WEBVTT

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Welcome everyone to week six of our GBR masterclass.

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I am so excited to be here with you all.

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We have another amazing class that I cannot wait for to share with you all.

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We have Dave Parker, who is going to be teaching on how businesses make money, how you're going

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to make money in your business, setting up your revenue model.

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So without further ado, Dave, welcome to GBR.

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Hello, Siobhan, great to be with you again.

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Hey everybody, super excited to be here with you.

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We're going to pull up some slides and I'll walk you through how startups make money and

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not become a statistic.

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Most importantly, there's crazy numbers about failure rates, and I'm going to walk you through

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how startups make money and agenda-wise, give you a little bit about me, how startups fail

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and why you shouldn't.

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Talk a little bit about what makes an enterprise value of a startup and how companies are valued,

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and then walk you through the company valuation drivers, including the 14 revenue models used

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primarily in tech, but in other businesses as well.

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So first off, a little bit about me.

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I'm a five-time founder, board member, and used to work for a company called Startup

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Weekend as a nonprofit that we sold to Techstars in 2015.

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I did this class about a year ago, almost to the anniversary date, and about a month

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later, I actually joined Fearless as the senior partner in charge of the investment side.

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I wrote a book called Trajectory Startup, and I'll talk to you some about that data

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today and what we pulled out of the book, and I've done about 15 transactions.

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I see the math there doesn't add up on the bottom, so that one's a little bit dated,

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but 15 transactions totaled 13 sell-side deals and two buy-side deals, which means I bought

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two companies and sold 13.

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Only three of mine were mine, so in the process.

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So some resources, and I'll make sure these links are available to you through Siobhan.

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You can download the free excerpt from the book, the excerpt one, and link to my blog

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through dkparker.com.

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And my publisher says, buy the book, because he always reminds me I need to say that.

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So first off, a little thing about startups.

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I think there's so much stuff in the Twittersphere about startups that sometimes it can be a

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little bit bizarre, because it's like, well, you know, follow your passion and money will

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follow, or it's all about the market, or focus on customers and revenue will follow.

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And I guess what I would tell you is don't believe the means.

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I don't think that's a good place to start.

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This is a list from CB Insights on why startups fail, and you'll notice there at the top

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of the list is there was no market need was the number one reason startups failed, followed

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by they ran out of money, which makes tons of sense, especially if you built a product

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that nobody wanted.

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Not the right team for the job.

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Sometimes we think of that as founder market fit, it's the right team to do it.

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They got out-competed, pricing or cost issues, user-unfriendly products.

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So a lot of the things on that list were about product, and especially building a product

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that nobody wanted.

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And you'll see that the list in CB Insights was this was a report they've done every six

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months for about the last decade, and it's been consistently the same, that founders

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end up building a product that people don't want.

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So but also on that list is pricing and cost issues, like how do you price the product

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and how do you monetize it?

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So today what I really wanted to do is break you in or give you some math about how to

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think about your startup.

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And I'll tell you in general that great teams in a bad market can have a failure and meh,

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like it doesn't really matter.

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But an okay team in a great market could have an amazing return.

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So great product with no path to revenue will be a failure, where an okay product with great

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monetization can still make you money.

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So I think at the end of the day, if you're thinking about, gosh, can I become a unicorn

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CEO with a startup, it will require both a great product, solid monetization, an amazing

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market, and obviously execution.

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So my favorite meme from that list is somebody who said the ideas are cheap, but execution

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is hard.

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But I would tell you, good ideas are still rare.

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So you still need to have a good idea, right?

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So ideas may be easy, but good ideas are still pretty hard.

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So that's a little bit about what the components are of successful, but let me break it down

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for you from both a founder and investor perspective, because I've come from the founder side of

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the table, and then I've been with three venture funds, and this is my third, and one family

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office.

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And from the founder's perspective, we tend to think about product and then unit economics

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and how we make money.

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From the investor perspective, we're thinking about returns, unit economics, and then product.

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So it's easy to get a check into your company.

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but it's hard for me to get a check out of your company.

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So what I really want to do is figure out

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how do I get the best opportunity for a return

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for my investors and by partnering with founders.

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So think of it that way, that there's two views of it.

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The next thing is I wanted to break down

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business models for you,

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because business models aren't really that complex

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if you break them down.

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There's three big components to business models.

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And I think for a lot of us as founders,

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we kind of lump all this stuff into the black box

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we call business models, like it's all in there.

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But there's really three big components.

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The first one is how do I create value,

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which is my product or service?

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How do I deliver value, which is how do I monetize it,

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which is my revenue model,

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my pricing and my marketing and sales.

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And then what's left over is how do I capture value?

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How do I get paid for it?

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Which is my top line revenue,

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my gross margins and my net profit.

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So let me break those down in some more detail.

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So by creating value,

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it's the product or service you deliver.

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So if I think about that as a software product,

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like a WhatsApp or a Facebook,

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it's the product that is delivered to the customer.

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If it's a combination model, that's a product and a service,

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it can be something that people are part of the delivery.

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But the difference here is product is something

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you can make money when you sleep.

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Services is something that requires people to make money.

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So when I think about it that way,

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it's the cost to build the product, which is the team,

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which is engineering, design, hosting, or manufacturing

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is my total cost to build and create a product.

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And then I also have my cost of delivery and support.

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So those are all the costs.

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If you think about that first bucket,

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is the bucket required to build

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or deliver the product or service?

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So that's number one.

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Bucket number two is how do you deliver value?

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So that's your revenue model,

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which I'll go through the 14 here in a few minutes.

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How do you price the product?

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So it's both competitive,

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but also allows you some runway to go make money.

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What your cost of marketing and sales are,

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so we think about that as your cost of customer acquisition,

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which is your marketing cost plus your sales cost

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to get the customer in to be a paying customer.

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And then your lifetime value.

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How long is that customer worth over a lifetime?

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So we have some companies in our portfolio

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that are consumer packaged goods,

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like a Range Beauty or a Brown Girl Jane.

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And they make a product that is a standalone product

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that you can buy from makeup.

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But that product, it can be sold once.

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I can calculate the cost of sales

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and the cost of the product itself.

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But then the question is how many times

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does the customer buy over their lifetime?

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So initially we start with 12 months in that calculation,

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but that's just an example of a makeup product

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that would be sold here.

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So, and just a quick note,

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the promotions and pricing are different.

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So keep in mind that promotion,

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like a free trial is not a pricing component.

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It's really just a marketing cost.

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So I just make that distinction here

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that promotions and pricing are different.

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Then capturing value is what's left over.

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So bucket number one was create value.

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Bucket number two was deliver value.

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And bucket number three was how do I capture value?

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So that's my top line revenue,

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my gross margins and my net profit.

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So that's, you'll notice

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there's not very many variables there.

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That is what's left over at the end

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after you build a product and sell the product.

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All right, so product market fit

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is kind of your first major milestone

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when it comes to your startup.

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So how do I know I have product market fit?

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Did I build a product that people cared about

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and can I sell it to them at a reasonable economic, right?

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So reasonable cost.

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So before product market fit,

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the early indicators are things like

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my leads are increasing

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or my website traffic is increasing.

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And then one of the things I'm gonna track

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is how long it takes me to close a customer.

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If I'm selling a consumer product,

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we have a company in our portfolio

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that does amazing fan art press on nails.

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So her business is called Pamper, Pamper Nail Gallery.

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So she makes a product that can be really expensive

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if it's custom, but the custom products

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or semi-custom products aren't that expensive.

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So from the time that people visit to the site

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to the time they place their first order,

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how long does that take?

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So that's a time to close example.

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Are the referrals increasing?

