Category Archives: Creating Business Plans

Formula, Not Spreadsheets

Andreessen Tweet Stream: 4/16/14

1/A few common fallacies about valuation of public and private technology companies:

2/First, ask any MBA how to value tech companies, she’ll say “discounted cash flow, just like any other company”

3/Problem: For new & rapidly growing tech co’s, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses.

4/You can run as many DCF spreadsheets as you want and may get nothing that will help you make good tech investment decisions.

5/Related to fact that tech co’s don’t have stable products like soup or brick companies; future cash flows will come from future products.

6/Instead, smart tech investor thinks about: A future product roadmap/opp’y, B bottoms-up market size & growth, C talent and skill of team.

7/Essentially you are valuing things that have not yet happened, and the likelihood of the CEO and team being able to make them happen.

8/Finance people find this appalling, but investors who do this well can make a lot of money, but spreadsheet investing is often disastrous.

9/Doesn’t mean cash flow doesn’t matter, in fact opposite: this is the path to find tech companies that will generate tons of future cash.

10/Corollary: For tech companies, current cash flow is usually useless for forecasting future cash flow–lagging not leading indicator.

11/This trips up value investors (Prem Watsa!) all the time; tech companies with high cash flows often about to fall off a cliff.

12/Because current cash flows are based on past products not future products. And profitability often breeds complacence and bureaucracy.

13/Always, always, always, the substance is what matters: WHO and WHAT. WHO’s building the products, and WHAT products are they building.

14/Brand will not save you, marketing will not save you, channels will not save you, account control will not save you. It’s the products.

15/Which goes right back to the start: Who are the people, what are the products, and how big is the market. That’s the formula.

Disruptive Queasiness

Chris Dixon presents  some common characteristics of good startup ideas (h/t @fredwilson for video):

  • They have founders who either know the tools better (champion coders) and/or know the problem better than others.
  • They un-bundle functions done by other business, such as newspapers or universities.
  • They originate with hobbies., e.g. github and drones.
  • They often challenge social norms.  Early on, you get a queasy feeling around them.  For example, tweeting or flickr defaulting to public.

The last is the most interesting and vexing, perhaps leaving the most room for individual extinct, and they involve spotting human behavior that can be changed on a large scale.

It’s Technological Intermediation First, Stupid

Two recent Tweets resonated:

 @Balajis: Uber/Lyft are like Netflix: technological intermediation between present day and the future

@levie: Step 1: Better delivery of an existing service (“Oh neat”) Step 2: Using data to change the service altogether (“Oh shit”)

So many times, the future means “fully transformed by digital.”

The better actionable focus seems to be the bridge or the intermediate step, whether it is in the profitable opportunity right now, as well as having a seat at the table and credibility to change the service altogether.

So, red envelopes can help you push the world to digital and better delivery of black cars can be a bridge to a change in the use of cars altogether.

UberTREE

A theme of some recent posts (see here and here) is that Uber is Google and everyone else’s response to Amazon’s last mile plans (Amazon Fresh and same-day delivery).  So in a week of drone chatter and after Uber’s ultra-cute cats and ice cream delivery promotions, comes a more serious sounding, but still whimsical partnership to deliver Christmas trees from Home Depot in ten cities.

Instead of spending your weekend wrestling with a tree from the not-so-near farm or slushy street corner, kick back, pour yourself an extra glass of eggnog and watch your app as Uber takes care of the heavy lifting. With the help of The Home Depot and a bit of holiday magic, Uber will deliver a live tree to your doorstep with the touch of a button…

If your timing is right, you’ll have a tree, stand, and an Uber gift delivered to your front door within minutes

A national retail partner, a much shopped for product this week, and a competitive price ($135 compared to $149 and up otherwise as listed on the Home Depot price).  It is becoming clearer where Uber is going and why Google set the valuation for Uber so high.

One question that will be interesting is what vehicles Uber is using for the deliveries.   Given Uber is saying that customers might have the product within minutes, they might have trucks circling the city loaded with Trees rather than point to point deliveries using their regular cars.

The selectiveness with which Uber is doing its last mile tests is an interesting contrast to the “if we don’t do it all right now and fast, someone will beat us to it” mentality.

Joey Chestnut

Brilliant piece about Amazon, including as to (1) why Jeff Bezos is the one laughing at the analysts and armchair analysts laughing at him and (2) why not breaking out your business to the outside world is so brilliant because they get complacent.

Amazon losses are a result of gargantuan investment not because of fundamental business issues, i.e., selling a dollar for ninety-nice cents.  As Eugene Wei says in his post:

But to me, a profitless business model is one in which it costs you $2 to make a glass of lemonade but you have to sell it for $1 a glass at your lemonade stand. But if you sell a glass of lemonade for $2 and it only costs you $1 to make it, and you decide business is so great you’re going to build a lemonade stand on every street corner in the world so you can eventually afford to move humanity into outer space or buy a newspaper in your spare time, and that requires you to invest all your profits in buying up some lemon fields and timber to set up lemonade franchises on every street corner, that sounds like a many things to me, but it doesn’t sound like a charitable organization.

