Kevin Rooke: Imagine a startup with $12 billion of revenue, 125%+ YoY revenue growth (two years in a row), and Apple-esque gross margins (30-50%). Without knowing anything else about the business, what would you value it at? $50 billion?
About a year ago, my partner David Beisel talked about how seed fundraising is no longer a local game , and that the best entrepreneurs seek out the best investors for them outside of their home market. That being said, it’s much easier to put a seed round together when you have a local lead who can help catalyze the round.
Home » Startups » US$1.3 Billion In Venture Capital Funding Found Its Way To Africa In 2019 Venture Capital is growing and nothing proves this more than WeeTracker’s Decoding Venture Investments In Africa 2019 report. [Image source: WeeTracker Report] VC investment grew from US$725.6m in 2018 to US$1.34b – the first time it has crossed a billion on the continent.
Every venture capitalist looks for strong founders, but what makes a founder strong is open for debate. With limited time to interact with founders before making decisions, investors often over-index on potential signals like age, school, technical credentials and experience.
Product Related “Companies where the product isn’t already awesome” — When a founder says they now need to hire a designer, red flags are going off. Quite a few well-known investors have been quoted stating that “UX is built into great products from the beginning.” Although that is a popular opinion, most VCs will also have a big picture conversation with you around product, the roadmap and the process of how decisions will be made.
Founder Related and Quirky Red Flags You send someone else to do your meeting with investors — Not really sure why this would ever happen for an early stage company. The Founder needs to be able to sell a vision in order to be successful and by having someone else represent them in a meeting with investors it causes stirs up all sorts of question marks.
I was in touch with a mix of academics, inventors and entrepreneurs as a student in Boston when I started my company American Patent Agency, which helps founders obtain patents on the inventions behind their businesses. While ideas were plentiful, the same could not always be said about venture capital.
… nailing Unit Economics
This post was first published on the Crunchbase blog.
Every startup begins as an idea. And as a founder, your idea needs a powerful story that wins the support of two key audiences:
- The customer. The story to a potential customer is all about what product or service you offer them, why they should care, how and when you plan to deliver it, and at what price.
- The investor. The story to an investor is simply how the money they give you will grow into more value, how fast and how big. It is also why you and your team are best placed to execute on that.
Oftentimes, the customer story is solidified. However, the story founders tell investors, which should focus on what they get out of their investment, is typically underdeveloped. To fix that, you need to understand your startup’s unit of value, unit economics, scalability, and growth rate.
Unit of Value
Define what it is you’re building that has economic, not emotional, value. Coca Cola’s unit of value is a can of fizzy drink; a movie theatre’s unit of value is a seat at an event; Google’s unit of value is a paid click (CPC, CPA or CPM); and Uber’s unit of value is a paid ride or delivery.
All companies have a unit of value. Tell investors what it is.
All units of value have a sale price, a cost of sale, and a gross profit. These make up unit economics. Uber charges per mile for a ride, the driver gets a percent of that charge, and the app itself has some costs associated with it (COGs/COS/CAC). If the sale price per mile is $1, and the cost of sale is $0.50, then gross profit is 50%. Your operating income (cash needed to run the business) comes from this gross profit, as does your actual profit (net earnings). This can be calculated per business model or unit you sell.
Successful companies aim for positive unit economics and the ability to scale them to produce large gross revenues. Netflix sells a subscription (unit of value) at a profit margin of 75% (unit economics). They have 137 million subscribers driving $15 billion of annual revenue ($109 per subscriber per year). Their overall gross profit is about 10% or $1.5 billion annually.
The final piece of the story is how fast your unit of value will be sold. If you project your product will reach $10m revenue over 10 years it will be valued less than another company projecting to reach the same revenue in three years. Netflix annual gross profit for the quarter ending September 30, 2018 was $1.587B, a 60% increase year-over-year.
What can you know from the start?