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Do customers love your product

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and they're referring it to friends?

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On a consumer package good side,

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that would be a straight referral

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or on a business to business side,

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it might be a referral to a different company.

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ACV and MRR is what's called annual contract value

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and monthly recurring revenue.

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So in general, the trend I'm looking for there

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is are they increasing or not?

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So is my monthly revenue increasing?

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But this is again, monthly recurring revenue,

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not just monthly revenue.

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And then if I'm building a consumer app,

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I may be looking at my time on site or my time in app.

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If anybody's familiar with OfferUp,

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OfferUp is a kind of an online.

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online version of Craigslist, right, it's a mobile first photo-based shopping and garage

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store app, garage sale app if you will.

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So and they raised money at over a billion dollars in valuation and the reason they did

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was people were spending more time on the site on a daily basis than people were spending

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on average on Facebook.

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So that's kind of time on site.

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And then LTV to CAC ratio is the next one, which is my lifetime value divided by CAC

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or my cost of customer acquisition.

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So if I'm selling a product for $1,000 and it costs me $100 to sell the product, then

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I have an LTV to CAC ratio of 10.

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So my point here is that there's a number of ways you look at what's called product

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market fit.

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It's all math.

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There's no mystery.

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So part of my goal here is to take some of the mystery away and just go right to the

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math.

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All right, so how do you monetize?

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Let me walk you through the 14 revenue models.

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I'll give you a list of all 14 at the end.

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I'll make sure Siobhan has the slides so that she can get out to you as well.

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So you don't have to take notes here.

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So keep in mind, this is kind of a heuristic to how to value a company, but it's not a

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calculus on valuing companies.

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And I'll walk you through some of that math at the end too.

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So my background, when I started to write the book, someone had asked me, well, before

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I started writing the book, actually, this was probably the motivation for the book.

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Somebody came to me and said, hey, can I have a copy of your financial model?

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And that's just the spreadsheet we used to look at how fast the company was going to

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grow and those things.

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And so theirs was a business-to-consumer marketplace like an eBay, and mine was a business-to-business

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subscription service that's something more like a Salesforce.

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And at the time, I was trying to figure out, well, how many templates would I need to do

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in order to make it easier for founders to actually do these financial models?

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So I pulled a list from Crunchbase of 2,600-plus companies, and we ended up tracking them over

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five years.

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That wasn't the original plan, but what I ran into was I sold a company, and then I

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went to work as a CEO, and then I helped run a nonprofit.

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So it took me about five years to write the book.

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And in that time, we ended up with a longitudinal study of those companies and the companies

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that succeeded and failed.

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So if they had failed, we used the Internet Archive, which is called the Wayback Machine,

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to go back and look at their last cached page and the last page that was up.

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So I know this is a bit of an eye chart, but what you'll see here is that gaming companies

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went from seed funding to A funding pretty quickly, and that was because if they had

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a hit, like a candy crush, the company would take off.

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And then combination companies went from about normal from A to B funding, but their

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seed to A funding was a little bit faster.

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And those companies are companies that charge services revenue and subscriptions as an example.

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And then all the rest of them kind of fell into a category.

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So what are the 14 models?

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First one is called fee-for-service, or just the services business.

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Services require people, so education is a good example of that.

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And then there's a model called the for-profit model, which is a model that works for both

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business to business and business to consumer.

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It's the easiest way to start a business because you don't need any funding to do it.

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You just need to sell and get some customers and then have people that can help deliver

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it.

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The problem is services are hard, and investors don't like to invest in it because every time

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you get a new customer or three customers, you have to hire another person to help with

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the delivery.

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So services businesses traditionally don't get funded by folks like us at Fearless or

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other VCs.

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You can get a bank loan at some point, but they're really hard because you're a startup

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founder in a young company as well.

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So those things can be really difficult.

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Second is called productized service.

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So think you're like Southwest Airlines or IBM in some ways.

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When I buy my ticket for the airlines, I didn't pay a fee for cleaning the chair or a fee

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for my water or a fee for my food, not that that's available anymore.

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But I paid one price and I had it all as a package price.

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So really productized service is just about packaging pricing.

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So typically gross margins are greater than 35 percent.

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It works both B2B and B2C.

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A little jet lag got up with me for there for a minute.

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I was just international yesterday.

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So examples here are companies like Moz, which was a services company first and then converted

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to a software company.

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So keep in mind, the difference between services business and a productized service business

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is just packaging up for the customer to buy.

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So if I can buy it with a set price and I don't have to pay on a per hour basis, that's

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really productizing the service or fixed price services.

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Three is commerce.

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So you're probably familiar with Wayfair and Lululemon are both commerce companies and

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they work both B2B and B2C.

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I have a wholesale cost of goods sold, an average margin percentage, an average basket,

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and number of baskets per month is my key calculation here.

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So commerce works both for physical goods or virtual goods, but there's a wholesale

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cost plus a gross profit or a gross sales price.

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Next up is a subscription.

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Everybody's moving to a subscription.

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It's a super popular model.

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So if it's B2B, it's Salesforce, if it's B2C, it's Spotify, again, both B2C and B2B.

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We have average revenue per user, conversion metrics, and churn percentage is our key metrics

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for the subscription business.

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And typically, these are done with tiered pricing.

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So the more mature companies have tiered pricing relative to that.

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That's number four, subscription.

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Number five is called a metered service business, and it's really a pay-as-you-go business.

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Link magazine subscriptions for business-to-business.

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So typically, this is B2B, or if you remember back to when cell phones used to charge for

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per text message instead of unlimited text messages.

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So the challenge with this one is B2C, it's a negative customer experience.

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B2B, it's actually a positive customer experience.

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If I'm using Amazon Web Services and my bill goes up, it usually means I'm making more

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money.

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So think of this one as a B2B example.

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And so if you're doing business-to-consumer instead of business-to-business, this would

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be B2B only.

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Challenges here is that infrastructure is required and it takes time to grow the company,

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but it does have the highest exit multiple.

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These companies are worth the most for the revenue that they bring in.

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Number six is the transaction fee or rental business.

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So examples here are companies like Stripe or Chegg.

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It happens both B2B or B2C.

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Really the only difference between a transaction fee business and a commerce business is if

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I have $100 sale in the commerce business, I'm booking the revenue of $100.

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If I have a $100 sale on Stripe, I'm booking a 3.5% fee that I'm paying.

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So the revenue that I book as a business is higher on commerce and lower because it's

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actual realized revenue in the transaction fee business.

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So now if you have two sides of a transaction fee business, it's called a marketplace.

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So eBay, Alibaba, and Uber are all examples of marketplace businesses.

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They work both B2B and B2C.

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Again similar to the transaction fee business, it's the average transaction amount times

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the number of transactions per month and the commission percentage on those transactions.

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So marketplaces are great.

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They can be hard because you have to ratchet them up.

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We have an example of a marketplace in our portfolio called ShearShare.

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So if you know anybody in the beauty business, typically the business has chairs for rent

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inside the salons, and then people want to rent chairs, but they have to sign a long

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term contract.

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So what ShearShare does is it allows barbers and beauticians and stylists to go in and

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rent on a day, a week, or a month.

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So if you're coming to New Orleans and you want to go rent a salon location there, you

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can totally do that on a day, a week, or a month basis.

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So that's number seven in marketplace.

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Combinations are next.

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So a company like Smartsheet is a good example of combination revenue models where the company

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does services plus subscription.

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So there can be good examples of hardware plus software.

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Most of these just require some level of scale in order to get to valuations from that perspective,

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00:18:33.320 --> 00:18:36.920
but they can mature faster because you're getting early revenue from customers in the

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form of services, as an example.

