Welcome everyone to week six of our GBR masterclass.
I am so excited to be here with you all.
We have another amazing class that I cannot wait for to share with you all.
We have Dave Parker, who is going to be teaching on how businesses make money, how you're going
to make money in your business, setting up your revenue model.
So without further ado, Dave, welcome to GBR.
Hello, Siobhan, great to be with you again.
Hey everybody, super excited to be here with you.
We're going to pull up some slides and I'll walk you through how startups make money and
not become a statistic.
Most importantly, there's crazy numbers about failure rates, and I'm going to walk you through
how startups make money and agenda-wise, give you a little bit about me, how startups fail
and why you shouldn't.
Talk a little bit about what makes an enterprise value of a startup and how companies are valued,
and then walk you through the company valuation drivers, including the 14 revenue models used
primarily in tech, but in other businesses as well.
So first off, a little bit about me.
I'm a five-time founder, board member, and used to work for a company called Startup
Weekend as a nonprofit that we sold to Techstars in 2015.
I did this class about a year ago, almost to the anniversary date, and about a month
later, I actually joined Fearless as the senior partner in charge of the investment side.
I wrote a book called Trajectory Startup, and I'll talk to you some about that data
today and what we pulled out of the book, and I've done about 15 transactions.
I see the math there doesn't add up on the bottom, so that one's a little bit dated,
but 15 transactions totaled 13 sell-side deals and two buy-side deals, which means I bought
two companies and sold 13.
Only three of mine were mine, so in the process.
So some resources, and I'll make sure these links are available to you through Siobhan.
You can download the free excerpt from the book, the excerpt one, and link to my blog
through dkparker.com.
And my publisher says, buy the book, because he always reminds me I need to say that.
So first off, a little thing about startups.
I think there's so much stuff in the Twittersphere about startups that sometimes it can be a
little bit bizarre, because it's like, well, you know, follow your passion and money will
follow, or it's all about the market, or focus on customers and revenue will follow.
And I guess what I would tell you is don't believe the means.
I don't think that's a good place to start.
This is a list from CB Insights on why startups fail, and you'll notice there at the top
of the list is there was no market need was the number one reason startups failed, followed
by they ran out of money, which makes tons of sense, especially if you built a product
that nobody wanted.
Not the right team for the job.
Sometimes we think of that as founder market fit, it's the right team to do it.
They got out-competed, pricing or cost issues, user-unfriendly products.
So a lot of the things on that list were about product, and especially building a product
that nobody wanted.
And you'll see that the list in CB Insights was this was a report they've done every six
months for about the last decade, and it's been consistently the same, that founders
end up building a product that people don't want.
So but also on that list is pricing and cost issues, like how do you price the product
and how do you monetize it?
So today what I really wanted to do is break you in or give you some math about how to
think about your startup.
And I'll tell you in general that great teams in a bad market can have a failure and meh,
like it doesn't really matter.
But an okay team in a great market could have an amazing return.
So great product with no path to revenue will be a failure, where an okay product with great
monetization can still make you money.
So I think at the end of the day, if you're thinking about, gosh, can I become a unicorn
CEO with a startup, it will require both a great product, solid monetization, an amazing
market, and obviously execution.
So my favorite meme from that list is somebody who said the ideas are cheap, but execution
is hard.
But I would tell you, good ideas are still rare.
So you still need to have a good idea, right?
So ideas may be easy, but good ideas are still pretty hard.
So that's a little bit about what the components are of successful, but let me break it down
for you from both a founder and investor perspective, because I've come from the founder side of
the table, and then I've been with three venture funds, and this is my third, and one family
office.
And from the founder's perspective, we tend to think about product and then unit economics
and how we make money.
From the investor perspective, we're thinking about returns, unit economics, and then product.
So it's easy to get a check into your company.
but it's hard for me to get a check out of your company.
So what I really want to do is figure out
how do I get the best opportunity for a return
for my investors and by partnering with founders.
So think of it that way, that there's two views of it.
The next thing is I wanted to break down
business models for you,
because business models aren't really that complex
if you break them down.
There's three big components to business models.
And I think for a lot of us as founders,
we kind of lump all this stuff into the black box
we call business models, like it's all in there.
But there's really three big components.
The first one is how do I create value,
which is my product or service?
How do I deliver value, which is how do I monetize it,
which is my revenue model,
my pricing and my marketing and sales.
And then what's left over is how do I capture value?
How do I get paid for it?
Which is my top line revenue,
my gross margins and my net profit.