You can never accurately forecast revenue and growth when you are just at the start of your company, so your story is just that — a story. A model. It is not a forecast or a plan. It tries to set out the potential of the business idea before you start building it and spending cash on it.
Where can I test this out?
To help you calculate, project, and play around with your unit economics, we’ve built a simple tool. Check it out and enter your own numbers to see how it works. We’ve also published a template pitch deck to show how we think this fits into your narrative to investors.
Not sure where to start with your investor story? Use the case study below to help.
At launch in 1997, Netflix’s unit of value (a subscription) and unit economics will have looked something like this:
- 100 million US households — 20% have a DVD player (in 1997).
- These 20m homes spend avg $10 a month renting DVDs.
- Most pay late fees.
- In 10 years the household/DVD ratio will grow to 70%.
- Netflix subscriptions to every home within 10 years — one million in first year.
- Charge $10 a month for the subscription (no late fees and unlimited rentals)
- $10 x 70m is $700m a month or $9.6 billion a year.
- Gross profit 10% and growth will be 100% a year.
- Need to source content and distribute it via a software platform that scales.
- This team can do this and will scale globally fast.
The story is grounded on a thesis made up of real-world modelling using actual numbers. You are able to do the same, showing what your idea can become, and how that idea will come to fruition in terms of velocity (how fast) and scale (how big).
Here are the two tools we’ve built to help you tell your investor story better:
CRUNCH NETWORK CONTRIBUTOR
The problems associated with the widespread rumors of Twitters “for sale” status and that the management team is divided on whether or not to sell the company were compounded this morning with reports that Google, Disney and Apple will not be bidders. The stock price is down 20% to $19.79 at the time of writing.
Who runs Twitter — Board or Management?
The impressive Board of Directors seems to have set itself against CEO Jack Dorsey by seeking an exit. This is not the first time the company seems to be being run by the Board rather than the management. Previous changes in strategy, management and even the decision to IPO do not seem to have been organic decisions planned by management but rather reactive Board led decisions.
As anybody who has run a business knows, a Board-Management tug-of-war almost never results in a win. Boards hold managers accountable on behalf of shareholders, and managers run companies. It is not clear that this is the case at Twitter and that may be the source of many of the issues.
The Board is made up of many celebrity figures including Peter Fenton, Marjorie Scardino, Bret Taylor, David Rosenblatt, Martha Lane Fox and Omid Kordestani. Previously Fred Wilson had also been a strong minded Board member. The Board’s opinions about the strategy and tactics may reflect a weak management needing direction, or may represent frustrated operators hoping for an exit and seeking to influence day-to-day decisions. Only an insider knows. But one thing is clear, unless Twitter management actually runs the company, the future of the company will be bleak.
The case for “No”
Why no? In principle, Twitter is the communications bus for the entire world. I would guess that 2–3 billion people a month see a Tweet mentioned on TV, radio, in a movie, in print. It has become an almost ubiquitous broadcast platform for anybody wishing to publish an event, an opinion, a riposte. It is a marketing platform used by every brand in the world. Compared to the other means of disseminating content, Twitter is a giant.
In its earliest manifestation, Twitter understood its position as a message dissemination infrastructure. It was happy for third parties to “carry” its messages to consumers and businesses via software integrations with its APIs. The potential reach of a Tweet was the addition of people who went to twitter.com, as well as people who used a piece of software provided by a third party to disseminate tweets.
Others were allowed to index tweets and provide filtered views showing tweets that pertained to a topic or an interest. It was an open and widely distributed platform, somewhat like the internet itself. Search engines could index and point to it just as they do web pages.
The biggest version of Twitter one could imagine?
This stage of Twitter’s development evoked its true potential, and was the manifestation of the biggest version of Twitter one could imagine. A universal data bus for everything important now. With an index and search open to developers.