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One of the other trends we see in this one is marketplaces, like the prior one, but where

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00:18:43.400 --> 00:18:47.920
they're charging an additional subscription to people who post frequently, which brings

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the transaction fees down to their highest posting companies.

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So that's number eight in combinations.

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Number nine is gaming.

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So if you know King and Candy Crush, Blizzard is another example.

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This is a B2C example.

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Your key metrics here are your number of downloads, the percentage of people who play every month,

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and then the average in-app purchase.

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What's funny about the gaming business is it's the only example of where companies introduce

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friction to increase their price.

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So when you get to a point in the game where you're like, oh, do you want to get through

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this level?

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You have to pay a premium to do it, where every other business, we're trying to take

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friction out of our customers' life and make it easier for them to use us versus make it

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harder.

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But gaming is the only one that makes it harder.

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The last few I'll go through fairly quickly because they only work at scale.

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So advertising and search is the next one.

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Example is Google and Facebook.

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It's typically B2B in that advertisers pay, but the users are free.

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So traffic is your key metrics.

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The number of clicks and the average revenue per click is the function of that one.

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So advertising works and it's a great revenue model, but you have to get to a million.

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00:20:00.000 --> 00:20:06.600
users per month. So on average on dkparker.com, I have 5,000 people who read my site every

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month. If I monetize that for a competitive, what's called a CPM rate or cost per thousand

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of $35, then I'd make roughly $150 a month monetizing my site. So the answer is, it's

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not that exciting. So advertising works as a legit model, but you have to figure out

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how you're going to get 2 million unique users per month.

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Number 11 is called new media. So if you know Clubhouse and Snapchat or TikTok as an

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example, all of those companies are the new media model, which is they have massive user

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growth and then ultimately they monetize usually via number 10, advertising. So in the case

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00:20:45.080 --> 00:20:51.360
of TikTok, it's pre-rolls and videos and embedded videos. So if you have a company and you ever

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heard somebody say, we want to go viral, they mean this. Going new media has three

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00:20:58.320 --> 00:21:04.360
steps in it. Word of mouth is first, network effect is second, and going viral is third.

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So word of mouth is people love your product and they talk about it. That's awesome. And

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00:21:08.040 --> 00:21:12.340
you have a way to track it on the marketing side. Network effect says the product works

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better if I upload my network to it. So think WhatsApp. If I have a WhatsApp app, I can

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get user virality and it's more effective if I have the network. And then you have crazy

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00:21:25.240 --> 00:21:31.080
ones like TikTok and Clubhouse and they take off in a viral effect. And that viral coefficient

385
00:21:31.080 --> 00:21:36.400
is calculated in what's called K-factors, just a math equation. So typically you don't

386
00:21:36.400 --> 00:21:39.800
have much revenue in early days and you're just growing, growing, growing as fast as

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you can. You can raise money for these businesses. This is probably the one revenue model that's

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00:21:43.760 --> 00:21:50.320
really the deferred revenue model because you can generate revenue later. So know that

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00:21:50.320 --> 00:21:56.240
that's number 11, new media. Big data is number 12. So think patients like me as an example

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00:21:56.240 --> 00:22:02.520
here. If I have big data, I can sell. That's great, but I have to have the data first.

391
00:22:02.520 --> 00:22:12.040
So typically this one works best when you're at scale again versus at launch. Lead generation

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00:22:12.040 --> 00:22:17.880
is next. Mint or Chime is a good example where the companies are super great at marketing

393
00:22:17.880 --> 00:22:22.320
and they're better at marketing than credit card companies are. So in Mint's case, they

394
00:22:22.320 --> 00:22:27.960
sold it into it and Chime's case is very similar. The services they offer are free and then

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00:22:27.960 --> 00:22:31.520
they make you an offer to get a credit card or other financial services and they get paid

396
00:22:31.520 --> 00:22:36.480
a referral fee to that. So really that's business to consumer. They're good at marketing and

397
00:22:36.480 --> 00:22:40.860
then they're selling your information to somebody else. If you've ever signed up to get a price

398
00:22:40.900 --> 00:22:45.340
on life insurance online, that is the lead generation business and a horrible customer

399
00:22:45.340 --> 00:22:49.940
experience. So the key metrics here is they have a cost to generate the traffic and then

400
00:22:49.940 --> 00:22:55.380
they can sell that lead for more than the cost of generating the traffic. So conversion

401
00:22:55.380 --> 00:23:00.380
rates there are super low. And the last but not least is called licensing. Licensing is

402
00:23:00.380 --> 00:23:04.980
think Microsoft Office 15 years ago where you get a sticker for a license that went

403
00:23:04.980 --> 00:23:09.740
on the bottom of your computer and you had a copy of Microsoft Office or Microsoft Windows.

404
00:23:09.740 --> 00:23:16.460
So licensing here works in things like geography. If I wanted to license my product for a field

405
00:23:16.460 --> 00:23:23.220
of use outside the US, maybe sell it to a different country. So also content licensing.

406
00:23:23.220 --> 00:23:27.460
So copyright and content licensing falls in that category. So that's number 14. So here's

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00:23:27.460 --> 00:23:35.860
the list for you. Go ahead and pick your primary. What you guess is your top revenue model.

408
00:23:36.420 --> 00:23:41.020
If you're not sure if that's going to be it, pick a secondary one as well. I'll leave this

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00:23:41.020 --> 00:23:45.940
up for just a minute. Well, maybe not a whole minute, but you know what I mean.

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00:23:57.940 --> 00:24:04.380
Right. So hopefully you've got your primary and secondary revenue models. So why does

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00:24:04.380 --> 00:24:10.980
it matter? Well, one, I can tell you for first off, is that hopefully the product

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00:24:10.980 --> 00:24:16.060
you're building is unique. And if it's in the consumer packaged goods space or in the

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00:24:16.060 --> 00:24:21.780
tech space, I'll tell you, we'll be interested to see it from Fearless perspective. But part

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of what we are making a choice on is how is how do I value the company? And if I was to

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00:24:26.780 --> 00:24:33.580
do a company, what's it worth? So this comes up frequently in what we call valuations.

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00:24:33.580 --> 00:24:37.300
And the concept here is if you came to me and said, hey, Dave, we want Fearless to invest

417
00:24:37.300 --> 00:24:41.220
in the company, we would have a discussion about how much of the company do we get for

418
00:24:41.220 --> 00:24:46.500
the money that we put in. So we invest in pre-seed deals, seed stage deals and A-stage

419
00:24:46.500 --> 00:24:53.500
deals. So our average check is, you know, a $750,000 check. We do smaller checks. We

420
00:24:53.500 --> 00:24:57.740
do occasionally larger checks. On average, it's $750,000. So if you came to me and said,

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hey, we want to invest, you'd invest in the company.

422
00:25:00.000 --> 00:25:03.360
have a discussion around like how do you value the company?

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00:25:03.360 --> 00:25:06.780
And one of the ways that impacts the value of the company

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is the revenue model that you choose.

425
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So of the 14 you just picked, primary to secondary,

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the revenue model makes a difference.

427
00:25:12.960 --> 00:25:15.140
So let me give you a different idea here.

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Services businesses generally trade at .75

429
00:25:18.000 --> 00:25:20.580
to one and a half times revenues.

430
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So I think of a company like Accenture

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00:25:23.060 --> 00:25:25.040
or Deloitte and Touche as an example.

432
00:25:25.040 --> 00:25:28.680
That company doesn't, if I do a million dollars in revenue,

433
00:25:28.720 --> 00:25:30.880
the company's gonna be worth roughly a million dollars

434
00:25:30.880 --> 00:25:32.520
when I sell it.