So let me break those down in some more detail.
So by creating value,
it's the product or service you deliver.
So if I think about that as a software product,
like a WhatsApp or a Facebook,
it's the product that is delivered to the customer.
If it's a combination model, that's a product and a service,
it can be something that people are part of the delivery.
But the difference here is product is something
you can make money when you sleep.
Services is something that requires people to make money.
So when I think about it that way,
it's the cost to build the product, which is the team,
which is engineering, design, hosting, or manufacturing
is my total cost to build and create a product.
And then I also have my cost of delivery and support.
So those are all the costs.
If you think about that first bucket,
is the bucket required to build
or deliver the product or service?
So that's number one.
Bucket number two is how do you deliver value?
So that's your revenue model,
which I'll go through the 14 here in a few minutes.
How do you price the product?
So it's both competitive,
but also allows you some runway to go make money.
What your cost of marketing and sales are,
so we think about that as your cost of customer acquisition,
which is your marketing cost plus your sales cost
to get the customer in to be a paying customer.
And then your lifetime value.
How long is that customer worth over a lifetime?
So we have some companies in our portfolio
that are consumer packaged goods,
like a Range Beauty or a Brown Girl Jane.
And they make a product that is a standalone product
that you can buy from makeup.
But that product, it can be sold once.
I can calculate the cost of sales
and the cost of the product itself.
But then the question is how many times
does the customer buy over their lifetime?
So initially we start with 12 months in that calculation,
but that's just an example of a makeup product
that would be sold here.
So, and just a quick note,
the promotions and pricing are different.
So keep in mind that promotion,
like a free trial is not a pricing component.
It's really just a marketing cost.
So I just make that distinction here
that promotions and pricing are different.
Then capturing value is what's left over.
So bucket number one was create value.
Bucket number two was deliver value.
And bucket number three was how do I capture value?
So that's my top line revenue,
my gross margins and my net profit.
So that's, you'll notice
there's not very many variables there.
That is what's left over at the end
after you build a product and sell the product.
All right, so product market fit
is kind of your first major milestone
when it comes to your startup.
So how do I know I have product market fit?
Did I build a product that people cared about
and can I sell it to them at a reasonable economic, right?
So reasonable cost.
So before product market fit,
the early indicators are things like
my leads are increasing
or my website traffic is increasing.
And then one of the things I'm gonna track
is how long it takes me to close a customer.
If I'm selling a consumer product,
we have a company in our portfolio
that does amazing fan art press on nails.
So her business is called Pamper, Pamper Nail Gallery.
So she makes a product that can be really expensive
if it's custom, but the custom products
or semi-custom products aren't that expensive.
So from the time that people visit to the site
to the time they place their first order,
how long does that take?
So that's a time to close example.
Are the referrals increasing?
Do customers love your product
and they're referring it to friends?
On a consumer package good side,
that would be a straight referral
or on a business to business side,
it might be a referral to a different company.
ACV and MRR is what's called annual contract value
and monthly recurring revenue.
So in general, the trend I'm looking for there
is are they increasing or not?
So is my monthly revenue increasing?
But this is again, monthly recurring revenue,
not just monthly revenue.
And then if I'm building a consumer app,
I may be looking at my time on site or my time in app.
If anybody's familiar with OfferUp,
OfferUp is a kind of an online.
online version of Craigslist, right, it's a mobile first photo-based shopping and garage
store app, garage sale app if you will.
So and they raised money at over a billion dollars in valuation and the reason they did
was people were spending more time on the site on a daily basis than people were spending
on average on Facebook.
So that's kind of time on site.
And then LTV to CAC ratio is the next one, which is my lifetime value divided by CAC
or my cost of customer acquisition.
So if I'm selling a product for $1,000 and it costs me $100 to sell the product, then
I have an LTV to CAC ratio of 10.
So my point here is that there's a number of ways you look at what's called product
market fit.
It's all math.
There's no mystery.
So part of my goal here is to take some of the mystery away and just go right to the
math.
All right, so how do you monetize?
Let me walk you through the 14 revenue models.
I'll give you a list of all 14 at the end.
I'll make sure Siobhan has the slides so that she can get out to you as well.
So you don't have to take notes here.
So keep in mind, this is kind of a heuristic to how to value a company, but it's not a
calculus on valuing companies.
And I'll walk you through some of that math at the end too.
So my background, when I started to write the book, someone had asked me, well, before
I started writing the book, actually, this was probably the motivation for the book.
