice article!
| hinkley wrote:
| The number of times I've worked at a place where some sales
| asshole was trying to land $1 of revenue that was going to cost
| us $2.50 to achieve the deliverables... wtf are they teaching in
| business school?
|
| One place I worked, their strategy was to chase the "whales"
| first and get them as customers so we could use them to get other
| customers. So many problems there that only because apparent to
| these idiots afterward. First, big companies aren't idiots. If
| you have next to nothing to offer, they'll give you next to
| nothing in return. And once you have an exploitative contract,
| good luck renegotiating it once your product has improved.
|
| In this particular industry it was even worse, as we found out.
| The big companies felt like they were doing people a favor, the
| medium sized companies were just cheap. Only the little companies
| were hungry and humble enough to pay good money for good product,
| but now you have a product that's been tilted toward the whims of
| much larger companies, which adds a lot of friction. Plus you've
| done all of your scalability work at the beginning when you are
| the least experienced with it.
|
| They did end up selling the company at a profit, but they had
| hoped for early retirement and all they got was comfortable
| living. I'm not convinced the buyers got a good deal on the terms
| either.
| simonswords82 wrote:
| Often this happens when a sales commission structure is
| misaligned with company profitability.
|
| The salesperson then cares more about commission and less about
| profit and generates revenue at any cost.
| tiffanyh wrote:
| I could generate huge revenues selling $100 gift cards for 80
| bucks.
|
| But I wouldn't be generating much profit.
| robertlagrant wrote:
| As they say, revenue is vanity.
| ghiculescu wrote:
| I love payback period, it's a great metric. But it's easy to take
| it too literally. It's meant to be a tool to help you make
| prioritization decisions ("what if we do this instead of that"),
| but people often use it as a management report ("we did this;
| here's the verdict").
|
| Here's a SaaS example: if it costs you $1000 to acquire a
| customer that pays you $100/month, the PBP is 10. That doesn't
| sound amazing. But you have options! If you give the customer a
| 20% discount to pay annually, they're now paying you ~$1000
| upfront, for a PBP of 0. Tweak the numbers slightly and you can
| get a negative payback period. Suddenly your "capital
| inefficient" business has a big flywheel without the need for
| outside capital.
|
| It's easy to think decreasing acquisition costs is what you need
| to do in the current market (and believe me, that's not a bad
| idea!), but that's the denominator. There's also a numerator -
| how much cash you bring in, and how quickly - that matters just
| as much. It's cash flow that matters, not profit.
| ecpottinger wrote:
| My dad had great ideas for businesses. Yet each one he started
| failed for him. Why, because he has such unrealistic view on
| how long the payback period will be. He even founded with a
| partner what is now a national company, but at the time it did
| not make a big profit in the first year, so he sold his share
| of the business. He had "Get rich Quick" fever, and never saw
| that bussiness rarely become an overnight success.
| toss1 wrote:
| Yup, just about every time I've read of an 'overnight
| success', it was indeed an a very rapid path to success . . .
| after a decade or two of slogging it out in the trenches of
| obscurity.
|
| There are a lot of moving parts, a lot to learn, and
| timing/luck are also factors. Until they all hit at the same
| time, it looks like a flop. It takes time to find, learn, or
| assemble all the key bits.
|
| Sorry your dad's impatience was so persistent. Sense of
| urgency is important, but impatience is deadly. Thanks for
| sharing such a clear example.
| rrrrrrrrrrrryan wrote:
| One of my finance professors mentioned that ~70% of business
| fail in their first two years, and ~90% of those failures are
| purely due to a lack of working capital, not due to any
| fundamental flaw in the business plan. If they kept doing the
| same thing and just had more money and time, things would
| have eventually worked out.
|
| People start businesses for emotional reasons, not logical
| ones, and vastly, vastly underestimate the amount of money
| they'll need to get the thing off the ground. Entrepreneurial
| people are inherently optimistic, (and they _have_ to be),
| but he said their estimates were typically off by ~5x. If you
| think you need a million dollars of runway, you probably need
| 5 million. If you think it 'll take a year to achieve
| profitability, it'll probably take 5 years.
| moonchrome wrote:
| > One of my finance professors mentioned that ~70% of
| business fail in their first two years, and ~90% of those
| failures are purely due to a lack of working capital, not
| due to any fundamental flaw in the business plan.
|
| Having seen my share of failed businesses - I'm very
| skeptical of these numbers.
| dtgriscom wrote:
| ... skeptical in which direction?
| yunohn wrote:
| > due to a lack of working capital, not due to any
| fundamental flaw in the business plan. If they kept doing
| the same thing and just had more money and time, things
| would have eventually worked out.
|
| Ironically, that's what VC funding aims to provide -
| capital to extend runway and improve scale quickly.
|
| Whereas the reality is VCs support negative unit economics
| and absurd customer acquisition costs.
| birdyrooster wrote:
| Interesting to think that the company which he divested from
| may have made it because of his exit.
| petemc_ wrote:
| Unless you have some information you're not sharing, this
| is a pretty horrible thing to say.
| anonymous_sorry wrote:
| Is it horrible to suppose that someone might not be well-
| suited to the task of driving a business from nothing to
| a national concern? Because I personally suspect that of
| most people, including myself, and don't think of myself
| as particularly mean-spirited.
|
| Also, the offspring of the man in question identifies an
| aspect of his temperament that led to things turning out
| the way they did.
| tnel77 wrote:
| I don't feel like it's horrible. If one of your founding
| members is focused on getting rich quick while the rest
| are trying to invest in the company long-term, then his
| departure very well could have helped the company
| ultimately succeed.
| hgomersall wrote:
| So far, my experience has been that business as a start-up is
| basically about surviving long enough to make a profit. Of
| course, some ideas are just bad, but I'm convinced loads of
| start-ups that failed could have been made to work given
| sufficient time. This doesn't work so well if you take a pile
| of capital, but if you go for organic growth it is more
| plausible to survive hand to mouth for a while.
| exelib wrote:
| Great example! I think your example exactly points out why PBP
| of 0 is soo awesome in this case! You can invest $1000
| immediately and get another customer in 0 months instead of 10.
| If they pay upfront again, so you can invest it again and so
| on.
| throwaway292939 wrote:
| > If you give the customer a 20% discount to pay annually,
| they're now paying you ~$1000 upfront, for a PBP of 0
|
| This sounds like a huge assumption being made here - as in,
| this is not as easy as it sounds.
| ghiculescu wrote:
| What's the assumption?
|
| We do this all the time so if I'm missing something I'm keen
| to hear it :)
| soVeryTired wrote:
| Maybe I've misunderstood here but it sounds like you're
| comparing the revenue brought in from a customer to the
| cost of attracting them in the first place. Doesn't that
| ignore costs like ongoing customer service and maintaining
| the systems the customer is actually using? Or are all
| those numbers rolled up into "cost of acquisition"?
| ghiculescu wrote:
| We typically calculate payback period using all go to
| market costs (sales + marketing + CS), but not product
| development or any COGS (which includes things like AWS
| costs).
|
| Again, it's not a management report. You should use it
| for prioritisation. For example, all our go-to-market is
| very country-specific. So we can look at the payback
| period for different countries and compare how well they
| are performing, and that tell us which ones we should
| invest more into.
|
| Every business should do it differently, based on which
| expenses are fixed or variable for them.
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