435
00:25:32.520 --> 00:25:34.080
Where if you see here for commerce,

436
00:25:34.080 --> 00:25:35.960
Lululemon is a good example.

437
00:25:35.960 --> 00:25:39.440
And Wayfair sells a very commodity driven product,

438
00:25:39.440 --> 00:25:41.040
which means there's not huge margins in it.

439
00:25:41.040 --> 00:25:43.040
I can buy that product anywhere else.

440
00:25:43.040 --> 00:25:44.480
Where Lululemon sells a product

441
00:25:44.480 --> 00:25:47.020
that is distinct to Lululemon.

442
00:25:47.020 --> 00:25:49.280
So those companies trade between two times revenue

443
00:25:49.280 --> 00:25:52.520
and nine times revenues, depending on the company.

444
00:25:52.520 --> 00:25:54.660
Then you get companies like subscription service companies,

445
00:25:54.660 --> 00:25:57.980
think DocuSign or Salesforce or Spotify.

446
00:25:57.980 --> 00:25:59.620
They have monthly recurring revenue.

447
00:25:59.620 --> 00:26:01.100
And you'll see here those companies trade

448
00:26:01.100 --> 00:26:03.660
eight to 12 times a million dollars,

449
00:26:03.660 --> 00:26:06.060
or right to 12 times the revenue.

450
00:26:06.060 --> 00:26:07.540
So in the case of a services business,

451
00:26:07.540 --> 00:26:08.940
if I did a million dollars in revenue,

452
00:26:08.940 --> 00:26:10.100
it'd be worth a million dollars.

453
00:26:10.100 --> 00:26:12.660
But if I had a subscription business for a million dollars,

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it would be worth between eight and $12 million,

455
00:26:15.860 --> 00:26:17.560
which totally makes it worthwhile

456
00:26:17.560 --> 00:26:19.660
if I can do subscription to do that.

457
00:26:19.660 --> 00:26:22.100
And then meter services, the hot outlier here,

458
00:26:22.100 --> 00:26:24.660
and then it trades 24 times revenues.

459
00:26:24.660 --> 00:26:27.420
So the reason I bring this up is that

460
00:26:27.820 --> 00:26:30.900
it is one area that you can impact the value of the company

461
00:26:30.900 --> 00:26:34.740
based on how you do revenue models.

462
00:26:34.740 --> 00:26:37.740
So for what it's worth, that's good to know.

463
00:26:37.740 --> 00:26:41.740
So what other factors drive the value of the company?

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00:26:41.740 --> 00:26:43.860
How fast you're growing is number one.

465
00:26:43.860 --> 00:26:47.080
So is the company growing at more than 40% a year?

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00:26:47.080 --> 00:26:49.380
That typically applies for more later stage companies,

467
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because in the early days,

468
00:26:50.220 --> 00:26:52.980
if you're going from zero to 100,000

469
00:26:52.980 --> 00:26:53.880
and 100,000 to a million,

470
00:26:53.880 --> 00:26:56.080
you're like, we're growing amazing, right?

471
00:26:56.080 --> 00:26:57.760
But it just depends on what your basis is

472
00:26:57.760 --> 00:26:59.960
or what you're growing off of.

473
00:26:59.960 --> 00:27:03.360
Do I have a logical or acquisitive upmarket buyer?

474
00:27:03.360 --> 00:27:04.720
So is there somebody logically

475
00:27:04.720 --> 00:27:07.040
that could buy us as a business?

476
00:27:07.040 --> 00:27:08.600
And if there's a logical upmarket buyer

477
00:27:08.600 --> 00:27:11.720
that has a history of buying companies, that's awesome.

478
00:27:12.960 --> 00:27:15.760
And then if I can create competition between the buyers,

479
00:27:15.760 --> 00:27:17.280
that's obviously a big point.

480
00:27:17.280 --> 00:27:19.120
The middle one there is the capital to revenue

481
00:27:19.120 --> 00:27:20.100
is a bit of a technical one,

482
00:27:20.100 --> 00:27:22.480
but what it means is how much capital

483
00:27:22.480 --> 00:27:24.280
have you taken in or you're yet doing three times

484
00:27:24.280 --> 00:27:26.560
more revenue than the capital invested.

485
00:27:26.560 --> 00:27:29.320
So that's typically an indication of the sales value.

486
00:27:29.320 --> 00:27:32.680
So all of those things influence your overall value

487
00:27:32.680 --> 00:27:35.560
of that company, but a big influence driver

488
00:27:35.560 --> 00:27:38.260
is what revenue model you picked.

489
00:27:39.440 --> 00:27:41.920
All right, so in summary here, a couple of notes.

490
00:27:41.920 --> 00:27:45.500
I'm not saying that you can calculate the value

491
00:27:45.500 --> 00:27:49.200
of your company based on a pre-revenue company.

492
00:27:49.200 --> 00:27:50.540
That's really tough.

493
00:27:50.540 --> 00:27:53.840
So if you wanna know how to value a pre-revenue company,

494
00:27:54.400 --> 00:27:56.440
I would point you to Dave Berkus' method.

495
00:27:57.520 --> 00:27:59.600
Dave actually wrote a blurb for me for the back of the book.

496
00:27:59.600 --> 00:28:01.880
I totally fanboyed him.

497
00:28:01.880 --> 00:28:04.400
I've been following him for years and I reached out to him.

498
00:28:04.400 --> 00:28:07.000
By the way, this is a great marketing hack as well.

499
00:28:07.000 --> 00:28:08.080
I reached out to Dave and said,

500
00:28:08.080 --> 00:28:10.440
hey, I've been a fan of yours for years.

501
00:28:10.440 --> 00:28:13.360
I've been following what you write and what you do.

502
00:28:13.360 --> 00:28:17.120
He was an early super angel based in Los Angeles.

503
00:28:17.120 --> 00:28:20.120
And he basically wrote about how to value a company

504
00:28:20.120 --> 00:28:21.840
with zero revenue.

505
00:28:21.840 --> 00:28:26.280
So if you're looking for data on that, go read Dave's post

506
00:28:26.280 --> 00:28:29.840
and it'll be in the link here that Siobhan will send you.

507
00:28:29.840 --> 00:28:33.360
So that's one way to look at how you value a company,

508
00:28:33.360 --> 00:28:34.480
but I will note it's mostly

509
00:28:34.480 --> 00:28:37.620
for West Coast technology companies is bias.

510
00:28:40.680 --> 00:28:42.660
You can look at who the potential buyers are

511
00:28:42.660 --> 00:28:44.680
for your company and know that some of those things

512
00:28:44.680 --> 00:28:48.120
in a later stage will have an impact and that's fine too.

513
00:28:48.120 --> 00:28:49.160
Right now, you don't need to focus

514
00:28:49.160 --> 00:28:50.400
on how you're gonna flip the company.

515
00:28:50.400 --> 00:28:53.160
You need to focus on building a great quality company.

516
00:28:54.160 --> 00:28:56.200
This data that I showed you in the previous chart

517
00:28:56.200 --> 00:28:59.400
is now a list of 240 publicly traded companies

518
00:28:59.400 --> 00:29:01.240
that we track on a quarterly basis.

519
00:29:01.240 --> 00:29:04.400
So know that in that, the ongoing effort here

520
00:29:04.400 --> 00:29:05.640
is to keep the data fresh.

521
00:29:05.640 --> 00:29:08.200
So we actually have something to help founders with

522
00:29:08.200 --> 00:29:09.520
and how they value the company

523
00:29:09.520 --> 00:29:12.600
and always happy to share the data with you.