Somebody came to me and said, hey, can I have a copy of your financial model?
And that's just the spreadsheet we used to look at how fast the company was going to
grow and those things.
And so theirs was a business-to-consumer marketplace like an eBay, and mine was a business-to-business
subscription service that's something more like a Salesforce.
And at the time, I was trying to figure out, well, how many templates would I need to do
in order to make it easier for founders to actually do these financial models?
So I pulled a list from Crunchbase of 2,600-plus companies, and we ended up tracking them over
five years.
That wasn't the original plan, but what I ran into was I sold a company, and then I
went to work as a CEO, and then I helped run a nonprofit.
So it took me about five years to write the book.
And in that time, we ended up with a longitudinal study of those companies and the companies
that succeeded and failed.
So if they had failed, we used the Internet Archive, which is called the Wayback Machine,
to go back and look at their last cached page and the last page that was up.
So I know this is a bit of an eye chart, but what you'll see here is that gaming companies
went from seed funding to A funding pretty quickly, and that was because if they had
a hit, like a candy crush, the company would take off.
And then combination companies went from about normal from A to B funding, but their
seed to A funding was a little bit faster.
And those companies are companies that charge services revenue and subscriptions as an example.
And then all the rest of them kind of fell into a category.
So what are the 14 models?
First one is called fee-for-service, or just the services business.
Services require people, so education is a good example of that.
And then there's a model called the for-profit model, which is a model that works for both
business to business and business to consumer.
It's the easiest way to start a business because you don't need any funding to do it.
You just need to sell and get some customers and then have people that can help deliver
it.
The problem is services are hard, and investors don't like to invest in it because every time
you get a new customer or three customers, you have to hire another person to help with
the delivery.
So services businesses traditionally don't get funded by folks like us at Fearless or
other VCs.
You can get a bank loan at some point, but they're really hard because you're a startup
founder in a young company as well.
So those things can be really difficult.
Second is called productized service.
So think you're like Southwest Airlines or IBM in some ways.
When I buy my ticket for the airlines, I didn't pay a fee for cleaning the chair or a fee
for my water or a fee for my food, not that that's available anymore.
But I paid one price and I had it all as a package price.
So really productized service is just about packaging pricing.
So typically gross margins are greater than 35 percent.
It works both B2B and B2C.
A little jet lag got up with me for there for a minute.
I was just international yesterday.
So examples here are companies like Moz, which was a services company first and then converted
to a software company.
So keep in mind, the difference between services business and a productized service business
is just packaging up for the customer to buy.
So if I can buy it with a set price and I don't have to pay on a per hour basis, that's
really productizing the service or fixed price services.
Three is commerce.
So you're probably familiar with Wayfair and Lululemon are both commerce companies and
they work both B2B and B2C.
I have a wholesale cost of goods sold, an average margin percentage, an average basket,
and number of baskets per month is my key calculation here.
So commerce works both for physical goods or virtual goods, but there's a wholesale
cost plus a gross profit or a gross sales price.
Next up is a subscription.
Everybody's moving to a subscription.
It's a super popular model.
So if it's B2B, it's Salesforce, if it's B2C, it's Spotify, again, both B2C and B2B.
We have average revenue per user, conversion metrics, and churn percentage is our key metrics
for the subscription business.
And typically, these are done with tiered pricing.
So the more mature companies have tiered pricing relative to that.
That's number four, subscription.
Number five is called a metered service business, and it's really a pay-as-you-go business.
Link magazine subscriptions for business-to-business.
So typically, this is B2B, or if you remember back to when cell phones used to charge for
per text message instead of unlimited text messages.
So the challenge with this one is B2C, it's a negative customer experience.
B2B, it's actually a positive customer experience.
If I'm using Amazon Web Services and my bill goes up, it usually means I'm making more
money.
So think of this one as a B2B example.
And so if you're doing business-to-consumer instead of business-to-business, this would
be B2B only.
Challenges here is that infrastructure is required and it takes time to grow the company,
but it does have the highest exit multiple.
These companies are worth the most for the revenue that they bring in.
Number six is the transaction fee or rental business.
So examples here are companies like Stripe or Chegg.
It happens both B2B or B2C.
Really the only difference between a transaction fee business and a commerce business is if
I have $100 sale in the commerce business, I'm booking the revenue of $100.
If I have a $100 sale on Stripe, I'm booking a 3.5% fee that I'm paying.
So the revenue that I book as a business is higher on commerce and lower because it's
actual realized revenue in the transaction fee business.