And Joey Chestnut?  Line of the year contender:

Given that giant mission, Amazon has decided to continue to invest to arm itself for a much larger scale of business. If it were purely a software business, its fixed cost investments for this journey would be lower, but the amount of capital required to grow a business that has to ship millions of packages to customers all over the world quickly is something only a handful of companies in the world could even afford. Joey Chestnut doesn’t just wake up one day and win the Coney Island hot dog eating contest every year, he has to spend months of training to prepare his digestive system for the feat. 

 

Do Ideas Matter?

Chris Dixon writes today of a metaphor that helps us get beyond the untruth that ideas do not matter in startup innovation.

Ideas are more than the Eureka moment — they are working out that initial Eureka moment through the idea maze:

In other words: a good idea means a bird’s eye view of the idea maze, understanding all the
permutations of the idea and the branching of the decision tree, gaming things out to the end
of each scenario. Anyone can point out the entrance to the maze, but few can think through
all the branches. If you can verbally and then graphically diagram a complex decision tree
with many alternatives, explaining why your particular plan to navigate the maze is superior
to the ten past companies that fell into pits and twenty current competitors lost in the maze,
you’ll have gone a long way towards proving that you actually have a good idea that others
did not and do not have. This is where the historical perspective and market research is key;
a strong new plan for navigating the idea maze usually requires an obsession with the market,
a unique insight from deep thought that others did not see, a hidden door.

That is from the work of Balaji Srinivasan.  Ideas are process rather than point in time.  Chris’s post talks about using analogy, history, academic thought, and direct experience to work one through the idea maze.  Complement this process by wrestling with Elon Musk’s notion that identifying too closely with history, analogy, and current thinking kills creative thought.

The A16Z Aha

If this is how they roll, who wouldn’t want to work with Andreessen Horowitz?  This is Scott Weiss, a General Partner there:

All great pitches have a few things in common: the founder/team is wicked smart, the idea is big and a breakthrough, and the market is potentially enormous.

But the best pitches are also usually non-obvious and unique to the particular entrepreneur’s story and background. “Founder/market fit” is important. Does the founder’s life story, educational background, personal struggles, Ph.D thesis, or prior work experience somehow qualify them to unfairly prosecute the opportunity they are pursuing? At our firm we always start off our meetings with a deep dive into the entrepreneur’s background, and the most convincing pitches literally pour out of them with some deep connection or “aha” that led them into the business they are explaining.  By doing so, the idea is unique/original and is presented authentically versus a canned sales presentation.

A lack of originality and authenticity is probably the biggest turnoff. Stereotypically, this can be a couple of MBAs that have been churning through different business ideas in order to find something that might make them rich. Or it could be a hired gun/former sales VP as the CEO adopting or explaining someone else’s idea. In both cases, they typically have done a superficial, McKinsey-esque market analysis but have no passion or connection to the business.

Another important quality of a “perfect” pitch is when a founder exudes in many different ways, the confidence and courage to go the distance, against improbable odds, to make an enduring or lasting business. They come off as expertly informed, determined and unflappable during the hard questions. And they usually lay out a series of chess moves that reveal an even bigger ambition: “If we do this, then we can do that…”

A lack of confidence is also a huge turnoff – usually typified by a single slide in the deck entitled, “Exit Strategy or Exit Options.” This is the kiss of death for our firm.

Thumbtack

Thumbtack’s business model seems to be:

Scraping -> Database -> Client Lead -> Referral fees

While they weren’t the first to notice that people have “bought and sold local services in the same ways for the last 50 years,” as Swanson puts it, their twist was to develop software, instead of using salespeople, to scour the Web for service professionals and invite them to join Thumbtack’s database. From there, the workers are vetted by the company’s 30 U.S. employees and some 200 full-time contractors based in the Philippines.

Thumbtack says it gets about 2 million monthly visitors who request referrals and provide their Zip Code. It sends each request to relevant workers in its system, who pay up to $15 each time to have their names appear in the particular customer’s list of referrals. The company likens the fees to Google’s AdWords, which sells ad space to the right of search results for desired words and phrases. (Yelp is ad-supported; Angie’s List charges users for subscriptions.)

If its database doesn’t include a qualified service to meet the customer’s needs, Thumbtack’s software crawls the Web to find one. “The hard part is finding the right service professional who is trusted and is available at the right time and at the right price,” says Bryan Schreier, a Sequoia Capital partner who is leading the investment. “That is the art of Thumbtack.”

 

Too Busy Making Plans

Fred’s view, today:

If you can’t get product right nothing else matters

I have seen brilliant strategic plans wasted with terrible product execution

I’ve lost too much money investing in brilliant plans

And I’ve made fortunes investing in brilliant products that had no plan

Both products and plans essential, but former has an edge if choosing one at inception.