Two Ways to Get to a $100 Million Valuation | Hacker News Reader

Two Ways to Get to a $100 Million Valuation

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58 pointsakingyens23 comments

"Do the exact opposite. Don’t spend money acquiring users, instead build your product to go viral, and then monetize through selling access to users (and their data) to advertisers."

This idea that viral=free is pretty dangerous. "Viral" can be a very expensive way to acquire customers. Who develops these viral features? free developers? Who tests them, deploys them, scales systems to handle viral growth? Viral is only free if you aren't paying your development, testing, and ops staff.

You're going to pay for those anyway if you are growing. The point is that those are fixed costs and not costs per costumer.

I'd think building virality into a product or service is one of the cheaper ways of acquiring customers. If you create something that works on its own, but is more fun when friends are using it, people are going to do the marketing for you. Instagram is a great example.

"Virality" is not something anyone has figured out how to bottle up and reproduce (and if they have, they're not sharing).

The music industry analogy would be to say "just make all your songs into hit records, that's how you get listeners".

The problem with viral is of course that it's not really a choice. When something is truly viral it became so by accident. You can't have a board meeting and decide; "OK guys, time for this thing to go viral!" and not expect to first have to launch an expensive media campaign.

Viral is single word which describes a business which grows at the rate of just over 1 for every new customer added.

It just means that its something that is good enough, enjoyable enough, or odd enough that someone who sees it tells other people they should see it too.

When your product is not viral, it means for customers don't tell other people to use your product. Or, they do, but the referrals can't figure out how to sign up, make sense of your value proposition, etc.

Markets exist for customer acquisition. You are bidding against other companies that are trying to do the same thing, capture your potential customer's attention. Some times those "bidders" are your direct competitors. Other times they are just another company that wants the same ad inventory you do. You have to be able to buy that inventory in a profitable manner, or the bigger you grow (if you are not viral) the closer you will get to failure, because each new customer is losing you money.

A perfect world can exist between viral and acquired. Customer acquisition can be done in a calculated manner to get the ball rolling in niches or channels which have not heard of your company.

If your product isn't viral, and it isn't all that spectacular (meaning a whole lot of things), eventually someone is going to copy it, and both your growth and margins will vaporize.

Acronyms Used: (trivial and otherwise)

SaaS: Software as a Service (might as well include it)

LTV: Life time Value (months of use * cost per month)

CAC: Customer Acquisition Cost

ARPU: Average Revenue per User (monthly)

Churn: Rate of customer loss (over specified period)

MAU: Monthly Active Users

WoM: Word of mouth

SEO: Search Engine Optimization

SEM: Search Engine Marketing

Warning! The entire article is filled with arcane finance newspeak and obscure acronyms!

tl;dr:

1. Have a high LTV:CAC ratio (what???)

2. Have high viral co-efficient. (okay.)

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LTV = Loan to value, a ratio of the outstanding debt on a property to the market value of that property. (or is it "Lifetime value" of a customer?)

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CAC = Customer acquisition cost is the resource a business needs to allocate in order to acquire an additional customer.

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And, oh yeah, just "be viral".

LTV = Life time value. Have a high ratio between customer acquisition costs and life time value in order to be profitable at scale when CAC goes up. Hope that makes sense now.

> Warning! The entire article is filled with arcane finance newspeak and obscure acronyms!

Boris Wertz is a SaaS/e-commerce investor. LTV, CAC, ARPU, churn, etc are pretty standard metrics for those types of businesses.

Here is a good guide to SaaS Metrics: http://www.forentrepreneurs.com/saas-metrics/

Here is Bessemer's SaaS Reporting Template: http://www.bvp.com/system/files/reporting_saas.xls?download=...

The Smart Bear blog has a good series of SaaS metrics articles: http://blog.asmartbear.com/?s=saas+metrics

Or, get one "investor" to pay you $1 for a 100-millionth of your company.

Or a cool hundred billion https://37signals.com/svn/posts/1941-press-release-37signals...

The two options for a highly valuable company are to either spend heavily to acquire high value users (i.e. Palantir, LTV:CAC ratio), or spend nothing to acquire ubiquitous users (i.e. Facebook, high viral coefficient).

Another important factor not mentioned here (but highly relevant towards a $100M valuation) is market size, which can often provide a restrictive upper bound if the product is too niche (in either case above).

Will GrowConf provide videos of the talks from this year? I'd love to listen to Boris Wertz's talk

To get an idea of how likely it is, how many startups are reaching a $100+ million valuation in a given year?

The rule of thumb among VCs is about 15 per year. Assuming $100+ million is considered a "big success". The cap for big success might be higher.

See more here: http://www.paulgraham.com/invtrend.html

Actually, this article here has some good quantitative data. It puts the number around 200. It looks like most of the companies are non-tech/outside the Valley though.

http://bostinno.streetwise.co/2013/05/14/only-200-startups-p...

I believe the rule of thumb is that there are 15 that reach $100M revenue. We could square the figure of 200 at $100M valuation with this rule of thumb if we assume valuation is say 10X revenue, so 200 reach ~$10M revenue. Thus maybe 1/15 or so of the companies that reach $10M in revenue hit the next level of scale and get to $100M revenue.

Here's some good recent data on how many exits and for how much in the past few years: http://tomtunguz.com/the-3-different-strategies-of-venture-f...

1) Revenue

2) Liquid assets

what about businesses without users?

What do you mean by "users"? A business has to have customers, at least in the long run. Those customers may or may not be the people who actually use the products (Google/Facebook/Yahoo/etc - you're not the customer, you're the product). But whether you're making tires or milk or websites or religious experiences or whatever, you have a product, and someone is using it.

I doubt anybody at Goodyear or B.F. Goodrich talk about people who buy their tires as "users". To my way of thinking, saying "users" implies something very specific about the nature of the business in question... eg, Google and Facebook have "users", whereas Goodyear, Proctor & Gamble, and Alcoa have "customers" (or "accounts").

what about businesses without users?

Came here to say the same thing.

“Your business either has a high life time value per user, or your business has a high viral co-efficient,” said Wertz, mapping out the two paths to startup success.

This makes it sound like everything must be some kind of service, charged on a per/user basis. It completely ignores companies that have customers instead, who sell a product which is used by some unknown set of "users".

Or to put it a different way: Facebook, Google and Twitter have users... IBM, HP, Dell, CA, SAP, SAS, etc., have customers. Not quite the same thing, but the latter still manage to make a lot of money.

That said, the basic point still stands... you can either (A). have a high LTV for a given customer, or you can (B). sell to a large, and steadily expanding base of customers. I suppose you could argue whether introducing new products via brand extensions or line extensions and selling them to your existing customers is A or B or a 3rd option altogether...

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