So now if you have two sides of a transaction fee business, it's called a marketplace.
So eBay, Alibaba, and Uber are all examples of marketplace businesses.
They work both B2B and B2C.
Again similar to the transaction fee business, it's the average transaction amount times
the number of transactions per month and the commission percentage on those transactions.
So marketplaces are great.
They can be hard because you have to ratchet them up.
We have an example of a marketplace in our portfolio called ShearShare.
So if you know anybody in the beauty business, typically the business has chairs for rent
inside the salons, and then people want to rent chairs, but they have to sign a long
term contract.
So what ShearShare does is it allows barbers and beauticians and stylists to go in and
rent on a day, a week, or a month.
So if you're coming to New Orleans and you want to go rent a salon location there, you
can totally do that on a day, a week, or a month basis.
So that's number seven in marketplace.
Combinations are next.
So a company like Smartsheet is a good example of combination revenue models where the company
does services plus subscription.
So there can be good examples of hardware plus software.
Most of these just require some level of scale in order to get to valuations from that perspective,
but they can mature faster because you're getting early revenue from customers in the
form of services, as an example.
One of the other trends we see in this one is marketplaces, like the prior one, but where
they're charging an additional subscription to people who post frequently, which brings
the transaction fees down to their highest posting companies.
So that's number eight in combinations.
Number nine is gaming.
So if you know King and Candy Crush, Blizzard is another example.
This is a B2C example.
Your key metrics here are your number of downloads, the percentage of people who play every month,
and then the average in-app purchase.
What's funny about the gaming business is it's the only example of where companies introduce
friction to increase their price.
So when you get to a point in the game where you're like, oh, do you want to get through
this level?
You have to pay a premium to do it, where every other business, we're trying to take
friction out of our customers' life and make it easier for them to use us versus make it
harder.
But gaming is the only one that makes it harder.
The last few I'll go through fairly quickly because they only work at scale.
So advertising and search is the next one.
Example is Google and Facebook.
It's typically B2B in that advertisers pay, but the users are free.
So traffic is your key metrics.
The number of clicks and the average revenue per click is the function of that one.
So advertising works and it's a great revenue model, but you have to get to a million.
users per month. So on average on dkparker.com, I have 5,000 people who read my site every
month. If I monetize that for a competitive, what's called a CPM rate or cost per thousand
of $35, then I'd make roughly $150 a month monetizing my site. So the answer is, it's
not that exciting. So advertising works as a legit model, but you have to figure out
how you're going to get 2 million unique users per month.
Number 11 is called new media. So if you know Clubhouse and Snapchat or TikTok as an
example, all of those companies are the new media model, which is they have massive user
growth and then ultimately they monetize usually via number 10, advertising. So in the case
of TikTok, it's pre-rolls and videos and embedded videos. So if you have a company and you ever
heard somebody say, we want to go viral, they mean this. Going new media has three
steps in it. Word of mouth is first, network effect is second, and going viral is third.
So word of mouth is people love your product and they talk about it. That's awesome. And
you have a way to track it on the marketing side. Network effect says the product works
better if I upload my network to it. So think WhatsApp. If I have a WhatsApp app, I can
get user virality and it's more effective if I have the network. And then you have crazy
ones like TikTok and Clubhouse and they take off in a viral effect. And that viral coefficient
is calculated in what's called K-factors, just a math equation. So typically you don't
have much revenue in early days and you're just growing, growing, growing as fast as
you can. You can raise money for these businesses. This is probably the one revenue model that's
really the deferred revenue model because you can generate revenue later. So know that
that's number 11, new media. Big data is number 12. So think patients like me as an example
here. If I have big data, I can sell. That's great, but I have to have the data first.
So typically this one works best when you're at scale again versus at launch. Lead generation
is next. Mint or Chime is a good example where the companies are super great at marketing
and they're better at marketing than credit card companies are. So in Mint's case, they
sold it into it and Chime's case is very similar. The services they offer are free and then
they make you an offer to get a credit card or other financial services and they get paid
a referral fee to that. So really that's business to consumer. They're good at marketing and
then they're selling your information to somebody else. If you've ever signed up to get a price
on life insurance online, that is the lead generation business and a horrible customer
experience. So the key metrics here is they have a cost to generate the traffic and then
they can sell that lead for more than the cost of generating the traffic. So conversion
rates there are super low. And the last but not least is called licensing. Licensing is
think Microsoft Office 15 years ago where you get a sticker for a license that went
on the bottom of your computer and you had a copy of Microsoft Office or Microsoft Windows.
