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Revenue is easy, profit is harder

edge.ceo

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Re: Revenue is easy, profit is harder

#111

Post by soVeryTired »

ghiculescu wrote: post #110
throwaway292939 wrote: post #109

Earlier quoted context omitted.

> If you give the customer a 20% discount to pay annually, they're now paying you ~$1000 upfront, for a PBP of 0 This sounds like a huge assumption being made here - as in, this is not as easy as it sounds.

What’s the assumption? We do this all the time so if I’m missing something I’m keen to hear it :)

Maybe I've misunderstood here but it sounds like you're comparing the revenue brought in from a customer to the cost of attracting them in the first place. Doesn't that ignore costs like ongoing customer service and maintaining the systems the customer is actually using? Or are all those numbers rolled up into "cost of acquisition"?

Re: Revenue is easy, profit is harder

#112

Post by ivalm »

13415 wrote: post #100
maCDzP wrote: post #52

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role r…

Most innovation of internet and computer-related business come from Silicon Valley, so it seems reasonably clear to me that investors there are doing the right thing. To be honest, I find it hard to name any highly successful EU companies whose main business is internet-based or software-related, at least not in the b2c sector. There are some, but the major players seem to come from the US and more recently also from…

Skype, Spotify. But both grew with SV venture. EU venture is not as good for early companies because they are much more conservative.

Re: Revenue is easy, profit is harder

#113

Post by ivan_gammel »

kmonsen wrote: post #94
ivan_gammel wrote: post #61

Earlier quoted context omitted.

Let’s say you distribute X million € to X startups (each one gets 1M) and you know that on average one of them will yield 2X in 5 years and the rest will just burn the money and die. This seems to be a good investment, right? You only need to pick those startups carefully. It appears, the criteria of selection may be quite different from what you would look at if you were to provide those money as a loan. I’m not sur…

No the unicorn needs to do a lot better than 2x. I think you need an X and a Y there for it to make sense.

I don’t know if every VC had an unicorn at least once in their portfolio, but for early stage investments to be a good idea they just need to beat consistently any other investment opportunities.

Re: Revenue is easy, profit is harder

#114

Post by ghiculescu »

soVeryTired wrote: post #111
ghiculescu wrote: post #110

Earlier quoted context omitted.

What’s the assumption? We do this all the time so if I’m missing something I’m keen to hear it :)

Maybe I've misunderstood here but it sounds like you're comparing the revenue brought in from a customer to the cost of attracting them in the first place. Doesn't that ignore costs like ongoing customer service and maintaining the systems the customer is actually using? Or are all those numbers rolled up into "cost of acquisition"?

We typically calculate payback period using all go to market costs (sales + marketing + CS), but not product development or any COGS (which includes things like AWS costs).

Again, it's not a management report. You should use it for prioritisation. For example, all our go-to-market is very country-specific. So we can look at the payback period for different countries and compare how well they are performing, and that tell us which ones we should invest more into.

Every business should do it differently, based on which expenses are fixed or variable for them.

Re: Revenue is easy, profit is harder

#115

Post by maCDzP »

lchengify wrote: post #95
dopeboy wrote: post #92

Earlier quoted context omitted.

This is a helpful reply. Any further literature (blogs or books) that you'd recommend to learn about these concepts?

Unfortunately, I picked most of this up from school (shout out to Babin's Engineering Entrepreneurship class @ Penn) and from my stepmother who is a capital markets attorney. However the two finance podcasts I follow really closely are "Odd Lots" from Bloomberg [1] and "The Compound and Friends" from Josh Brown and Michael Batnick. Both take a more broader look at the economy than just venture capital, and are super…

Thank you for putting some perspective on construction and VC. I’ll check out your recommendations since I am eager to learn more.

Re: Revenue is easy, profit is harder

#116

Post by ghaff »

threeseed wrote: post #85
JumpCrisscross wrote: post #56

Earlier quoted context omitted.

> a lot of theses articles are pretty basic corporate finance One take: yes, and venture-backed companies often forget or ignore the basics of corporate finance. Another take: orthodox corporate finance isn’t tailored for start-ups. If you’re developing a product, GAAP income is meaningless. So we bootstrap interim financial metrics, e.g. eyeballs and ARPUs and DAUs (oh my!). In truth, the latter dominates at the ear…

Actually the problem with startups is that they focus on corporate finance too much. When in reality they should be acting like a small business e.g. florist. Often these startups are failing because of basic cash-flow management.

Somewhat. But even if you (perhaps rightfully) roll your eyes at startup growth at all costs approaches, the thinking around cash flow at a VC-backed startup should often be different than that of a florist funded by savings, a bank load, or friends and family.

Re: Revenue is easy, profit is harder

#117

Post by yunohn »

rrrrrrrrrrrryan wrote: post #49
ecpottinger wrote: post #8

Earlier quoted context omitted.

My dad had great ideas for businesses. Yet each one he started failed for him. Why, because he has such unrealistic view on how long the payback period will be. He even founded with a partner what is now a national company, but at the time it did not make a big profit in the first year, so he sold his share of the business. He had "Get rich Quick" fever, and never saw that bussiness rarely become an overnight success…

One of my finance professors mentioned that ~70% of business fail in their first two years, and ~90% of those failures are purely due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out. People start businesses for emotional reasons, not logical ones, and vastly, vastly underesti…

> due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out.