524
00:29:12.600 --> 00:29:17.600
As we think about it from our perspective at Fearless,

525
00:29:18.100 --> 00:29:20.000
we want founders to be prepared

526
00:29:20.560 --> 00:29:22.280
and know what you're raising money against

527
00:29:22.280 --> 00:29:24.120
and how to raise money.

528
00:29:24.120 --> 00:29:26.720
And ultimately there, I guess the takeaway from this

529
00:29:26.720 --> 00:29:29.520
is that I hope that what you're working on

530
00:29:29.520 --> 00:29:31.640
is a unique idea and product,

531
00:29:31.640 --> 00:29:35.320
but how you monetize it is almost never unique.

532
00:29:35.320 --> 00:29:37.160
So know that that's part of the process here

533
00:29:37.160 --> 00:29:41.640
is that the 14 revenue models have changed very little

534
00:29:41.640 --> 00:29:44.560
and now it's been six or seven years of watching this space

535
00:29:44.560 --> 00:29:47.480
and I've become super nerdy about how companies make money

536
00:29:47.480 --> 00:29:48.960
and how they price things.

537
00:29:49.000 --> 00:29:51.000
And at some point, if you become part

538
00:29:51.000 --> 00:29:52.120
of the Fearless portfolio,

539
00:29:52.120 --> 00:29:53.120
I'm sure I'll be talking with you

540
00:29:53.120 --> 00:29:55.080
about how your pricing works as well.

541
00:29:56.160 --> 00:29:57.040
So that's it.

542
00:29:57.040 --> 00:29:59.440
I'm gonna go off the big screen here

543
00:29:59.440 --> 00:30:00.600
and have them pull it.

544
00:30:00.000 --> 00:30:02.520
down and I'll open it up for questions.

545
00:30:02.520 --> 00:30:05.320
And I'm happy to have you weigh in with,

546
00:30:06.480 --> 00:30:08.080
put notes in the chat window there

547
00:30:08.080 --> 00:30:10.240
about which revenue model you picked

548
00:30:10.240 --> 00:30:11.840
or any questions that you have.

549
00:30:13.060 --> 00:30:15.360
While we pull that up,

550
00:30:15.360 --> 00:30:18.120
I will give you a little brief

551
00:30:18.120 --> 00:30:19.400
on Fearless and Fearless Fund.

552
00:30:19.400 --> 00:30:23.360
So Fearless Fund One is a $26 million venture fund

553
00:30:23.360 --> 00:30:27.000
started by Ayanna Parsons and Ariane Simone.

554
00:30:27.000 --> 00:30:28.160
So they're my partners in the fund,

555
00:30:28.200 --> 00:30:29.760
which is super exciting for me.

556
00:30:30.840 --> 00:30:33.280
They launched it as a $5 million exploratory fund.

557
00:30:33.280 --> 00:30:36.560
It became a $26 million fund.

558
00:30:36.560 --> 00:30:38.760
We'll write our final check out of that fund

559
00:30:38.760 --> 00:30:40.800
here in about a week or two.

560
00:30:40.800 --> 00:30:42.800
And we've announced the start of Fund Two,

561
00:30:42.800 --> 00:30:46.480
which is gonna be a $125 million fund.

562
00:30:46.480 --> 00:30:48.160
And what we do is we invest

563
00:30:48.160 --> 00:30:50.220
in women of color founded companies.

564
00:30:51.840 --> 00:30:52.920
In addition to that,

565
00:30:52.920 --> 00:30:55.360
half of the portfolio is in consumer packaged goods.

566
00:30:55.360 --> 00:30:58.520
So think food and beverage, health and beauty,

567
00:30:58.520 --> 00:31:01.720
and half of it's in the technology side of the business.

568
00:31:01.720 --> 00:31:04.760
So I'll tech broadly in that category.

569
00:31:04.760 --> 00:31:09.000
We do pre-seed checks, which is generally early product,

570
00:31:09.000 --> 00:31:12.040
maybe revenue, but generally early product.

571
00:31:12.040 --> 00:31:15.440
Seed stage checks, which is some product

572
00:31:15.440 --> 00:31:17.200
and a little bit of revenue,

573
00:31:17.200 --> 00:31:18.780
and then series A stage checks,

574
00:31:18.780 --> 00:31:21.080
which is really there's existing product and revenue

575
00:31:21.080 --> 00:31:22.640
and the company is scaling and growing.

576
00:31:22.640 --> 00:31:24.720
So, all right.

577
00:31:24.720 --> 00:31:27.200
With that, let me hit exit full screen here

578
00:31:27.200 --> 00:31:28.840
and see if I can help.

579
00:31:28.840 --> 00:31:30.840
Question one, is there a decision tree

580
00:31:30.840 --> 00:31:33.280
on the best revenue model based on the input, access,

581
00:31:33.280 --> 00:31:36.240
and cost of capital, CEO background and industry?

582
00:31:36.240 --> 00:31:37.200
Not really.

583
00:31:37.200 --> 00:31:40.120
I would say it's a great question, by the way.

584
00:31:40.120 --> 00:31:42.200
I don't think it's based on,

585
00:31:42.200 --> 00:31:45.880
I think it's based on first on how the customers will buy.

586
00:31:45.880 --> 00:31:48.800
So I would say if you look at the industry trends

587
00:31:48.800 --> 00:31:50.400
and you look at your competitors,

588
00:31:50.400 --> 00:31:52.200
how have they conditioned the companies to buy?

589
00:31:52.760 --> 00:31:54.920
Or if you're doing something really different,

590
00:31:54.920 --> 00:31:56.520
what is the way that customers are used

591
00:31:56.520 --> 00:31:57.840
to buying your products today?

592
00:31:57.840 --> 00:31:59.880
So on the consumer package goods side,

593
00:31:59.880 --> 00:32:03.040
that might be a subscription service in a box

594
00:32:03.040 --> 00:32:05.000
that comes with a certain number of products

595
00:32:05.000 --> 00:32:06.360
on a monthly basis.

596
00:32:06.360 --> 00:32:09.080
So that's monthly recurring revenue, it's a subscription,

597
00:32:09.080 --> 00:32:12.000
but they can do subscription plus additional commerce items

598
00:32:12.000 --> 00:32:14.560
or they can do subscription and pay a little bit more

599
00:32:14.560 --> 00:32:17.560
to get an increase on the box would be one example.

600
00:32:17.560 --> 00:32:20.240
So, but yeah, from a CEO perspective

601
00:32:20.240 --> 00:32:21.640
or industry perspective,

602
00:32:21.640 --> 00:32:23.840
some of the industry trends will say,

603
00:32:23.840 --> 00:32:26.600
hey, if you're selling to B2B,

604
00:32:26.600 --> 00:32:28.120
companies are used to buying it this way.

605
00:32:28.120 --> 00:32:30.440
You typically don't go away from that.

606
00:32:30.440 --> 00:32:33.720
You typically sell it in a way that they want to buy.

607
00:32:33.720 --> 00:32:35.680
What's your thoughts regarding the customer acquisition

608
00:32:35.680 --> 00:32:37.800
via LinkedIn and Instagram for lead generation

609
00:32:37.800 --> 00:32:39.080
for a B2B model?

610
00:32:42.080 --> 00:32:45.080
So I used LinkedIn and Instagram a bunch,

611
00:32:45.080 --> 00:32:48.640
but for B2B, I would definitely have a bias for,

612
00:32:48.640 --> 00:32:50.360
so I think a business to consumer is,

613
00:32:50.360 --> 00:32:51.920
it's a business selling to a consumer

614
00:32:51.920 --> 00:32:53.560
who's paying the fee, right?