So licensing here works in things like geography. If I wanted to license my product for a field
of use outside the US, maybe sell it to a different country. So also content licensing.
So copyright and content licensing falls in that category. So that's number 14. So here's
the list for you. Go ahead and pick your primary. What you guess is your top revenue model.
If you're not sure if that's going to be it, pick a secondary one as well. I'll leave this
up for just a minute. Well, maybe not a whole minute, but you know what I mean.
Right. So hopefully you've got your primary and secondary revenue models. So why does
it matter? Well, one, I can tell you for first off, is that hopefully the product
you're building is unique. And if it's in the consumer packaged goods space or in the
tech space, I'll tell you, we'll be interested to see it from Fearless perspective. But part
of what we are making a choice on is how is how do I value the company? And if I was to
do a company, what's it worth? So this comes up frequently in what we call valuations.
And the concept here is if you came to me and said, hey, Dave, we want Fearless to invest
in the company, we would have a discussion about how much of the company do we get for
the money that we put in. So we invest in pre-seed deals, seed stage deals and A-stage
deals. So our average check is, you know, a $750,000 check. We do smaller checks. We
do occasionally larger checks. On average, it's $750,000. So if you came to me and said,
hey, we want to invest, you'd invest in the company.
have a discussion around like how do you value the company?
And one of the ways that impacts the value of the company
is the revenue model that you choose.
So of the 14 you just picked, primary to secondary,
the revenue model makes a difference.
So let me give you a different idea here.
Services businesses generally trade at .75
to one and a half times revenues.
So I think of a company like Accenture
or Deloitte and Touche as an example.
That company doesn't, if I do a million dollars in revenue,
the company's gonna be worth roughly a million dollars
when I sell it.
Where if you see here for commerce,
Lululemon is a good example.
And Wayfair sells a very commodity driven product,
which means there's not huge margins in it.
I can buy that product anywhere else.
Where Lululemon sells a product
that is distinct to Lululemon.
So those companies trade between two times revenue
and nine times revenues, depending on the company.
Then you get companies like subscription service companies,
think DocuSign or Salesforce or Spotify.
They have monthly recurring revenue.
And you'll see here those companies trade
eight to 12 times a million dollars,
or right to 12 times the revenue.
So in the case of a services business,
if I did a million dollars in revenue,
it'd be worth a million dollars.
But if I had a subscription business for a million dollars,
it would be worth between eight and $12 million,
which totally makes it worthwhile
if I can do subscription to do that.
And then meter services, the hot outlier here,
and then it trades 24 times revenues.
So the reason I bring this up is that
it is one area that you can impact the value of the company
based on how you do revenue models.
So for what it's worth, that's good to know.
So what other factors drive the value of the company?
How fast you're growing is number one.
So is the company growing at more than 40% a year?
That typically applies for more later stage companies,
because in the early days,
if you're going from zero to 100,000
and 100,000 to a million,
you're like, we're growing amazing, right?
But it just depends on what your basis is
or what you're growing off of.
Do I have a logical or acquisitive upmarket buyer?
So is there somebody logically
that could buy us as a business?
And if there's a logical upmarket buyer
that has a history of buying companies, that's awesome.
And then if I can create competition between the buyers,
that's obviously a big point.
The middle one there is the capital to revenue
is a bit of a technical one,
but what it means is how much capital
have you taken in or you're yet doing three times
more revenue than the capital invested.
So that's typically an indication of the sales value.
So all of those things influence your overall value
of that company, but a big influence driver
is what revenue model you picked.
All right, so in summary here, a couple of notes.
I'm not saying that you can calculate the value
of your company based on a pre-revenue company.
That's really tough.
So if you wanna know how to value a pre-revenue company,
I would point you to Dave Berkus' method.
Dave actually wrote a blurb for me for the back of the book.
I totally fanboyed him.
I've been following him for years and I reached out to him.
By the way, this is a great marketing hack as well.
I reached out to Dave and said,
hey, I've been a fan of yours for years.
I've been following what you write and what you do.
He was an early super angel based in Los Angeles.
And he basically wrote about how to value a company
with zero revenue.
So if you're looking for data on that, go read Dave's post
and it'll be in the link here that Siobhan will send you.
So that's one way to look at how you value a company,
but I will note it's mostly
for West Coast technology companies is bias.
You can look at who the potential buyers are
for your company and know that some of those things
in a later stage will have an impact and that's fine too.