The business model for this stage was obvious. An ad every n tweets no matter which environment the Tweet stream was consumed through, with Twitter as the “AdSense” and “AdWords” of the whole thing. This would have resulted in Google-sized revenues quickly.
The smallest version of Twitter one could imagine?
But at that time, there was a belief that Twitter needed to become a destination. This implied that any ability for a third party to take tweets and re-broadcast them through another app or site was bad. It implied that indexing and searching tweets was to be blocked, it set Twitter against its disseminators. By doing so, it limited the Twitter audience to those who directly engaged with the properties owned and operated by the company.
This was the smallest version of Twitter one could imagine. It seems clear that many at the board level wanted Twitter to be a destination, a Yahoo if you will. And to create content “channels” that would attract the audience for the channel. And to prevent any other means of accessing those channels.
This allowed Twitter to become a branded destination and created the conditions where its key KPIs were not “tweets seen” but became “logged-in users” on a Twitter-owned property. The advertising platform Twitter has so impressively built over the past 3–4 years is based on top of this approach.
The $2 billion or so in revenues it generates is impressive, but tiny compared to what would result from a truly universal data bus available everywhere. This would be a replacement of Google for content discovery, whereas the current Twitter is at best a replacement for Yahoo as a destination for content — and a poor one at that.
IPO was premature?
Twitter’s IPO was done before the company had truly completed its transition to becoming a content-rich destination site. The suspicion is that the need to IPO early was driven by board decisions and not organic management choice.
Dick Costolo did an excellent job of trying to manage a ship in a storm that had only partial navigation, but the stock price ultimately reflected two things. Firstly, a company that could not accurately predict revenues and, secondly, one that had a KPI (logged-in users) that was always going to be its worst metric. The market took the direction of the board and management that Twitter wanted to be a branded portal business with advertising and measured it accordingly.
Most of the 2013–2016 ailments of Twitter emanate from this product decision and the decision to IPO before it was completely built and functioning. The management changes, the stock performance, the yearning to sell the company.
The case for “Yes”
Twitter is a dysfunctional company with an interfering board and, like any dysfunctional family, it needs a divorce. A buyer would gain a clean slate and would be able to build the biggest possible version of Twitter, free of internal squabbles.
This is the strongest case for a sale. But who should be the buyer if this outcome is wanted? There are only two good answers. One is Google, the other is a private equity buy-out.
Google is the obvious buyer. A universal data bus carrying everything that is important now to the entire world, with ads every n Tweets would probably have revenues close to and eventually surpassing web-search revenues.
With the emergence of live video — an area YouTube should excel in — the impact of this would be compounded by the video ad opportunity. And the vision would be well-aligned with Google’s “organize the World’s Information, and make it Accessible” vision. If Google is truly out of the race, Larry or Sergey or David Drummond — call me and let me explain why you should re-consider. I’m always available at http://chat.center/keith.
Twitter is a dysfunctional company with an interfering board and, like any dysfunctional family, it needs a divorce.
If Google really is out of the running, the next best sale is to PE. Silverlake, KKR or Blackrock should look at how they worked with Skype previously and consider taking Twitter private, removing the short-term thinking and re-launch it as the biggest version of Twitter it can be. That company could own digital advertising and audience engagement for decades to come.
If neither option materializes, Twitter should take itself private — Qihoo360 just did this, as did Dell. There would be no shortage of banks interested in helping.
What’s next for Twitter?
The board should not sell Twitter to a media or content buyer. By doing so they would cheat the world by taking away a wonderful chance to build a universal data and messaging bus able to scale to the challenges of 4 billion smartphone owners wanting news, entertainment, live video and more.
Management should go back to Twitter’s founding principles and build that universal, open, biggest possible version of Twitter.
And the markets should give the company the space to perform such a transition.
Twitter is not Yahoo. It is a baby, struggling to grow up. Infanticide is wrong. Let the children grow.
Part 2 with Brett Knutson from Sharing Startups interviewing me about Entrepreneurship.