615
00:32:53.560 --> 00:32:55.640
So if it's my 14 year old daughter

616
00:32:55.640 --> 00:32:59.000
who wants to buy a set of nails from Vivian at Pamper,

617
00:32:59.000 --> 00:33:00.600
right, that's a B2C model.

618
00:33:00.600 --> 00:33:04.400
Where if Vivian is selling to a brand

619
00:33:04.400 --> 00:33:07.800
who wants to buy giveaways for their trade show booth

620
00:33:07.800 --> 00:33:09.160
that have their logo on it, right?

621
00:33:09.160 --> 00:33:10.640
That's an entirely different model

622
00:33:10.640 --> 00:33:14.240
of whose credit card or paycheck is getting used.

623
00:33:14.240 --> 00:33:16.080
So when I think about

624
00:33:16.080 --> 00:33:18.360
if you're doing lead generation for B2B,

625
00:33:19.080 --> 00:33:20.480
definitely LinkedIn.

626
00:33:20.480 --> 00:33:21.920
Those ads are expensive.

627
00:33:21.920 --> 00:33:24.600
So the one thing you need to make sure you know is

628
00:33:24.600 --> 00:33:26.280
what's my cost of customer acquisition

629
00:33:26.280 --> 00:33:27.120
and click-through rates.

630
00:33:27.120 --> 00:33:28.120
Those are impressions,

631
00:33:28.120 --> 00:33:29.920
the number of impressions the ads makes,

632
00:33:29.920 --> 00:33:31.840
the click-through percentage,

633
00:33:31.840 --> 00:33:34.760
and then what's called the CPO, the cost per lead,

634
00:33:34.760 --> 00:33:35.760
which is the number of people

635
00:33:35.760 --> 00:33:37.600
who give you that form information at the end.

636
00:33:37.600 --> 00:33:41.000
So Dave, daviddkparker.com, phone number, et cetera.

637
00:33:41.000 --> 00:33:42.840
So yeah, LinkedIn is definitely the preference on there,

638
00:33:42.840 --> 00:33:46.400
but ultimately you're tracking your cost per lead.

639
00:33:46.920 --> 00:33:49.000
My company is a global creative network

640
00:33:49.000 --> 00:33:50.960
that provides multimedia production services

641
00:33:50.960 --> 00:33:53.400
for businesses, filmmakers, nonprofit organizations.

642
00:33:53.400 --> 00:33:55.080
Besides consultation for emerging

643
00:33:55.080 --> 00:33:57.400
and established entertainment industry professionals,

644
00:33:57.400 --> 00:33:59.800
I'm also assuming it falls into that model.

645
00:33:59.800 --> 00:34:02.080
It's, yeah, it's the services business.

646
00:34:02.080 --> 00:34:04.240
There's also deferred payments in the industry.

647
00:34:04.240 --> 00:34:07.000
So I'm wondering, it's this model,

648
00:34:07.000 --> 00:34:09.679
also what are the key metrics for product as a service?

649
00:34:09.679 --> 00:34:11.159
So great question.

650
00:34:11.159 --> 00:34:13.080
So yeah, so you're in the services business

651
00:34:13.120 --> 00:34:17.360
with some licensing revenue at the end, which is fine, right?

652
00:34:17.360 --> 00:34:20.280
Ultimately that licensing revenue isn't huge revenue.

653
00:34:20.280 --> 00:34:22.560
So product as a service, I would say,

654
00:34:22.560 --> 00:34:24.480
what's the, if I think about friction

655
00:34:24.480 --> 00:34:26.719
in selling your service to somebody,

656
00:34:26.719 --> 00:34:29.159
what's the easiest way for you to sell

657
00:34:29.159 --> 00:34:32.600
a bound set of services early and get that customer engaged?

658
00:34:32.600 --> 00:34:33.440
So I'll give you an example.

659
00:34:33.440 --> 00:34:36.520
I ran a consulting company for years that I co-founded.

660
00:34:36.520 --> 00:34:39.320
It was one of the three companies I sold.

661
00:34:39.320 --> 00:34:40.880
One of the, yeah, one of the three I sold.

662
00:34:40.880 --> 00:34:41.760
I sold it back to my founder,

663
00:34:41.760 --> 00:34:45.040
but it still counts as a sale, co-founder, I should say.

664
00:34:45.040 --> 00:34:47.080
So one of the things we did was we did

665
00:34:47.080 --> 00:34:48.920
what we called a revenue review.

666
00:34:48.920 --> 00:34:50.840
And it was a fixed price offer

667
00:34:50.840 --> 00:34:52.400
at the beginning of the engagement.

668
00:34:52.400 --> 00:34:54.520
There was five or $10,000

669
00:34:54.520 --> 00:34:56.199
because our average engagements in consulting

670
00:34:56.199 --> 00:34:58.480
were 200 to $300,000.

671
00:34:58.480 --> 00:35:00.240
No one would buy that sort of.

672
00:35:00.000 --> 00:35:04.400
engagement without getting to know you anyway. It's probably the same is true in your industry.

673
00:35:04.400 --> 00:35:08.800
It's a creative service. It's about more than just the equipment. It's about how you deliver

674
00:35:08.800 --> 00:35:16.240
and how you edit in production. So is there a fixed price piece where you could provide that

675
00:35:16.240 --> 00:35:21.520
service in a bounded way, productize the service, where it's low risk for you because you know how

676
00:35:21.520 --> 00:35:27.520
you're doing it and it takes away the risk for the customer. So that fixed price actually lowers

677
00:35:27.520 --> 00:35:32.720
their cost of engaging with you. And then the next engagement goes up in price. So that would

678
00:35:32.720 --> 00:35:38.160
be the way I would think about productizing a service for a business like yours. I hope that's

679
00:35:38.160 --> 00:35:41.760
helpful. It's the one thing I don't like about streaming. I don't get to have much interaction.

680
00:35:43.360 --> 00:35:48.480
All right. What other questions do you have? Pricing questions fall into this game too,

681
00:35:48.480 --> 00:35:53.360
because I will get text messages from portfolio CEOs going, hey, how do you think about pricing

682
00:35:53.360 --> 00:35:58.880
this? So I've clearly spent way too much time on that. All right. Question four. Should the

683
00:35:58.880 --> 00:36:04.800
capital to revenue always be less than one? Do I put one and get a three in revenue? Did I

684
00:36:04.800 --> 00:36:09.280
misunderstand that slide? Great point. So there's two components here. I'm probably going to take

685
00:36:09.280 --> 00:36:12.960
the capital to revenue one off the slide deck because it's not really relevant for early stage.

686
00:36:13.920 --> 00:36:19.680
If I'm thinking about my LTV to CAC ratio, what I'm thinking about there is there's a heuristic

687
00:36:19.680 --> 00:36:26.800
around, let's say I'm doing a B2B thing. If I'm selling a product for a thousand dollars

688
00:36:27.600 --> 00:36:33.200
and it costs me a hundred dollars to sell the product, my LTV, a thousand dollars, and my CAC,

689
00:36:33.200 --> 00:36:40.160
a hundred dollars, my LTV to CAC ratio is 10. Now, assuming I'm not selling a product that has a cost

690
00:36:40.160 --> 00:36:45.520
of $90, right? So I'm assuming that there's reasonable margin in there. I'm probably willing

691
00:36:45.520 --> 00:36:52.720
to spend up to three or four, maybe even $500 of the thousand dollars to get that customer.

692
00:36:53.520 --> 00:36:59.520
Again, profits as well, right? But the idea there is on a consumer, I would be willing to spend

693
00:36:59.520 --> 00:37:05.280
maybe up to eight or 10 to acquire the customer, as long as their lifetime value can go out.