Right now, you don't need to focus
on how you're gonna flip the company.
You need to focus on building a great quality company.
This data that I showed you in the previous chart
is now a list of 240 publicly traded companies
that we track on a quarterly basis.
So know that in that, the ongoing effort here
is to keep the data fresh.
So we actually have something to help founders with
and how they value the company
and always happy to share the data with you.
As we think about it from our perspective at Fearless,
we want founders to be prepared
and know what you're raising money against
and how to raise money.
And ultimately there, I guess the takeaway from this
is that I hope that what you're working on
is a unique idea and product,
but how you monetize it is almost never unique.
So know that that's part of the process here
is that the 14 revenue models have changed very little
and now it's been six or seven years of watching this space
and I've become super nerdy about how companies make money
and how they price things.
And at some point, if you become part
of the Fearless portfolio,
I'm sure I'll be talking with you
about how your pricing works as well.
So that's it.
I'm gonna go off the big screen here
and have them pull it.
down and I'll open it up for questions.
And I'm happy to have you weigh in with,
put notes in the chat window there
about which revenue model you picked
or any questions that you have.
While we pull that up,
I will give you a little brief
on Fearless and Fearless Fund.
So Fearless Fund One is a $26 million venture fund
started by Ayanna Parsons and Ariane Simone.
So they're my partners in the fund,
which is super exciting for me.
They launched it as a $5 million exploratory fund.
It became a $26 million fund.
We'll write our final check out of that fund
here in about a week or two.
And we've announced the start of Fund Two,
which is gonna be a $125 million fund.
And what we do is we invest
in women of color founded companies.
In addition to that,
half of the portfolio is in consumer packaged goods.
So think food and beverage, health and beauty,
and half of it's in the technology side of the business.
So I'll tech broadly in that category.
We do pre-seed checks, which is generally early product,
maybe revenue, but generally early product.
Seed stage checks, which is some product
and a little bit of revenue,
and then series A stage checks,
which is really there's existing product and revenue
and the company is scaling and growing.
So, all right.
With that, let me hit exit full screen here
and see if I can help.
Question one, is there a decision tree
on the best revenue model based on the input, access,
and cost of capital, CEO background and industry?
Not really.
I would say it's a great question, by the way.
I don't think it's based on,
I think it's based on first on how the customers will buy.
So I would say if you look at the industry trends
and you look at your competitors,
how have they conditioned the companies to buy?
Or if you're doing something really different,
what is the way that customers are used
to buying your products today?
So on the consumer package goods side,
that might be a subscription service in a box
that comes with a certain number of products
on a monthly basis.
So that's monthly recurring revenue, it's a subscription,
but they can do subscription plus additional commerce items
or they can do subscription and pay a little bit more
to get an increase on the box would be one example.
So, but yeah, from a CEO perspective
or industry perspective,
some of the industry trends will say,
hey, if you're selling to B2B,
companies are used to buying it this way.
You typically don't go away from that.
You typically sell it in a way that they want to buy.
What's your thoughts regarding the customer acquisition
via LinkedIn and Instagram for lead generation
for a B2B model?
So I used LinkedIn and Instagram a bunch,
but for B2B, I would definitely have a bias for,
so I think a business to consumer is,
it's a business selling to a consumer
who's paying the fee, right?
So if it's my 14 year old daughter
who wants to buy a set of nails from Vivian at Pamper,
right, that's a B2C model.
Where if Vivian is selling to a brand
who wants to buy giveaways for their trade show booth
that have their logo on it, right?
That's an entirely different model
of whose credit card or paycheck is getting used.
So when I think about
if you're doing lead generation for B2B,
definitely LinkedIn.
Those ads are expensive.
So the one thing you need to make sure you know is
what's my cost of customer acquisition
and click-through rates.
Those are impressions,
the number of impressions the ads makes,
the click-through percentage,
and then what's called the CPO, the cost per lead,
which is the number of people
who give you that form information at the end.
So Dave, daviddkparker.com, phone number, et cetera.
So yeah, LinkedIn is definitely the preference on there,
but ultimately you're tracking your cost per lead.
My company is a global creative network
that provides multimedia production services
for businesses, filmmakers, nonprofit organizations.
Besides consultation for emerging
and established entertainment industry professionals,
I'm also assuming it falls into that model.
It's, yeah, it's the services business.
There's also deferred payments in the industry.
So I'm wondering, it's this model,
also what are the key metrics for product as a service?
So great question.
