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.
On Saturday I published a story on Medium called “Dear Zuck, What the Fuck” — https://medium.com/@kteare/dear-zuck-fuck-84d9c1bdba26#.8mm0qbhhz.
3 Readers at Hacker News flagged the article as spam or link bait —
“This is clearly just marketing spam” (https://news.ycombinator.com/item?id=11465528),
— others described it as an accusation related to merely the look of FB Messenger and pointed out that this look is common to many apps, including iMessage and others that pre-date chat.center —
“His first example is basically saying “you copied us since we both look like iMessage”. (https://news.ycombinator.com/item?id=11463349).
These comments miss the point.
Of course, because this is the internet, there are links in my story, and because social media exists and I do want the word about this to get out, I do ask people to share it.
These links are clearly not “bait”. The intent of the links is clear from the context and nobody who clicks would have been baited or misled. I also did ask people to read the article first and only share if they empathized.
Note: If you read this and empathize, please Tweet, Facebook and generally share this today if possible. (https://medium.com/@kteare/dear-zuck-fuck-84d9c1bdba26#.8mm0qbhhz)
More importantly. The article does not accuse Facebook of merely copying a UI. Indeed it explicitly says that may be a reasonable and obvious UI and could even be a coincidence. In a chat with a Messenger team member Sunday he claimed that was indeed the case.
a fair person might say that it’s easy for two pages to look similar, especially if their goal is similar. the color schemes may just accidentally be the same. The 3 column layout also. And perhaps the message box at the bottom is just, you know, “obvious”. And I am a fair man, so I’ll give you that.
What the article does do is say that Facebook has duplicated the entire concept of a Unique chat ID (a human readable URL pointing to a SaaS chat service), and then of linking that from any starting point (for example a URL in an email or a web page) to the owner of the ID via a Web and mobile app.
Until Friday chat.center was novel in offering a service combining these elements.
However, because we fully integrate into the DNS using this approach (making chat.domain.com/person possible), and because we do not require a person clicking a URL to be a “member” or “join” before connecting to its owner, we are different and better than Facebooks offering. We both use chat IDs, but we are making chat ID’s open and unlimited. Facebooks can ONLY use m.me/personname and can ONLY be used to click on by members of Facebook.
There is no doubt that Facebook has created a uniquely Facebooky duplicate our service. They may or may not have copied it. But as the founder of chat.center and a person who cares about users, employees and investors I certainly think Facebook should be called out for the duplication.
I also think it is fair to point out that they have duplicated an old version of chat.center and in a way that limits its usefulness.
We are not really concerned at a competitive level either. Open chat IDs are in many ways more attractive than Facebook ones for any self-respecting brand, and the DNS is clearly the right place to integrate this functionality. Besides, the version you copied dates back to April 2015. We are close to our next version and it is a significant step forward in this space. So this is not about the competition.
It is also reasonable to state that an educated team at Facebook MUST have been aware of chat.center. Here are just the TechCrunch stories covering us since we started:
Assuming the product team at Facebook Messenger are even doing basic due diligence, these things would have been known to them.
So, these are the “reasonable reasons” for my article and for my complaint, and my reasons for explaining to the world what has happened and what I as the founder of chat.center think about it.
So, in summary, to put this article into the context of click bait, or to suggest I am complaining simply about a UI being stolen are therefore both clearly mistaken.
Happy to chat live here — http://chat.center/keith
I hope you don’t mind me calling you Zuck. We barely know each other, although I did once bump into you whilst walking in College Terrace in Palo Alto.
The thing is, Mark feels too familiar, and Mr Zuckerburg way too formal. Besides I am a veteran entrepreneur and you are way younger than me so Mr feels, you know, a bit much.
Zuck feels just about right, and the good thing is it rhymes with fuck! — which is really pertinent given what I am about to say.
Well, Zuck, it seems as if your Messenger team has been closely watching what I have been doing with chat.center. I mean, wow! watching isn’t even the word for it. Snooping, Spying, is more like it. And clearly they must have liked what they saw because they made a copy. It’s a big surprise because nobody there even told us how much it appealed to them.
In case you think me paranoid….here is a screenshot from the new web version of Messenger at http://m.me. It’s from my personal page.
And here is the screen shot from my chat.center page.
Now, Zuck, a fair person might say that it’s easy for two pages to look similar, especially if their goal is similar. the color schemes may just accidentally be the same. The 3 column layout also. And perhaps the message box at the bottom is just, you know, “obvious”. And I am a fair man, so I’ll give you that. But then it just gets plain spooky.
Here is a blurb from the chat.center web site.
Unique Chat URL — and Click-to-Chat button for everything else
So you can engage your customers everywhere, not just on your website.
Use your chat address on social profiles, social ad campaigns, direct mail, business cards, signage, restaurant menu, product packaging, brochures etc.
At our core we provide a unique URL that points to a person or a business. Mine is http://chat.center/keith.
And here is what you say at the Facebook page for Messenger:
Usernames help people find businesses on both Facebook and Messenger, so they can connect with and message the businesses they’re interested in more easily. Because each username is unique, they also help people to identify your exact business, even if you have a relatively common name.
Mine is http://m.me/kteare
Firstly, I want to thank your team for their embracing of our core concept. of course they can’t go as far as us. We have integrated our offering into the DNS (the domain name system), so anybody can create a unique chat ID using their domain name. My incubator, archimedes labs, has done this and so you can reach me at http://chat.archimedeslabs.com. Being FaceBook the team want to keep things in-house and so their offering is inevitably more limited. But that said, it’s close to an exact copy — even down to the idea.
But it doesn’t stop there,
Today we’re also introducing Messenger Links, which businesses can use to make it fast and easy for people to start a message thread with them. Messenger Links use a Page’s username to create a short and memorable link (m.me/username) that, when clicked, opens a conversation with the business in Messenger.
On our chat.center web page we show our business customers this exact functionality.
This is close to an exact idea copy… but again there is a difference. My Facebook Unique chat ID cannot be clicked on by a non-Facebook member. if a user clicks it they are asked to log in with their FaceBook ID — like this:
chat.center on the other hand allows anybody (or if this is a business, any customer) to click a chat link and be in a chat with a business owner or ID owner. Try it. Click here — http://chat.center/cc — and you will see this:
No request to log in at all. A truly open chat ID available to a customer no matter what their membership status. Of course we do ask for a name and email address on a first chat, but that is to enable communication in case the chat receiver cannot reply right away. And it is not a registration. It is simply temporary for that chat.
So apart from the non-support for the DNS (domain name system), and so a user’s own internet identities; and apart from the requirement to log in to FaceBook, both of which limit your offering, it feels like a total rip-off of our idea.
Don’t get me wrong, we are flattered. And I am a big fan of your fearless acquisitions of Instagram and WhatsApp, which made Facebook relevant to the mobile era. We are not really concerned at a competitive level either. Open chat IDs are in many ways more attractive than Facebook ones for any self-respecting brand, and the DNS is clearly the right place to integrate this functionality. Besides, the version you copied dates back to April 2015. We are close to our next version and it is a significant step forward in this space. So this is not about the competition.
But, it would have been nice to chat ahead of time. We are a small team of 6, and I’m in Palo Alto and after all I’m only a click away at http://chat.center/keith. So, really Zuck. What the Fuck!
BTW if you read this and want your own chat ID head over to http://chat.center. Use the code “12MonthsFree” and start enjoying “Click to Chat” for yourself or your business.
I have had the pleasure of speaking to several gatherings this summer. One at Startup Iceland, one at Bitspiration in Warsaw, Poland and a few others. Here is one of the talks.