Ironically, that’s what VC funding aims to provide - capital to extend runway and improve scale quickly.

Whereas the reality is VCs support negative unit economics and absurd customer acquisition costs.

Re: Revenue is easy, profit is harder

#118

Post by ghaff »

ChuckMcM wrote: post #86
maCDzP wrote: post #52

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role r…

Okay, as someone who has lived in the "heart" of Silicon Valley for a few decades I'll take a shot at this. To be fair, I didn't appreciate how unusual it looked until I helped a friend start their business in Illinois and saw what they dealt with at a bank. You are correct in your assessment that articles like the one linked here are pretty standard business explainers. The interesting thing for me is that it really…

I have a friend who retired somewhat early as CxO of a company with a (lowish 8 figure?) payday. Although, from a financial perspective he somewhat regretted spending about a decade doing a bunch of angel investing rather than just investing in big tech, I think it was also sort of a hobby and he still invests in a few companies he's particularly interested in. Along with also being involved in philanthropy with a large local institution.

So, yeah, there's a level where you know you don't have the money to routinely fly private or buy a super-yacht or buy properties around the world. But you have enough for any expenses you reasonably want/need and may not even want a bunch of the stuff that more money could buy. So you throw some money at interesting things.

Re: Revenue is easy, profit is harder

#119

Post by lchengify »

maCDzP wrote: post #115
lchengify wrote: post #95

Earlier quoted context omitted.

Unfortunately, I picked most of this up from school (shout out to Babin's Engineering Entrepreneurship class @ Penn) and from my stepmother who is a capital markets attorney. However the two finance podcasts I follow really closely are "Odd Lots" from Bloomberg [1] and "The Compound and Friends" from Josh Brown and Michael Batnick. Both take a more broader look at the economy than just venture capital, and are super…

Thank you for putting some perspective on construction and VC. I’ll check out your recommendations since I am eager to learn more.

No problem! Some other thoughts I had after thinking more about your question.

- Companies that have physical assets often have a focus on operations work (e.g., where do I economically source asphalt near Berlin?). Intellectual Property businesses often have a focus on product work (e.g., what new software feature does EMEA sales need to make their quarter?). One is quite literally, building the value mile by mile at a relatively high cost. The other is more "unlocking" value that was so unbalanced something with minimal physical footprint can access it.

- Since outcomes in IP are so binary, it winds up that having all the ingredients geographically focused produces the best outcomes. This is definitely true for talent, but also the money, risk appetite, specialized services, government, etc, all contribute to the ecosystem. This is why SV (tech) and LA (media and entertainment) exist. By comparison, NYC is still large, but is a deep secondary (1/10th the size) for both industries.

- Asset classes aren't just about returns, they also have other dimensions like volatility ("beta") and liquidity. Being able to sell something easily is valuable, and not being subject to crazy swings is also valuable. Unfortunately those two often are at odds. These features make for different investment mixes, and also affect how you can get leverage (loans) with them as collateral. Specifically, real estate is super easy to get a loan on since it's not very volatile. Pre-IPO startup shares are very hard to get a loan on, because they are both volatile and illiquid.

- For non-public investments, a lot of the value is from either shaping the deal yourself or getting access to the right people. It's easy for me to invest $1000 in GE. I can't just walk up to Pixar and ask to invest $1000 in their next film. Same is true for startups. You either need to seed the deal (be the lead investor), or have the access to contribute. Building these relationships is a lifetime of work. This is why people specialize.

- Adding to above, VCs themselves are even more specialized. VC's typically stratify by company stage (seed, A, B, C, mezzanine, etc), industry, geography, thesis, etc. These are often driven by the philosophies of the partners, fund size, or by the LPs with specific expectations. To give a very direct example, GV with exactly one LP and invests in A-stage or later, has very different goals than YC, which has very different goals than the venture arm of a big-12 pharma company like Roche (Pharma is also intellectual property based). It's specialization all the way down.

Re: Revenue is easy, profit is harder

#120

Post by lumb63 »

lchengify wrote: post #80
maCDzP wrote: post #52

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role r…

When investing in different industries (construction vs tech), it's often useful to think about them in the context of asset classes. Specifically, construction is more tied to either real estate, hospitality or government contracts. These often raise money via a bond (debt) offering or an equity with a very well-worn finance model. These projects require a lot of upfront capital (billions not unusual for roads) and…

This doesn’t answer OPs question, IMO (or my interpretation of what OP was saying is wrong).

Sure, construction and high-growth tech startups are different investment opportunities. They have different risk profiles. As someone managing money, shouldn’t you be looking to mitigate risk to maximize returns? Why give money to the startup which has an idea and no experience running a business, managing capital, accounting, etc.? Wouldn’t money be much better spent on a startup that had all those things?

I have heard in the past that the majority of startups fail, and that successful startups are often founded by people who have founded (often unsuccessful) startups before. When looking for a company to invest in, shouldn’t these be top priority? I don’t buy that VC and high growth companies need to be as risky as they are. I suspect a lot of it is bad decisions and lack of due diligence.

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