So yeah, so you're in the services business
with some licensing revenue at the end, which is fine, right?
Ultimately that licensing revenue isn't huge revenue.
So product as a service, I would say,
what's the, if I think about friction
in selling your service to somebody,
what's the easiest way for you to sell
a bound set of services early and get that customer engaged?
So I'll give you an example.
I ran a consulting company for years that I co-founded.
It was one of the three companies I sold.
One of the, yeah, one of the three I sold.
I sold it back to my founder,
but it still counts as a sale, co-founder, I should say.
So one of the things we did was we did
what we called a revenue review.
And it was a fixed price offer
at the beginning of the engagement.
There was five or $10,000
because our average engagements in consulting
were 200 to $300,000.
No one would buy that sort of.
engagement without getting to know you anyway. It's probably the same is true in your industry.
It's a creative service. It's about more than just the equipment. It's about how you deliver
and how you edit in production. So is there a fixed price piece where you could provide that
service in a bounded way, productize the service, where it's low risk for you because you know how
you're doing it and it takes away the risk for the customer. So that fixed price actually lowers
their cost of engaging with you. And then the next engagement goes up in price. So that would
be the way I would think about productizing a service for a business like yours. I hope that's
helpful. It's the one thing I don't like about streaming. I don't get to have much interaction.
All right. What other questions do you have? Pricing questions fall into this game too,
because I will get text messages from portfolio CEOs going, hey, how do you think about pricing
this? So I've clearly spent way too much time on that. All right. Question four. Should the
capital to revenue always be less than one? Do I put one and get a three in revenue? Did I
misunderstand that slide? Great point. So there's two components here. I'm probably going to take
the capital to revenue one off the slide deck because it's not really relevant for early stage.
If I'm thinking about my LTV to CAC ratio, what I'm thinking about there is there's a heuristic
around, let's say I'm doing a B2B thing. If I'm selling a product for a thousand dollars
and it costs me a hundred dollars to sell the product, my LTV, a thousand dollars, and my CAC,
a hundred dollars, my LTV to CAC ratio is 10. Now, assuming I'm not selling a product that has a cost
of $90, right? So I'm assuming that there's reasonable margin in there. I'm probably willing
to spend up to three or four, maybe even $500 of the thousand dollars to get that customer.
Again, profits as well, right? But the idea there is on a consumer, I would be willing to spend
maybe up to eight or 10 to acquire the customer, as long as their lifetime value can go out.
I'll give you an example you don't want to do. I ran a code school in Seattle called Code Fellows.
Code Fellows average lifetime value for customer, because once we trained you to be a coder,
you would never buy anything from us again. You'd take that training, you'd go get a job at Amazon
or Microsoft, and then we were done with you, right? So our average lifetime value was about
$16,800. It cost us $1,580 to acquire a customer. So that LTV to CAC ratio was about 11, which is
awesome, but I could never sell them something again. So in the case of some of our consumer
packaged goods company, if you're in the makeup side of the business, people are going to reorder
multiple times and they may reorder for years if you keep providing a great product. So that's LTV
to CAC ratio, cost of sales, your CAC, lifetime value calculated at 12 months until you have real
data. But no, that's the reference there. And thanks for that note. I'll go back and get rid
of that capital ratio because that's a little bit confusing. All right. What's my take on businesses
that are in the restart phase? How do we measure how much our business should be making every year
or growing? Boy, that's a great question. So think of it first off as your total addressable market.
How big is the market opportunity that you're facing and what percentage of that market can
you look at? If you're doing something that's brand new and never been done before, then you
have to educate the customer. If I'm doing something that somebody else is already doing,
I just have to get them to buy that service or that product for me instead of somebody else.
So in the first example, if I'm doing something that's never been done before,
I have to be in the educational sales process. So I'm going to have to take time to educate the
customers, get them ready, help them understand the product, help them understand the price and
the payoff. So no, in that case, my sales process is going to be longer and my sales ramp is going
to be longer. So then it's a question of how much growth can you get? If you're in the services
business, service business growth is hard because I can only scale as fast as I hire people. If I
can't hire people faster, it's hard to scale that business. Product businesses then become
opportunities for growth around, do I have enough products? Do I have any supply chain issues? The
last year in particular has been tough on that one for us too. So there's no right answer to
how much you should be growing, but if you're looking to go and get sold, then 40% growth to
50% growth a year is kind of a minimum. So, and again, early days, the percentage is easy to
fake because you have such a low basis. All right, question six might be a bit beyond revenue model,
but I thought I'd ask, what is your recommendation for commerce companies thinking about pricing as
they continue to expand their offering and understand their customers? The revenue model
might stay the same, but other metrics might change. Totally right. So typically when you
get a revenue model, the
they stay pretty consistent.