694
00:37:06.400 --> 00:37:11.200
I'll give you an example you don't want to do. I ran a code school in Seattle called Code Fellows.

695
00:37:11.280 --> 00:37:16.160
Code Fellows average lifetime value for customer, because once we trained you to be a coder,

696
00:37:16.160 --> 00:37:20.160
you would never buy anything from us again. You'd take that training, you'd go get a job at Amazon

697
00:37:20.160 --> 00:37:24.800
or Microsoft, and then we were done with you, right? So our average lifetime value was about

698
00:37:24.800 --> 00:37:33.600
$16,800. It cost us $1,580 to acquire a customer. So that LTV to CAC ratio was about 11, which is

699
00:37:33.600 --> 00:37:38.800
awesome, but I could never sell them something again. So in the case of some of our consumer

700
00:37:38.800 --> 00:37:43.120
packaged goods company, if you're in the makeup side of the business, people are going to reorder

701
00:37:43.120 --> 00:37:48.640
multiple times and they may reorder for years if you keep providing a great product. So that's LTV

702
00:37:48.640 --> 00:37:55.440
to CAC ratio, cost of sales, your CAC, lifetime value calculated at 12 months until you have real

703
00:37:55.440 --> 00:37:59.760
data. But no, that's the reference there. And thanks for that note. I'll go back and get rid

704
00:37:59.760 --> 00:38:04.800
of that capital ratio because that's a little bit confusing. All right. What's my take on businesses

705
00:38:05.600 --> 00:38:10.720
that are in the restart phase? How do we measure how much our business should be making every year

706
00:38:10.720 --> 00:38:19.520
or growing? Boy, that's a great question. So think of it first off as your total addressable market.

707
00:38:19.520 --> 00:38:24.880
How big is the market opportunity that you're facing and what percentage of that market can

708
00:38:24.880 --> 00:38:29.360
you look at? If you're doing something that's brand new and never been done before, then you

709
00:38:29.360 --> 00:38:33.680
have to educate the customer. If I'm doing something that somebody else is already doing,

710
00:38:34.480 --> 00:38:38.160
I just have to get them to buy that service or that product for me instead of somebody else.

711
00:38:38.800 --> 00:38:42.160
So in the first example, if I'm doing something that's never been done before,

712
00:38:42.160 --> 00:38:46.640
I have to be in the educational sales process. So I'm going to have to take time to educate the

713
00:38:46.640 --> 00:38:52.800
customers, get them ready, help them understand the product, help them understand the price and

714
00:38:52.800 --> 00:38:59.440
the payoff. So no, in that case, my sales process is going to be longer and my sales ramp is going

715
00:38:59.440 --> 00:39:06.720
to be longer. So then it's a question of how much growth can you get? If you're in the services

716
00:39:06.720 --> 00:39:12.960
business, service business growth is hard because I can only scale as fast as I hire people. If I

717
00:39:12.960 --> 00:39:17.440
can't hire people faster, it's hard to scale that business. Product businesses then become

718
00:39:17.440 --> 00:39:23.040
opportunities for growth around, do I have enough products? Do I have any supply chain issues? The

719
00:39:23.040 --> 00:39:27.520
last year in particular has been tough on that one for us too. So there's no right answer to

720
00:39:27.520 --> 00:39:33.040
how much you should be growing, but if you're looking to go and get sold, then 40% growth to

721
00:39:33.040 --> 00:39:37.920
50% growth a year is kind of a minimum. So, and again, early days, the percentage is easy to

722
00:39:37.920 --> 00:39:44.640
fake because you have such a low basis. All right, question six might be a bit beyond revenue model,

723
00:39:44.640 --> 00:39:49.440
but I thought I'd ask, what is your recommendation for commerce companies thinking about pricing as

724
00:39:49.440 --> 00:39:53.280
they continue to expand their offering and understand their customers? The revenue model

725
00:39:53.280 --> 00:39:58.880
might stay the same, but other metrics might change. Totally right. So typically when you

726
00:39:58.880 --> 00:39:59.840
get a revenue model, the

727
00:40:00.000 --> 00:40:02.040
they stay pretty consistent.

728
00:40:02.040 --> 00:40:03.980
Now what you're trying to do is optimize the revenue model.

729
00:40:03.980 --> 00:40:05.600
So in the case of commerce,

730
00:40:05.600 --> 00:40:08.520
how do I increase my average basket on a monthly basis?

731
00:40:08.520 --> 00:40:11.600
So it could be attach rate, product recommendations,

732
00:40:11.600 --> 00:40:13.880
the number of products in the cart,

733
00:40:13.880 --> 00:40:17.040
or so think of that as this overall basket.

734
00:40:17.040 --> 00:40:19.080
The other thing is how often can I get the customer

735
00:40:19.080 --> 00:40:21.160
to come back and repeat purchase?

736
00:40:21.160 --> 00:40:23.440
So how do I do things like email newsletters

737
00:40:23.440 --> 00:40:24.940
or email product promotions

738
00:40:24.940 --> 00:40:27.280
or text message product promotions

739
00:40:27.280 --> 00:40:29.640
to get people to transact more often?

740
00:40:29.680 --> 00:40:31.320
So bigger basket,

741
00:40:31.320 --> 00:40:35.320
increased frequency of products transactions

742
00:40:35.320 --> 00:40:37.720
or number of transactions per month sold,

743
00:40:37.720 --> 00:40:38.880
or I have to decrease costs.

744
00:40:38.880 --> 00:40:42.440
So in general, it's increased revenues or decreased costs.

745
00:40:42.440 --> 00:40:44.240
Both work, right?

746
00:40:44.240 --> 00:40:45.520
And in the early days,

747
00:40:45.520 --> 00:40:47.160
it's easier to focus on increasing revenue

748
00:40:47.160 --> 00:40:49.280
and get more efficient later,

749
00:40:49.280 --> 00:40:50.680
unless you're in a pandemic

750
00:40:50.680 --> 00:40:52.800
and Airbnb would have told you that

751
00:40:52.800 --> 00:40:55.840
figuring out the costs becomes super important,

752
00:40:55.840 --> 00:40:58.640
which was highlighted when they went through the pandemic.

753
00:40:58.640 --> 00:41:00.800
They didn't have to be too concerned about costs

754
00:41:00.800 --> 00:41:01.840
until pandemic hit,

755
00:41:01.840 --> 00:41:04.320
and then the answer was lower those costs and get them down.

756
00:41:04.320 --> 00:41:07.560
So increase more profitable products,

757
00:41:07.560 --> 00:41:09.060
increase the basket size,

758
00:41:10.000 --> 00:41:11.600
increase the frequency of order

759
00:41:11.600 --> 00:41:13.240
becomes the ones you wanna start pushing on

760
00:41:13.240 --> 00:41:14.700
as far as growth numbers go.

761
00:41:15.880 --> 00:41:16.720
Number seven,

762
00:41:16.720 --> 00:41:19.440
what's your take on businesses that are in the restart phase?

763
00:41:19.440 --> 00:41:20.920
I'm not sure what you mean by restart.

764
00:41:20.920 --> 00:41:22.560
So it could be we're pivoting

765
00:41:22.560 --> 00:41:24.880
is probably the way I would think of it.

766
00:41:24.880 --> 00:41:26.400
I think the answer is it's fine.

767
00:41:26.840 --> 00:41:29.840
It's better to pivot than to run headlong off the edge.

768
00:41:29.840 --> 00:41:33.040
I've had two of my five startups failed,

769
00:41:33.040 --> 00:41:35.520
one in their gargantuan crater.

