What gets a company into the 10x forward price/revenue multiple club?
- Competitive advantage period — how wide is the ‘economic moat’ that protects your castle, and how long will it take for that moat to dry up?
– Network effects — increasing value of using your product as more people use it. A positive feedback cycle that gives you an unfair advantage the more customers you get.
– Predictability — make your revenues repeatable, e.g. get people to subscribe so you always have a ‘base’
– Switching costs — decrease customer churn by giving them a reason to stick with you even if competitors undercut your prices.
– Margins — make a lot of money from every revenue dollar. Duh.
– Marginal margins — make more money as you make more revenue. Less intuitive, but it means to make sure you select a business that scales well. Labor costs = death; information goods = amazing.
– Customer/Partner concentration — are your revenues reliant on a relatively small number of customers who might leave you? Does any one customer (or partner or supplier) have too much control over your company’s future revenues? Arguably, partners are getting even more important, as so many web businesses make money as affiliates or platform applications for another company’s product. The article focuses on partners as a source of revenue, but dependence on a partner’s platform (e.g. all the apps who might have been killed by Apple’s announcements today) is also threatening.
– Cost per customer acquisition — is your marketing really expensive? Or do you grow organically well? Bezos quote is perfect: ““More and more money will go into making a great customer experience, and less will go into shouting about the service. Word of mouth is becoming more powerful. If you offer a great service, people find out.”
– Growth, with caveats — growth is good, but it can’t be “profitless prosperity”. Growth can be misleading if it can’t be sustained profitably over time. And growth because you’ve discovered a new market will bring other competitors, so if you haven’t established barriers to entry, you’ll see margin erosion (possibly for Groupon?)
– Cash — collect your cash before you recognize revenue; and spend less of that cash on capital investments to run your business
– Real options — ability to naturally expand your business into adjacent markets without diluting your brand or efficacy
How can a company manage expectations to get strong multiples in the market then? And, since that analysis was based on public companies with lots of disclosures, what can private startups learn from the scorecard?
- Delay announcements of products but hint about them secretly, to make your company seem dangerous and competitive. Kind of like installing lots of missile launchers on your beaches (arguably, people you hire fall into this function) but not showing how many missiles you have.
– Cohort analysis — show that earlier cohorts of customers use your product more frequently / engage for longer periods of time per use / pay more as you get more customers registered. I.e. network effects.
– Footprint — don’t limit your product to a single platform, region, or business model. Clearly you can’t overstretch, but have at least two major stories for each.
– Be noteworthy — take risks, develop a brand personality, and spend time doing things that are worth talking about. Instead of spending too much on marketing.
– Focus, but don’t limit yourself — a key decision involves your branding and even company name. If you’re a printing business, printing.com is better than paperprinting.com, because it leaves you open to printing on tshirts and birthday cakes later.