Now what you're trying to do is optimize the revenue model.
So in the case of commerce,
how do I increase my average basket on a monthly basis?
So it could be attach rate, product recommendations,
the number of products in the cart,
or so think of that as this overall basket.
The other thing is how often can I get the customer
to come back and repeat purchase?
So how do I do things like email newsletters
or email product promotions
or text message product promotions
to get people to transact more often?
So bigger basket,
increased frequency of products transactions
or number of transactions per month sold,
or I have to decrease costs.
So in general, it's increased revenues or decreased costs.
Both work, right?
And in the early days,
it's easier to focus on increasing revenue
and get more efficient later,
unless you're in a pandemic
and Airbnb would have told you that
figuring out the costs becomes super important,
which was highlighted when they went through the pandemic.
They didn't have to be too concerned about costs
until pandemic hit,
and then the answer was lower those costs and get them down.
So increase more profitable products,
increase the basket size,
increase the frequency of order
becomes the ones you wanna start pushing on
as far as growth numbers go.
Number seven,
what's your take on businesses that are in the restart phase?
I'm not sure what you mean by restart.
So it could be we're pivoting
is probably the way I would think of it.
I think the answer is it's fine.
It's better to pivot than to run headlong off the edge.
I've had two of my five startups failed,
one in their gargantuan crater.
So it was an epic fail.
So I think when it comes to pivoting,
the answer is that's great
as long as you're pivoting to a better market
than you probably were in before
or if you figured out the economics better.
So the great thing is you learn by experience.
The hard thing is experience is expensive
and usually painful from personal experience, right?
You learn more from your failures than your successes.
So we think founders who've had even a failure before,
that's not a kiss of death
and it's part of the experience process,
especially in startup land, right?
Where selling three of five
is actually a pretty good ratio in startups.
So last question,
I do not understand the LTV calculation very well.
Please explain.
You bet.
So my lifetime value
is how long the customer will be with me
for starting at 12 months
and going out as far as I think that they will be a customer.
So what I mean by that,
think about it as,
let me pick an example.
I'll go back to Vivian's pamper nail gallery example.
In the case of Vivian's customer base
and people who are buying custom nails,
those are expensive.
So like five or $600 for a set of custom nails.
If you could get Vivian to do it for you on video
and push it on TikTok, even cooler, right?
My daughter's a huge fan, she's 14,
but there's also nails there that could be $100 or $200,
right, that are super cool as well.
So the question for her is,
how many times will that customer purchase in a given year?
Do I think it's three times, do I think it's six times?
So that allows you to take your average transaction amount,
$300, or let's call it $100 to keep the math easy,
times the number of transactions a year, let's call it four.
So I would say my initial lifetime value calculation
for that customer is $400.
Now, I know what you're saying,
but what if they buy for more than a year?
That's okay, it's just when you start to calculate it,
you wanna start at 12 months,
and then as you have real data,
you'll come back and add the real data.
So know that the reason for that is,
if you don't calculate at 12 months,
you may overspend, cost of customer acquisition,
to go get a customer that may not be valuable.
So you have to really,
you're balancing out those choices with,
how much do I spend to get a customer?
I can't spend $1,000 to get $100 customer, right?
Because I'll lose money super fast.
So what you're trying to find in that ratio,
as it starts to mature as a business,
is you'll go from, for a lot of you,
the answer is, I don't really have any idea yet,
I haven't started advertising or doing promotions.
But when you start,
you'll start tracking that and understanding,
okay, if I'm spending $100 a month now,
what would happen if I spent $1,000 a month in advertising?
Would I get a 10X return?
Would it be completely linear?
Or would I get 12 or 15 times my money, right?
If I went up in price?
So it allows you a way to calculate revenue
to cost on a consistent basis,
and you can look at it month to month,
so it kind of informs your decision.
All right, just as a note,
we'll have a coaching call this month,
and you can chat with me more and go from then.
I'm happy to do that.
And I'll make sure I get these slides out to Siobhan as well.
So thanks for hanging out with me on a great Tuesday.
I've kind of lost track of time,
I just came back from Tunisia yesterday.
So jet lag, sorry for the yawns.
But it was a pleasure,
and I look forward to seeing you on the coaching call.
Thanks everybody, have a great night.
you