770
00:41:35.520 --> 00:41:37.560
So it was an epic fail.

771
00:41:37.560 --> 00:41:39.280
So I think when it comes to pivoting,

772
00:41:39.280 --> 00:41:40.800
the answer is that's great

773
00:41:40.800 --> 00:41:43.480
as long as you're pivoting to a better market

774
00:41:43.480 --> 00:41:44.840
than you probably were in before

775
00:41:44.840 --> 00:41:46.640
or if you figured out the economics better.

776
00:41:46.640 --> 00:41:49.480
So the great thing is you learn by experience.

777
00:41:49.480 --> 00:41:51.560
The hard thing is experience is expensive

778
00:41:51.560 --> 00:41:55.800
and usually painful from personal experience, right?

779
00:41:55.800 --> 00:41:57.640
You learn more from your failures than your successes.

780
00:41:57.640 --> 00:42:00.840
So we think founders who've had even a failure before,

781
00:42:00.840 --> 00:42:01.920
that's not a kiss of death

782
00:42:01.920 --> 00:42:04.360
and it's part of the experience process,

783
00:42:04.360 --> 00:42:06.520
especially in startup land, right?

784
00:42:06.520 --> 00:42:08.120
Where selling three of five

785
00:42:08.120 --> 00:42:10.360
is actually a pretty good ratio in startups.

786
00:42:10.360 --> 00:42:12.800
So last question,

787
00:42:12.800 --> 00:42:15.200
I do not understand the LTV calculation very well.

788
00:42:15.200 --> 00:42:16.040
Please explain.

789
00:42:16.040 --> 00:42:16.860
You bet.

790
00:42:16.860 --> 00:42:18.840
So my lifetime value

791
00:42:18.840 --> 00:42:21.380
is how long the customer will be with me

792
00:42:21.380 --> 00:42:23.600
for starting at 12 months

793
00:42:23.640 --> 00:42:26.640
and going out as far as I think that they will be a customer.

794
00:42:26.640 --> 00:42:27.980
So what I mean by that,

795
00:42:31.680 --> 00:42:32.520
think about it as,

796
00:42:32.520 --> 00:42:34.400
let me pick an example.

797
00:42:34.400 --> 00:42:38.200
I'll go back to Vivian's pamper nail gallery example.

798
00:42:38.200 --> 00:42:40.240
In the case of Vivian's customer base

799
00:42:40.240 --> 00:42:42.000
and people who are buying custom nails,

800
00:42:42.000 --> 00:42:42.960
those are expensive.

801
00:42:42.960 --> 00:42:45.720
So like five or $600 for a set of custom nails.

802
00:42:45.720 --> 00:42:47.520
If you could get Vivian to do it for you on video

803
00:42:47.520 --> 00:42:50.200
and push it on TikTok, even cooler, right?

804
00:42:50.200 --> 00:42:52.640
My daughter's a huge fan, she's 14,

805
00:42:52.640 --> 00:42:56.320
but there's also nails there that could be $100 or $200,

806
00:42:56.320 --> 00:42:58.600
right, that are super cool as well.

807
00:42:58.600 --> 00:43:00.160
So the question for her is,

808
00:43:00.160 --> 00:43:03.920
how many times will that customer purchase in a given year?

809
00:43:03.920 --> 00:43:06.200
Do I think it's three times, do I think it's six times?

810
00:43:06.200 --> 00:43:08.480
So that allows you to take your average transaction amount,

811
00:43:08.480 --> 00:43:11.640
$300, or let's call it $100 to keep the math easy,

812
00:43:11.640 --> 00:43:14.100
times the number of transactions a year, let's call it four.

813
00:43:14.100 --> 00:43:16.700
So I would say my initial lifetime value calculation

814
00:43:16.700 --> 00:43:18.920
for that customer is $400.

815
00:43:18.920 --> 00:43:19.760
Now, I know what you're saying,

816
00:43:19.760 --> 00:43:21.540
but what if they buy for more than a year?

817
00:43:21.540 --> 00:43:25.740
That's okay, it's just when you start to calculate it,

818
00:43:25.740 --> 00:43:26.900
you wanna start at 12 months,

819
00:43:26.900 --> 00:43:28.420
and then as you have real data,

820
00:43:28.420 --> 00:43:30.660
you'll come back and add the real data.

821
00:43:30.660 --> 00:43:33.020
So know that the reason for that is,

822
00:43:33.020 --> 00:43:34.340
if you don't calculate at 12 months,

823
00:43:34.340 --> 00:43:37.340
you may overspend, cost of customer acquisition,

824
00:43:37.340 --> 00:43:40.460
to go get a customer that may not be valuable.

825
00:43:40.460 --> 00:43:41.940
So you have to really,

826
00:43:41.940 --> 00:43:44.140
you're balancing out those choices with,

827
00:43:44.140 --> 00:43:45.620
how much do I spend to get a customer?

828
00:43:45.620 --> 00:43:48.940
I can't spend $1,000 to get $100 customer, right?

829
00:43:48.940 --> 00:43:51.100
Because I'll lose money super fast.

830
00:43:51.620 --> 00:43:53.060
So what you're trying to find in that ratio,

831
00:43:53.060 --> 00:43:55.940
as it starts to mature as a business,

832
00:43:55.940 --> 00:43:57.700
is you'll go from, for a lot of you,

833
00:43:57.700 --> 00:43:59.220
the answer is, I don't really have any idea yet,

834
00:43:59.220 --> 00:44:01.580
I haven't started advertising or doing promotions.

835
00:44:01.580 --> 00:44:02.820
But when you start,

836
00:44:02.820 --> 00:44:04.700
you'll start tracking that and understanding,

837
00:44:04.700 --> 00:44:06.940
okay, if I'm spending $100 a month now,

838
00:44:06.940 --> 00:44:09.740
what would happen if I spent $1,000 a month in advertising?

839
00:44:09.740 --> 00:44:11.260
Would I get a 10X return?

840
00:44:11.260 --> 00:44:12.460
Would it be completely linear?

841
00:44:12.460 --> 00:44:15.520
Or would I get 12 or 15 times my money, right?

842
00:44:15.520 --> 00:44:16.740
If I went up in price?

843
00:44:16.740 --> 00:44:20.220
So it allows you a way to calculate revenue

844
00:44:20.300 --> 00:44:22.220
to cost on a consistent basis,

845
00:44:22.220 --> 00:44:24.540
and you can look at it month to month,

846
00:44:24.540 --> 00:44:26.940
so it kind of informs your decision.

847
00:44:26.940 --> 00:44:29.140
All right, just as a note,

848
00:44:29.140 --> 00:44:30.540
we'll have a coaching call this month,

849
00:44:30.540 --> 00:44:33.420
and you can chat with me more and go from then.

850
00:44:33.420 --> 00:44:34.700
I'm happy to do that.

851
00:44:34.700 --> 00:44:37.820
And I'll make sure I get these slides out to Siobhan as well.

852
00:44:37.820 --> 00:44:41.520
So thanks for hanging out with me on a great Tuesday.

853
00:44:41.520 --> 00:44:42.420
I've kind of lost track of time,

854
00:44:42.420 --> 00:44:44.660
I just came back from Tunisia yesterday.

855
00:44:44.660 --> 00:44:46.660
So jet lag, sorry for the yawns.

856
00:44:46.660 --> 00:44:48.140
But it was a pleasure,

857
00:44:48.140 --> 00:44:50.000
and I look forward to seeing you on the coaching call.

858
00:44:50.000 --> 00:44:52.680
Thanks everybody, have a great night.

859
00:45:00.000 --> 00:45:02.060
you